Arch Resources, Inc. (NYSE:ARCH) Q2 2024 Earnings Call Transcript

Arch Resources, Inc. (NYSE:ARCH) Q2 2024 Earnings Call Transcript July 25, 2024

Arch Resources, Inc. misses on earnings expectations. Reported EPS is $0.811 EPS, expectations were $1.26.

Operator: Good morning, and welcome to the Arch Resources Inc. Second Quarter 2024 Earnings Call Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Deck Slone. Please go ahead.

Deck Slone: 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 filed with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

I’d also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we’ve posted in the Investors section of our website at archrsc.com. Also participating on this morning’s call will be Paul Lang, our CEO; John Drexler, our President; and Matt Giljum, 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?

Paul Lang: Thanks Deck 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 during the second quarter, Arch continues to drive forward with our clear and consistent plan for long-term value creation growth. During the quarter, the team achieved adjusted EBITDA of $60 million, set a quarterly production record in our core metallurgical segment, while driving ahead with the development of our second longwall distributor itself, where we expect substantially more favorable considerations. Shipped 2 million tons of coking coal despite significant logistical challenges, stemming from the tragic collapse of the Francis Scott Key Bridge, paid down an incremental $13 million of debt, giving us a net cash positive position of $26 million.

And worked to right-size the operating activities in our thermal segment, setting the stage for cash generation at these operations in the back last year. In addition, in a particular note, we deployed an incremental $19.6 million in our capital return program during the second quarter, even in the face that we just discussed logistical challenges and a subdued near-term market environment. We returned this capital through the repurchase of an additional 94,000 shares of common stock with an investment of $15 million and the declaration of a quarterly cash dividend of $0.25 per share payable in September with a total projected payment of $4.6 million to shareholders. In aggregate, we’ve now deployed well over $1.3 billion in our capital return program since its relaunch in February 2022, which we hope to agree represents a substantial amount of value generation in a relatively brief period of time.

This total included $732 million or $38.78 per share in dividend payments and the repurchase of $615 million of common stock as well as the repurchase and retirement of our convertible notes. It’s worth pointing out that, including the Q2 repurchases, we’ve now reduced our diluted share count by well over 3.5 million shares or more than 16% when compared to the level in May 2022. Looking ahead, we remain sharply focused on driving that share count down even further. As you know, the [Indiscernible] our value proposition is to return 100% for the company’s discretionary cash flow to shareholders with a strong emphasis on share repurchases. We believe that this framework has created substantial value for our shareholders in the past, and we set expect it to continue to do so in the future.

Let’s now switch to some brief commentary on the steel and coking coal markets before turning the call over to John for additional comments on our operating performance during Q2. As you are now aware, seaborne coking coal demand remains tepid due principally our estimation through a challenging global macroeconomic environment related in part to weak infrastructure and property market spending in China. Predictable, but nonetheless, consequential effects of [Indiscernible] and a slowing timeout from [Indiscernible] quarter in economic celebration in Europe. These factors are — to weigh on global steel demand as evidenced by the recent erosion of steel prices. Hot-rolled coil prices in major steel producing regions are down approximately 50% versus the peak seen in 2021.

As part of this, European steel markets are under push with the average capacity factor of blast furnaces standing around 65% according to our estimates. The steel market weakness has had to predictive knock on effect on global coking coal markets. Even with these pressures, however, customer interest at Arch’s high-quality coking coal products, particularly in Asia, continues to drive. Asian steelmakers appear increasingly focused on identifying strong, consistent, and long-run sources for their long-term coking coal clients, given their expansion plans in order to buffer themselves from the lack of new investment in the coking coal supply. Given the number of customer inquiries over the last couple of months, we expect to have ample opportunity to continue to build on our global customer base with a strong Asian emphasis that represents a good strategic fit with our high growing assets.

