Q1 2023 Arch Resources Inc. Earnings Call
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The event is being recorded I would now like to turn the conference over to Dirk Salone senior.
Senior 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 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.
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 CFO .
And Matt <unk> our CFO .
After our formal remarks, we'll be happy to take questions with that I'll now turn the call over to Paul Paul.
Thanks, <expletive> and good morning, everyone. We appreciate your interest in arch and are glad you could join us on the call. This morning.
I'm pleased to report that the Rx team has again demonstrated operational excellence in our core metallurgical segment in the first quarter, while delivering strong value driving financial results across the entire enterprise.
Overall arch generated an adjusted EBITDA of $277 3 million during the period driven by significant quarter over quarter improvement in the average selling price and unit cost and cash margin achieved by our coking coal operations in.
In short the team continue to press ahead on all fronts with our simple clear and actual plan for long term success and value creation during.
During the quarter the arch team showcased the company's expanded cash generating capabilities by achieving more than a 31% sequential increase in the average cash margin for our core metallurgical.
Delivering an 8% sequential increase in adjusted EBITDA, and generating almost $96 million and discretionary cash flow, despite a nearly $170 million.
Build in working capital.
We drove forward with our intense and ongoing efforts to streamline and strengthen our balance sheet by retiring in our remaining convertible securities, reducing our already modest indebtedness by an incremental $27 million or.
We're 15% and maintaining a net cash positive position of $71 million.
And finally, we generated significant value for our shareholders through our robust and precisely structural capital return program declared a quarterly dividend of <unk> $47 8 million.
Or $2 45 per share.
And deploying $77 million to settle the last of our convertible securities and repurchase shares thus avoiding dilution of approximately 554000 shares.
It's worth pausing here to reflect more on this last item our capital return program given the tremendous progress we've made since its re launching in February last year.
Since that relaunch just a period of over 12 months arch has deployed more than $1 billion through the program consisting of dividend payments of more than $571 million.
Inclusive of the just announced June dividend and share repurchases, along with convert convertible security settlements of more than $444 million.
I might add that through the share repurchases and convertible security settlements, we've avoided in aggregate dilution three 5 million shares.
Over even a longer time horizon arches, now deployed more than $1 8 billion.
Through our capital return program over the course of the past six years, demonstrating our cash generating capabilities as well as our strong commitment to rewarding our shareholders.
As we've stated repeatedly we believe our capital return program has proven to be tremendously effective in driving shareholder value.
In view of the capital allocation model as appropriate durable and well aligned with shareholder interest and preferences.
As a result, we fully expect this program to remain the centerpiece of our value proposition for the foreseeable future.
Fortunately the conversation over to John for additional color on the operations I'd like to take a moment to discuss the dynamics, we're seeing in the global coking coal markets.
As you are no doubt aware seaborne coking coal prices have retraced significantly in recent months due largely in our view the global macroeconomic concerns.
Since early March the price of high vol. A coking coal loaded in a vessel on the U S. East Coast has declined about 25% from $328 to $247 per metric ton.
While that is a significant pullback clearly it's important to point out here that arch is low cost mines still generate a healthy cash margin even at today's stepped down prices, which illustrates again the value of being in the lowest quartile of the cost curve.
What's particularly interesting about pullback in seaborne coking coal prices is that we continue to see many constructive indicators in the marketplace for instance, global steel prices continue to trade at levels around 50% above their November loans.
Moreover, the vast majority of the blast furnace capacity idled in Europe last year in the face of weak steel demand around 25 million tons by our count has now restarted and lead times for new orders of finished steel are twice what they were just a few months ago.
At the same time.
Booking coal supplies remain constrained after years of Underinvestment and the situation has been exacerbated.
By increasing regulatory pressures in all jurisdictions. This.
This combination of circumstances is particularly evident in Australia, where coking coal exports declined by more than 9 million tonnes in 2022 versus the already depressed level of 2021 and are following the incremental 15% on a year over year basis. During the first two months of 2023.
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Meanwhile, exports from the United States and Canada. The next two major sources of high quality seaborne coking coal were only marginally higher than 2022 and 2021.
<unk>, it's significantly under shoe pre pandemic levels. Despite the sustained period of historically strong pricing that has prevailed in recent years.