Meanwhile, the coking coal supply side of the story remains muted, reflecting degradation and depletion of the resource base and major suppliers, only a modest investment in new and replacement mine capacity, recent mine outages that have removed 2% to 3% of supply for the global seaborne and an increasingly fragile supply chain. Moreover, we believe that the current coking coal prices are below the marginal cost of production on a global basis. We achieve accurate, will take a predictable coal on production margins over time, assuming such prices persist. As a result of these various factors, we expect seaborne coking coal markets to balance quickly once the global company begins to strengthen and global steel demand starts to reassert itself.

Looking ahead, we remain sharply focused on driving continuous improvement and execution across our entire operating platform support strong value-generating capital returns for our stockholders, even its very soft market environment. With our cost-competitive coking coal portfolio, high-quality products, rapid rate and in credit in Asian markets and recognize sustainability leadership, we believe we are exceptionally well-positioned to capitalized as global steel demand stabilizes and then returns to its anticipated upward growth. With that, I’ll turn the call over to John for further discussion of our operational performance in Q2. John?

John Drexler: Thanks Paul and good morning everyone. As Paul just discussed, the Arch team navigated through the extreme disruption to the logistics chain in an effective manner in Q2, shipping more than 2 million tons of coking growth even as we were forced to direct virtually all our seaborne volumes to an already busy DTA during April and May. I want to commend the Arch team for that excellent rent, but I also want to extend our appreciation to our rail and other logistics providers for their great support during that challenging time. I would also point out that we had two additional vessels, representing more than 160,000 tons that just slipped into Q3 due to the extremely busy June shipping schedule at both East Coast terminals.

While we were disappointed that those vessels fell out of Q2, those early July loadings provide a jump start to the year’s back half when we anticipate moving substantially more volumes. Given the strong performance of the overall logistics chain in the face of Q2 [Indiscernible] as well as our positive operating momentum, we are confident we can achieve the step-up necessary to deliver on our full year sales guidance of between 8.6 million and 9 million tons. Bolstering that confidence further is our continuing operational progress. As Paul indicated, the metallurgical team delivered a record performance during Q2, producing more than 2.5 million tons in total for the first time. Just as importantly, Leer South progressed into the final panel in District 1 in early July and is achieving strong advance rates there even as the mine prepares for the transition to District 2 in late September or early October.

As you will recall, our data shows that the coal seam is 15% to 20% thicker in District 2 and that the overall mining profile is more advantageous, which should drive a step-up in production levels in future periods. Now, let’s spend a few minutes on the Metallurgical segment’s operating margins, which were compressed in Q2 due to the challenging logistical environment. In total, logistical disruptions had an estimated impact of greater than $12 million in Q2 related to vessel to merge, lead-time vessel movements, increased rail fees, and mid-streaming activities, which, in aggregate, acted to lower our average sales netback accretion. As an aside, it may also be worth noting that we had a higher than ratable percentage of high [Indiscernible] shipments during Q2, which also actively dampened the average net.

The Metallurgical segment’s cash costs were also pressured due to the difficult logistical environment during Q2 as we directed every possible loading swap to coking coal. As a result, we deferred the shipment of nearly 150,000 tons of thermal byproducts during the quarter. Given that the thermal byproduct inventory value is immaterial, the reduced shipping schedule for this product served to increase the Metallurgical segment’s unit costs by an estimated $6 per ton. We expect these unit costs to reverse in the year’s second half. We are also expecting an appreciably stronger performance from the Thermal segment in the year’s back half. That positive outlook is driven principally by the expectation of an improving contribution from our Powder River Basin operations in Q3 and Q4.

As you will recall, we entered 2024 at an annual production rate of close to 55 million tons. Based on the expectation that we would ship 50 million tons of our estimated volumes and an incremental 5 million tons or so related to intra-year sales. Unfortunately, muted power demand, coupled with depressed natural gas prices, fell virtually all new buying activity, while spurring an influx of requests for thermal. As a result, we spent the first six months of the year realigning operating activities and stripping rates with the much reduced shipping forecast. On a more positive note, the excess stripping that we completed during Q1 and Q2 resulted in a significant build in pit inventory in the year’s first half in our PRB months. As most of you are aware, pit inventory is grown and is still sitting in the pit post the removal of the overbid, a step that constitutes the lion’s share of the production Consequently, these tons, when they do ship, will have a positive impact on our port-in cash margins since most of the operating cost has already been incurred.