Finally, Russia the other large supplier in the seaborne coking coal market remains a significant question mark in the face of continuing hostilities in Ukraine, which in turn created various challenges to move in these products due to credit considerations and logistics, while most of the Russian volume continues to find a home.
In global markets, we believe that mounting cost pressures and increasingly difficult business climate and heavy discounts for the products could make it difficult to maintain this dynamic indefinitely.
Given these supply constraints as well as our substantial and ongoing increases in steel demand in blast furnace capacity expansions across southeast Asia.
We remain constructive on hot metal output in the intermediate as well as the longer term.
In summary, we continue to be sharply focused on our strategy for value creation over the long haul.
In recent quarters, we have expanded and strengthened our world class coking coal portfolio extended the global reach of our high quality coking coal products restored our balance sheet to a net positive cash position greatly simplified our capital structure and extended our industry, leading ESG performance.
We believe this progress across every facet of our business sets. The stage for continued success strong discretionary cash generation and robust capital returns in the future.
With that I'll now hand, the call over to John Drexler, Some further thoughts on our operational performance John .
Thanks, Paul and good morning, everyone as Paul just discussed Art's team maintained excellent operational momentum in Q1 as highlighted by sequential improvements in our average selling price cash cost and cash margin in our core metallurgical segment.
The upshot of this strong execution with an EBITDA contribution of $263 million from the metallurgical segment in Q1, which I view as clear evidence of the substantial and stepped up cash generating capabilities of our coking coal franchise posted the leer south ramp.
The metallurgical segment's cost performance during Q1 at $82 66 per ton stands out as particularly noteworthy in my view.
Despite ongoing inflationary pressures that have pushed the overall cost structure of many of our publicly traded metallurgical peers higher Q1 marked arches best cost performance in the past six quarters again, underscoring the positive impact of the Leer south ramp on our entire coking coal portfolio.
I might add here that the continued productivity gains and volume growth at Leer South through 2023 will result in another step up in volumes in 2024, as we progress into still more favorable geology.
Given this tailwind we believe that our reiterated cost guidance of $84 per ton at the midpoint for full year 'twenty three is appropriate and achievable and we're equally positive about the outlook for 2024 and beyond.
Supplementing the strong contribution of our metallurgical business, our legacy thermal segment once again generated a substantial amount of cash flow as well. Despite the continuation of sub optimal rail service in the powder River basin, a significant pullback in international thermal prices and geologic Chan.
<unk> at our West Elk Longwall operation in Colorado.
In total the thermal segment contributed $46 3 million and segment level EBITDA in Q1, while expanding just $5 5 million in capital now.
That brings the total EBITDA generation for this segment to more than $1 3 billion.
Over the past six five years against a total of just over $144 million in capital spending.
The quick math, then is that we have generated in excess of nine times more EBITDA than we have expanded in capex over that timeframe, which tells you just how effective our harvest strategy has been so far.
Looking ahead, we expect only a modest contribution from the thermal segment in Q <unk> Q2, due largely to the geologic challenges at west hub and the expectation of Q2 being a typical shoulder season quarter in the powder River basin.
As most of you are aware west Delta has maintained a fairly stellar performance over the course of the past 15 years or so however, late in Q1, the mining countered a clay layer and the costing that has resulted in a short term degradation in our overall product quality and production volume.
We expect the impact of this in seam dilution to continue through the middle of the third quarter at which time, we expect to be able to have the longwall and a more favorable area of the reserve base.
Because of this issue west Elk sales volumes could be down as much as 1 million tons in 2023 to around $3 5 million tonnes, which will lead to significantly constrained exports shipments over the next two quarters.
In total we now expect west out to export only around 750000 tons all of which is currently priced and reflected in the guidance table along with around $2 75 million tons of domestic non.
With this we expect total EBITDA from the thermal segment to be modestly positive in Q2.
Better, but still constrained in Q3 and back to business as usual status in Q4 and thereafter.
On the marketing front. The arch team has continued to make advances in expanding and strengthening our metallurgical contract book since 2023 began.