We are currently sitting on more than 8 million tons of pit inventory in Wyoming, which is twice as much as we would typically do. During the year back half, we expect shipments to exceed production, which will allow us to monetize some of this pit inventory balance. Meanwhile, West Elk again operated efficiently and generated solid adjusted EBITDA, even as it continued to shift under several legacy contracts that dampen netbacks. More importantly, the longer-term outlook at West Elk remains compelling. During Q2, the marketing team continued to build out West Elk’s book of industrial business in the outer years at fixed prices in excess of $70 per ton, $25 to $35 per ton above the legacy contracts that are expiring. At the same time, the mine continued to drive ahead with the development of the piece where the coal is significantly thicker, the quality is markedly better, and the first on cash cost should be substantially lower.

Those factors in aggregate should translate into a step change in profitability for West Elk across a wide range of market conditions, once the longwall transitions to be seen in mid-2021. Before passing the baton to Matt, let’s spend a few minutes discussing the team’s exemplary achievements and the sustainability arena. As you know, we firmly believe that a culture of safety and environmental stewardship will be essential for long-term success of our business. During the first half of 2024, Arch’s subsidiary operations achieved an aggregate total lost-time incident rate of 0.47 incidents per 200,000 employees or more than 4 times better than the industry average. On the environmental front, the company recorded zero environmental violations under SMCRA as a result as well as zero water quality exceedances across all our subsidiary operations.

Further highlighting the team’s excellent growth the State of Colorado recognized West Elk in Q2 with an Outstanding Safety Award and Excellence and Innovative Safety Technology Award and an Excellence in Mining Reclamation Award. And the state of Wyoming honor, Whole Creek with the Surface Mine Safe Award. On behalf of the Board and the senior management team, I want to once again commend the entire workforce for their deep commitment to excellence in the potential areas of performance. With that, I will now turn the call over to Matt for some additional color on our financial results. Matt?

Matthew Giljum: Thanks John and good morning, everyone. Let’s begin with the discussion of second quarter cash flows and liquidity. Operating cash flow totaled $59 million in Q2, which was negatively impacted by a working capital increase of $15 million. In April, we have discussed the likelihood of a significant working capital increase in the quarter in light of the bridge collapse in Baltimore and the impact it would have on shipment tons, with the ability to quickly pivot to alternative shipping methods resulted in a much smaller than anticipated build. Capital spending for the quarter totaled $47 million and discretionary cash flow was $12 million. Turning to the balance sheet, we ended June with cash and short-term investments of $279 million.

We reduced debt levels by $13 million during the quarter, ending June with total debt of $133 million, a net cash position of $146 million and liquidity of $366 million. Turning now to the capital return program. As Paul detailed, we remain active in the program in the second quarter despite the challenging logistical and soft market environment. While cash flows for the quarter is most important variable dividend, our Board has declared a fixed dividend of $0.25 per share payable on September 30 to stockholders of record on August 30. I’ll discuss our guidance in more detail shortly, with the expectation of increased volumes in segments in the back half of the year, we would anticipate cash flows to support more significant returns in Q3 and Q4, and we would expect share repurchases to be the primary vehicle for those returns.

Next, I’m going to spend a few minutes expanding on the severance tax rebate that we received from the State of West Virginia in the quarter. Rebate stems from visionary legislation for best by the state to encourage coal-related investment and employment. If you may recall the incentives of the state created in that legislation were an important consideration in our ultimate decision to move forward with the $400 million build-out in [Indiscernible]. We’re now pleased to report that the legislation has proved highly beneficial to both parties. On the Arch side of the operation, we have a new world-class coking coal line that we expect to remain set-piece of our operations for decades. For the state, that investment has translated into 600 well-paying direct jobs, a significantly higher number of indirect jobs and substantial incremental severance tax receipts as well as a host of other state and local tax revenues.