As Paul noted coking coal prices have softened in recent weeks in the face of growing anxiety about the strength of the global economy as a whole Fortunately arch has already entered into commitments for more than 85% of our anticipated coking coal volumes in 2023 based on the midpoint of guidance and is in advanced discussions for Signet.
Second portion of the remainder.
While the price for much of this volume will be tied to published market prices closer to the time of shipment. We believe the strong appetite for our products even in the face of a weakening market environment is a clear indication of the outstanding value and use of our high quality product slate.
We should also note that while we are essentially sold out in our thermal segment for 2023. We currently show that our committed thermal sales volume, which stands at 71 million tonnes exceeds our thermal guidance for sales volume, which stands at 67 million tons at the midpoint.
Given low natural gas pricing and ongoing real issues in the powder River basin similar to prior years, we expect that as the year proceeds we could enter into discussions with customers about carrying over thermal volume into future years.
Of course as in the past, we will only entertain such requests. If we are certain we are preserving the full economic value of the existing commitments.
We currently expect the carryover volumes could be 5% of our current powder River basin commitments.
Now, let's turn our attention to our single most critical area of performance safety and environmental stewardship.
During Q1 arches subsidiary operations started the year in a strong fashion on pace with last year's record safety performance and once again recorded zero environmental violations and zero water quality exceedances into.
In total arches subsidiary operations have now operated a total of more than three years without a water quality exceeds.
In addition, the Leer mine and the Lear and Leer South preparation plants were recently honored by the state of West, Virginia with Mountaineer Guardian Awards for safety Excellence.
<unk> Award represented the seventh time it has been so honored in the past eight years.
The state of West, Virginia also honored the Lear and <unk> mines, along with one of arches idled operations with awards for Reclamation excellence.
In addition, the West Elk mine was honored by the state of Colorado with the Outstanding Safety Performance Award and excellence in mining Reclamation Award.
I want to congratulate our operations for these tremendous honors and thank the entire workforce for their deep and abiding commitment to our most important corporate values safety environmental stewardship, corporate citizenship and the highest ethical behavior.
We are truly fortunate to have such a talented professional and high performing team.
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 from an earnings perspective, Paul and John have already covered the highlights with improved productivity and favorable pricing in the metallurgical segment driving sequential improvement in EBITDA and pre tax earnings.
So I will keep my comments focused on cash flows liquidity and capital structure.
Starting with the quarter's cash flows operating cash flow in Q1 totaled $126 million as we experienced a build in working capital of nearly $170 million.
We correctly anticipated the direction of the working capital change, but underestimated the amount of the increase.
Notably inventories at March 31, we're at levels, we haven't seen in nearly a decade and current liabilities haven't been this low in nearly two years or well before we started to see inflation accelerating.
I will get into this in more detail in a few minutes, but clearly we expect to see much of this build unwind and benefit cash flows over the remainder of the year.
Capital spending for the quarter totaled just over $30 million, which was below ratable based on our full year guidance.
In the financing section of the cash flow statement I wanted to point out two significant items first of all we received over $43 million in the quarter from the exercise of outstanding warrants.
The warrants can either be exercised at the election of the holder on a gross basis with the holder paying the exercise price on a net basis with no cash payment.
In the quarter, we saw the exercise of nearly 800000 warrants with the vast majority of those opting for a gross settlement.
The other item I wanted to highlight was the repurchase of convertible bonds during the quarter as we utilized proceeds from the warrant exercises along with the discretionary cash flow to repurchase the remaining convertibles.
As we discussed last quarter, we have prioritized the settlement of the convertible bonds over the course of the last year and are happy to report that all of the convertibles have now been settled or repurchased.
Finishing up the discussion of cash flows discretionary cash flow for the quarter totaled $96 million and consistent with the capital return Formula. Our board has declared a dividend of 50% of that amount or $2 45 per share.
The dividend will be paid on June 15th to stockholders of record on May 31.
We ended the quarter with cash on hand of $222 million and total liquidity of $348 million, including availability under our credit facilities.
Cash and liquidity at quarter end were at the lower end of our target range as we prioritize the repurchase of the remaining convertibles.
Moving onto the remainder of 2023 I wanted to revisit the working capital discussion and how that could play out over the rest of the year.
Looking first at accounts receivable the pricing dynamics that we discussed last quarter have reversed at least quarter to date.
The provisional pricing will likely be higher than the price, we will realize an Asian export volumes following the ultimate true up later in the year.
We would expect that dynamic to benefit second quarter cash flows.
On the flip side those higher provisional prices are likely to be offset to a large degree in terms of working capital by an expected increase in export shipments overall during the quarter as well as currently anticipated vessel time.
Moving to inventory, while we don't expect to remain at the peak levels for March some of the increase we have experience should be viewed as permanent.
As the increase in volumes from Alere style.
The overall increase in export activity and the need to hold more critical spare parts to protect against supply chain challenges require higher inventory levels.
Based on these factors. We currently expect the overall change in working capital to be slightly favorable in the second quarter.
Trends in the back half of the year will be largely dependent on the prevailing metallurgical prices, but assuming prices at current levels. We would expect a more significant benefit in the back half with much of that weighted towards the fourth quarter.
Next I wanted to provide some additional detail around our capital structure and share count.
As I mentioned, there were two significant steps towards simplifying the capital structure in Q1.
The purchase of the remaining convertibles and the exercise of nearly two thirds of the remaining warrants.
The convertible repurchase had two benefits first it reduced our quarter end diluted share count by over 420000 shares as compared to year end levels.
And second it eliminated any future dilution that would've resulted from ongoing dividend payments.
With regard to the warrants the first quarter exercises resulted in an increase in the basic share count.
The diluted share count already include the impact of the warrants based on the assumption of a net settlement.
So while the basic share count increased more than 1 million shares in the quarter due primarily to the warrant exercises. There was not a similar increase in fully diluted shares and in fact, we actually reduced the fully diluted count over the course of Q1 by 300000 shares through the convertible repurchase and share buybacks.
We now have just over 450000 warrants that remain outstanding and given their terms would expect those to be exercised in the next couple of quarters.
Going forward to the extent, we have additional warrants exercised on a gross basis, we will use the cash proceeds to reduce dilution just as we did in the first quarter.
So while the exercise of the remaining warrants will increase the basic share count there should be no change no change in the fully diluted count.
And as we continue to execute on the second 50% of the capital return program. We would expect both the basic and fully diluted share count to continue to decline over time.
Finally, while we have repurchased all of the convertible bonds. The capped call that we purchased at the time of the issuance remains outstanding.
Call is not factored into our reported fully diluted share count or otherwise recorded in our financial statements.
But the intrinsic value of the capped call remains approximately $62 million.
Presenting more than 520000 shares at yesterday's closing share price.
Before turning the call over for questions I wanted to briefly highlight a few items from our operational and financial guidance.
For the metallurgical segment, we are reiterating our sales volume and cost guidance and would anticipate a roughly 10% increase in volumes in the second quarter with additional increases in the back half of the year.
John has already noted the reduction in our thermal sales volume guidance and we have increased our cost guidance to reflect the impact of the lower volumes.
The expected full year cost now in the range of $14 50 to $15 50 per ton.
We continue to expect full year capital spending of $150 million to $160 million and are also maintaining our previous guidance for SG&A net interest expense and cash taxes.
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 if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Lucas pipes with B Riley Securities.
Please go ahead thank.
Thank you very much operator, and good morning, everyone.
Good morning Luca.
My first question is on the met coal cost side and good job there in the first quarter and I'm wondering if you could speak a little bit on the on the outlook there specifically with the 10% increase in volumes expected for Q2.
Offsetting factors that should.
Yes.
Lead to even further cost improvements from here like longwall moves are.
What are you seeing that would really appreciate your color as it relates to the medical costs. Thank you.
Hey, Lucas this is John Drexler.
In the metallurgical segment, we've been making great progress as as Leer, South is ramped up and gotten until volume levels.
We expect to be able to move forward with some real proud of the team in the east and managing overall cost, but we really benefited from kind of getting all of that production in line. We've still got a wide range in the cost guidance we.
Do expect a step up in opportunities to move more volumes in the back half of the year. If youll look at kind of the cadence of our of our shipments. It would imply that we're kind of approaching that 10 million ton a year run rate in the back half of the year.
$4 9 million tons of sales to get to that so that should put us in a good position to be able to achieve.