The rebate earned in the second quarter was the result of a long process refining of the law, not only documenting the investments that were made and also demonstrating the benefits to the state from increases in coal production, employment and severance tax payments under a baseline peer group. Looking ahead, we expect to qualify for additional rebates in the future, although the extent and timing of those potential future recovers will be driven by a host of factors, including market dynamics. Finally, I’ll conclude my remarks with some comments on our guidance for the rest of the year. In the Metallurgical segment, we have maintained our full year guidance for coking coal sales volumes and gas [ph] funds. Our volumes for the first half of the year were less than run, particularly in April, shipments in May and June were at an annual pace of more than 9 million tons.

For cash costs, our guidance excludes the Q2 benefit and any potential future incremental benefits of severance tax rebate, while anticipating a meaningful reduction in the thermal byproduct inventory by year-end. Additionally, we have adjusted several other items in line with the weaker operating results thus far this year. Capital spending is now expected to be in the range of $155 million to $165 million, a reduction of $10 million at the midpoint. Total SG&A guidance is now approximately $92 million at the midterm, including those cash and noncash expense, representing a reduction of $5 million. Finally, we now expect that we will not pay any cash taxes in 2024, and will carry several NOL carryforward totaling approximately $250 million in 2025.

With that, we are already on same questions. Operator, I’ll turn the call back over to you.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Lucas Pipes from B. Riley. Please go ahead.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. My first question is kind of on the margin outlook for the met coal business. There were a few moving pieces on the cost side in Q2, and I wondered if you could maybe speak to Q3? I assume that there’s a $6 benefit from the thermal byproduct, but then there’s not the severance rebate, and I would anticipate much higher volume? And then on the realization front, you spoke to a somewhat higher contribution from High-Vol B in Q2. So, wondering how that as well as maybe lower rail rates might impact realization. So, broadly kind of coking coal margins in Q3 versus Q2. Thank you very much.

John Drexler: Hey Lucas, it’s John Drexler, I’ll start off here. And I think you hit on a couple of the key themes. Obviously, the second quarter was impacted significantly with what happened at the Port of Baltimore and the bridge collapse and as a reminder, 50% of our metallurgical exports go under that bridge on an annual basis. So, the logistics team did a fantastic job of managing that. We talked through the impact of the reduced margins there. There was a component of us having to redirect a lot of rail transportation. It was a longer transport to our DTA facility as a result. So, there’s rail surcharge impacts, but the team did a fantastic job of working to get that coal flow redirected. We got creative as well. We talked a little bit about it on the first quarter call as well, where we had an opportunity to midstream.

So when there was an opportunity to load some margins and get them through some lower draft openings of that bridge early in the recovery process, we took advantage of that and loaded several vessels that way as well. Once again, there are some incremental charges coming through there also. Again, you also got demerged. You’ve got vessels that are getting tied up, getting delayed. So, we had all of those costs coming through. So about $12 million of impact of reduced margin as a result of that. On the cost side, you hit on it as well. The typical byproduct that we produce and have forever in the met segment is the Middlings project, the thermal my product, it’s about 10% of our production. Typically, that’s on a standard cadence of shipments as we indicated in our remarks, inventory value of that product is extremely low.

So, as a result of reduced shipments from what we had planned, there’s a pretty significant impact on the unit cost. The opportunity though is those are going to be recovered in the back half of the year as we ship that middling product. And so we’ve got a lot of confidence here. We came operationally for former the met segment produced at a record level. We expect more going forward, but with Leer South continuing its progress and an ongoing improvement in the District 2, we feel good about our ability to continue to produce with those higher levels. And then we’ll work very hard and have confidence we can achieve the shipment reference that we’ve projected as well.

Deck Slone: Lucas, it’s Deck. I might just add, look, we wouldn’t expect that $6 sort of pressure on netbacks that we incurred in Q2 as a result of the bridge collapse glass for all the reasons that John just articulated, but also look, the pricing today on the USE Coast down around $10. I think the positive side of that is that if you look at the average pricing which was around $218 for HVA. So that implies a rail rate that might be $10 lower as well. So if you take those two pieces and you sort of — they kind of net out right now, again, assuming prices hold up, we don’t have those additional costs that we’re raining on netbacks. So, I think that those are important components, certainly suggest right now that we could see a step up in an expansion of margins where we are today.

Certainly would add the fact that, as you point out, volumes are — we would anticipate stronger volumes, which should also result in lower unit cost. So, all those pieces in aggregate really should deliver a stronger future.

Matthew Giljum: And maybe one of the details on your question, you asked about the impact of High Vol-B. During Q2, there are typical splits on shipments are 70% High Vol-A, 15% High Vol-B, 15% overall. We were 20%-plus High Vol-B during Q2 on the shipment front. Overall, in the quarter, that ends up evening out. It had a modest impact on the realization, but when we did want to note in our commentary.

Paul Lang: Well, I think because as I look at this sort of standing back and take in a bridge collapse affected Q2 and a lot of strain rate. But Q2 is betting for reasons outside the copper. I think John pointed out very well with the team is an outstanding job of reacting considering what we were able to do and divert those tons and bringing the market was amazing. We touched on the very big issues which were the netbacks were effective, [Indiscernible] were affected. But really, as I look at it, we were still able to do some capital returns. And I think probably most important to all of this is it’s behind us. It was outside of us. We’re moving on and then should revert the ore at the end of the day and that’s why we’re optimistic about the back half of the year.

Lucas Pipes: Thank you very much for all that detail. My second question is on West Elk. And you mentioned $70 in the prepared remarks. And I wondered, is that kind of a good number to use on the entire output of West Elk going forward? Or is that maybe more specifically for export tons? And so if you could maybe comment on the opportunity from higher prices at West Elk. I would appreciate the additional detail. Thank you very much.

Paul Lang: Yes, Luca, it’s a great question. I’ll start off and will have some thoughts as well. The opportunity at West Elk is that it produces at a relatively low cost, great high-quality product sought after in the export thermal markets plays incredibly well in the industrial market as well. As we’ve been discussing, we are transitioning to the VC from where we have been producing for some time and producing very successfully and at low cost, we’re going to see an improvement in the quality of the coal, the higher BTU, higher-quality products that we think will be even more sought after and so an expansion on the top line. As we continue to build out at West Elk, we have deployed additional continuous miner units to get the VC developed.

So as we — so as a result of that, we’ve seen a temporary step-up in unit costs at West Elk here as we are finishing out the build out. We expect to be producing from the longwall in the VC in mid-2025. At that time, we’re going to see a step down in costs. So, even as we sit here today with a lower realization product, we indicated legacy products at $25 to $35 below on a carryover basis into this year from last year, we struggled a little bit, but we’re still generating EBITDA there and feel very good about where West Elk is going as we move for.

John Drexler: And look at that pricing really pertains to about 2 million tons of North American industrial business. And so as those legacy contracts roll off and really, they’re averaging around $40 as the new contracts sort of kick in and they’re averaging above 70%, that’s a significant step-up on that increment. We do, of course, expect to have additional volumes that we seaborne market, and the netbacks there will be determined by where the seaborne market trends. But clearly, that base of North American business is significant for West Elk. It provides visibility and obviously, a great step up. So when you get into mid-2025, we’ll get into the final of the VC, costs could come down $15 to $20. And we’re talking about very substantial margin expansion and West Elk really becomes a much greater contributor as we as we progress into 2025 period, but certainly as we get into mid-2025 and we have that further step down in cost, that comes with a much bigger coal in the VC with 400 to 500 BTUs of high quality.

So letup is becoming, again, an increasingly exciting story.