The cost targets that we have out there, we still do see inflationary pressures supply chain pressures.
Once again, the team's managing those well and we'll continue to move forward, we think with the great metallurgical portfolio and the ability to demonstrate cost in the lowest quartile in the industry Luca.
Lucas it's deck I would add that look in the first quarter, while we only shipped $2 1 million tons, we actually produced.
1000 times more than that on the production side, So Q2, probably won't look terribly different.
The production and that's really the bigger driver on the cost front. So while certainly we will be looking for those incremental improvements given the production won't change that much in all likelihood in Q2 from Q1, you maybe can't wouldn't expect.
A further step down in Q2, but as John said Q3 Q4 as production continues to climb that certainly our target is to continue to.
To drive those costs down.
That's that's very helpful.
Follow up question related to the cost side.
How would you frame up marginal cost globally at this time and where would you say your assets sit on the global metallurgy metallurgical coal cost curve.
Diluted that.
<unk> question, but let me give it a go let me start with just talking about the U S. And here is mainly how we frame that and if you look at some of the public guidance out there for cost it seems that the average cost in the U S.
Coking coal would be around $110 again, just based on kind of the public guidance that we see from a range of competitors and if thats. The case, you would certainly expect that the marginal cost of production would probably be.
Call it $20 higher than that for that that highest cost increment that top 10% and the cost curve and so given that fact that $130 or so in the U S. When we are guiding to $84 at the midpoint clearly that shows sort of significant advantage. We have in terms of cost structure in that $45 spread is really pretty.
<unk> two <unk>.
Our value proposition in the marketplace I guess I would add this is John just said the goal is to move towards 10 million tonnes next year and as we do move towards that 10 million tons. We believe we should be able to at least maintain our cost who knows maybe we can drive them down a bit further. Meanwhile, the rest of the industry <unk> inflation, so that one.
30 marginal cost could grow there is no counterbalanced for most of those producers. They are not looking at reductions in costs and the way that we may be so we think were really exceptionally well positioned in the U S. Theres certainly our large Australian producers that at legacy asset surface mines that aren't growing but that are very low on the cost curve that would.
Occupy that first quartile I Wouldnt say were soft.
In the second quartile and then when you factor in the fact that our product quality is what it is from a margin perspective, we may be better than that so again, we feel very good about acquisition.
Yeah.
That is very helpful color.
<unk> tried to squeeze a third one in here really quickly on the thermal side, obviously lots of.
Headwinds in the domestic market with where natural gas prices aren't I wonder if you could.
Provide a little bit of color as it relates to 2024.
Coal fixed price commitments and roughly where those commitments have been coming in a fleet. Thank you very much for your perspective.
Yes look at the thermal markets as we've seen have weakened.
What we've seen natural gas pricing.
We continue to feel we've got a great book already established for 2024.
Has locked in good pricing prior to seeing some of the weakness that we've seen more recently here.
A significant portion of that volume.
As we indicated in our prepared remarks as well given the low price natural gas given some of the pressures in the marketplace.
We expect that we may see up to 5% of our committed volumes rollover.
Into 'twenty four.
We'll make sure that we're capturing all of the value of any.
That does carry over into 'twenty four but once again I think we're feeling good about the establishment of the book that we have for next year and how we'll move that forward.
You look at the deck again, I would only add that in the last even in the last few weeks that in a little bit to our position even for 2023 at solid prices. So while there certainly is pressure out there there's no doubt in natural gas prices are low we are finding opportunities and thats largely driven by the fact that even now inventories are huge.
<unk> probably.
Where they would like them to be so there still is.
Some modest opportunity, but there is no doubt that the thermal market has gotten tougher.
Alright, I appreciate all the color. Thanks, Thanks, again and best of luck. Thank you.
Lucas.
The next question comes from Nathan Martin with the Benchmark Company. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Good morning, Nick.
Yeah.
Maybe just following on Lucas is less.
Last comments on the thermal market appreciate your thoughts already there.
I guess, maybe from a production standpoint, I also noticed coal creek was down meaningfully quarter over quarter any updated thoughts on that.
Hey, Nate.
At coal Creek as we've been reporting we've been spending a significant focus on putting coal creek in a position to have substantial reclamation completed.
We're at about 80% completed with the reclamation there we do still have some commitments from a very small active area of that operation.
We're able to continue to supply with a very small footprint.
<unk>.
From a property perspective and from an operations perspective support perspective, so we kind of expect this as we move forward and things are continuing to play out of coal Creek as we expect.
Great appreciate those thoughts John .
And then maybe when we look at the thermal shipment guidance in general I mean, how much of the decrease would you guys say from west Elk. It would seem maybe about 1 million tons or so there due to the geology and how much is coming from the PRP.
Yes, if you look at the volume impact, yes, as we indicated with the challenges that we've seen at west Alex that the team there continues to manage very well and that we expect to get through as we move to another favorable area of the reserve base in the third quarter about 1 million tonnes of the overall guidance reduction.
Comes from West dealt with the remainder of that being that roughly 5%.
Expectation of carryover from our committed volumes into the following year.
David.
But to be clear that we obviously have these totally committed.
And we've seen this play out many times. So we're trying to I think get ahead of this gave everyone. A good view of what the rest of the year could play out which is really the source of the guidance that we're providing on the thermal side.
Look I think what's important though is if cone's rollover as John said, six 5%, we intend to retain that value or it.
It will be done at a price that's acceptable to us in the future.
Makes sense, Paul I appreciate that and maybe shifting over to the met side. It looks like you guys.
So with a little bit more on the domestic side. So maybe you could give a little more color about the opportunity there versus how that compares specifically to what youre seeing in export market.
Yes, I think as we worked through.
The quarter the first quarter there was some opportunity for additional domestic commitments. If you look at all the math there we were pleased with the price we were able to obtain.
On those.
Fixed price volumes for the full year, the remainder of the opportunity we see as we look for the rest of the year is primarily going to be end of the export market. We believe there could still be some opportunities.
If need be and we stand at the ready if things are there and we see appropriate value, but we see most of the remaining value.
Probably in the export market.
We have seen at times underperformance by other producers at times of the North American market and so we stand at the ready to step in if we have the volumes in a bit and if it's economically attractive that's typically for.
A few trains here are a few trains there rather than anything significant in that last North American deal. We did was probably the last one Don It was very late in the season and as you look at it today, it seems pretty prescient, because given where prices are today.
Those net back that were achieving on those domestic sales exceed the net back we would achieve today on current listed seaborne prices. So we feel good about where we manage that and.
But as John said as we go forward and really the focus is going to be on the seaborne market.
I appreciate the thoughts guys and then maybe Matt one on for you to wrap things up.
Mentioned, the expectation for a slight favorable change in working cap here in the second quarter than it would have put a dollar amount around that.
Yeah, So I guess the way I'd look at it.
Starting with a.
A little more detail around the inventory build we saw for the quarter.
Some of that as I mentioned, we are going to.
Likely be viewing is permanent and so.
Just using rough numbers, we built about $50 million of inventory during the quarter and it's probably fair to say that two thirds to three quarters of that is probably not going to reverse this year. So.
So if you look at what that means for the remaining build for the quarter, it's roughly about $130 million.
We will see some favorable trends in receivables as.
As I mentioned, the provisional pricing impact, we will get offset a little bit primarily by vessel timing, but I would say of that remaining working capital build that we do expect a turn there is probably no more than 25% of that would turn in Q2 and the rest falls probably in the back half of the year obviously.
All of that dependent on where met prices go from here, but.
Assuming prices, where they are that's how I would think it would play out.
Very helpful. Matt appreciate that I'll leave it there guys. Thanks again for your time and best of luck.
Thank you.
Next question comes from.
Michael Dudas with vertical research partners. Please go ahead.
Good morning, gentlemen.
Hello, Michael.
First.
<unk> West Elk.
How has the market been in many indications of.
That product and whats certainly that's been the decline in reversal in pricing on the thermal segment any any thoughts on that market and as you ramp back up the health of that going into when you get back to normalized production, which I guess you indicated would be in Q4 of this year.
Yes, Michael.
Look I think clearly disappointment in what we've encountered.
Over over time less than.
<unk> been a great reserve base, we are in the southern reaches where we're currently mining in sequence right now of that reserve basin ran into an unexpected kind of.
In the scene issue with the clay layer and Thats just caused our overall quality and production issues, we're managing through that and as we indicated mid third quarter.
We expect to be in better areas of the reserve base and have the issue behind us from a market perspective, we are dealing with that were working with the customers to manage the reduction in volumes.
Even with the softening in the thermal markets that we see a couple of things one was still done supply into the into the domestic market, both utility and industrial and with some of the issues that are occurring.
In that region from a production standpoint.
We're seeing that that coal is still needed. So we are excited to work through this and get back to where we need to be and even in the international arena. Despite the softening in market prices. It's still that's back to an attractive returns. So our focus is to get back.
On sequence and get back to where we expect west Elk to run the team's doing a great job of managing it there.
<unk>.
Get back to where we need to be.
Mike It's Tac I think when you look longer term for west out it's a pretty positive outlook. When you think about overall thermal consumption in the U S has been coming down systematically since 2008. When you when you look at Latin. So we're going to continue to see that for the CRB assets that market continues to get smaller we see coal based <unk>.
Our generation shutdown west up actually has some large industrial customers that really are committed to coal and plan to run on coal for the foreseeable future and so we could really see less outages to make a meaningful contribution over the life of the reserve base, there and we certainly have 10 years or more at West Alpha.
Now lets out and continue to roll on and of course, when the window is open into the seaborne market. It's a highly profitable mine as we've seen as John noted right now even with prices in the international market down somewhat and new capital being at $190 and Thats a net back of left out of close to $100 and so we continue to see.
West Alpha is a highly profitable component for our thermal segment and quite frankly, it's probably half the EBITDA from thermal and sort of normalized times and as indicated while the PRP over time is going its opportunity is going to be declining left out does not.
It may not experience that same level of erosion.
Yes.
Other point I'd add is.
<unk> did a good job of framing up.
Our our expectations longer term less telco fairly positive.
The other factor that's out there is while the quality of the coal is better than new castle that quality continues to improve over time.
So.
Our outlook for West Elk, if anything look we've hit a little bump in the road.
Longer term I think we're feeling really good about that mine.
That's history encourage you and equality is sensitive heat in sell through or anything else. That's.
<unk>.
While the quality, we shift even today out of west Elk is better ash and better <unk> than new castle.
And that calories everything points go up Mike.
Overtime.
Excellent. Thank you.
Hello, John .
We can assess performance of transportation logistics that you witnessed in the quarter and what Youre seeing today east and West and again, we've seen changes in shipments.
Pricing for vessels.
And what's really interesting, but any any any any.
Any significant or meaningful changes in net backs that you can share with us.
Yes, so last three months on we'll start a little bit different story eastern-west. So I'll start in the east.
He started off a little slow, but as the quarter ran on really cannot have any issues with the service that we receive particularly out of <unk>.
Sure.
The railroad ran well and.
By and large the poor trend well also so we feel we're in pretty good shape going forward.
The west is a little bit of a different story.
January and February were pretty rough months, particularly the powder River basin.
<unk>.
We did see a little bit of improvement in March and we're seeing a little bit more incrementally in April .
It was not the greatest performance we've seen so the western railroads are struggling to keep up with the improvements that we've seen in the east.
On the pricing obviously the.
We're heavily tied to the international marks.
And while we did very well in Q1, we will see a little bit degradation in Q2, the other thing thats going to hurt us a little bit in Q2 is the rail rate is one one quarter off the current rates. So we will see the higher rail rate in Q2 and it'll be adjust.
And then into Q3.
Excellent. Thank you gentlemen.
Thank you Michael.
This concludes our question and answer session I would like to turn the conference over to Paul Lang for any closing remarks.
I want to thank you again for your interest in <unk>, because you could see 2023 is off to a strong start in the arch team is executing at a high level, while the global coking coal market is experiencing a soft patch one that we believe could ultimately prove to be constructive.
We remain focused on driving forward with our strategy for long term value creation in every facet of the business with each passing quarter. We believe our story is becoming sharper simpler and even more compelling.
With that operator, we'll conclude the call and we look forward to reporting to the group in late July stay safe and healthy everyone.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.