Lucas Pipes: This is very helpful. I appreciate all the color and detail and all the best of luck. Thank you.

Paul Lang: Thank you.

Operator: The next question comes from Chris LaFemina from Jefferies. Please go ahead.

Chris LaFemina: Hi thanks operator. Hi guys thanks for taking my question. I just wanted to ask about kind of the capital allocation framework. I mean the balance sheet is obviously very strong, the outlook for the second half is that you should be highly cash generative. But let’s assume we have some kind of nasty macro downturn. Should we assume in that case that the accumulation of cash on the balance sheet would then be used for buybacks? Let’s assume that you’re in a situation where free cash flow is negative because coal prices have gone down a lot. Is that — would that be the strategy then to deploy that capital on the balance sheet to fund buybacks? Or in that scenario, do you want to maintain the very strong balance sheet because of the risks of further weakness in prices and weaker cash flow?

I’m just trying to understand how you use that cash in a downturn? I mean, obviously, in an upturn, the issue is your share price was high, which is a nice problem to have. But in a higher share price environment, it seems like the strategy is to not really aggressively buy back shares. So, I’m trying to understand what happens in the downturn? Thanks.

Paul Lang: Hey Chris, this is Paul. I’ll give me my thoughts and Matt wants to [Indiscernible]. I’ll start out with of our capital returns program effectively return on 100% of discretionary cash on shareholders. This hasn’t changed. Conversely, as we’ve said many times in the past, the allocation program, which is to say the split to great dividend and share repurchases has always been flexible and dynamic as it should be. As we look ahead, I think there’s three reasons we’ve seen for heavier share reports going forward. Firstly, the economic fundamentals, as you point metallurgical segment — and especially on the supply side remains supportive when the global market seem to be relatively balanced. And second, the automotive improved operational execution in the coming quarters gives a lot of comfort knowing where we’re hit.

And I think both third piece of this is the current sales we are in the commodity cycle, which we argue is somewhat of a cross makes our stock and good buy. So, as you would expect, the rate or the pullback of equity, the more likely we’d be putting some of the cash we voted on the balance sheet last year to work. That was the reason we did — we wanted to be set up for these kind of commissions. Absolutely the Board is taking on this is dynamic. So I don’t want to be too specific as to what we’d likely spend in different equity models. But I also want to reiterate that when we built that cash balance, we’ve always said our minimum cash level was about $200 million. That allowed us to keep a robust — a pretty robust 105b-1 plan in during lockouts.

So, in the end, I think it’s not quite a binary as you might know. I think this is more of a continuum among which, I’d say, the use of cash as the equity goes down is probably a little prevalent and if equity goes up and we slow down. But I think the good news is what I’m very proud of is we set ourselves up for this very item to occur. There’s been a downturn in the market, but that’s why we built the excess cash on the balance sheet. Matt you want to–?

Matthew Giljum: I guess the only thing I’d add, Chris, as you look at our cost position compared to our peers, in a situation where cash flows go negative for us, it’s going to be extremely painful for others. So, we would probably view that as something that can’t really be sustained for very long. And so I think we still have room where we can deploy some of that cash that we built on the balance sheet last year and still maintain a very conservative profile, understanding that the conditions that are leading to negative margins are probably going to be more short-term in nature.

John Drexler: And Chris, I just said if we simply see a pullback in pricing in coking coal prices, we are at that point where you said that extreme point where you have negative margins, you just have some compression, but we continue to believe that $200 million is sufficient, right? If we’re generating a margin and a solid margin where prices are today, even with a little further weakness, really comfortable with the idea of $200 million being sufficient amounts of cash, given very low debt levels, very low capital requirements and CapEx requirements. So, we’re feeling really pretty positively about the fact that, that dry powder really will be available to us.

Chris LaFemina: Yes. I mean there’s no question you guys are in a position of strength in a downturn with the balance sheet. And I would agree to maintaining a strong balance sheet is obviously critical. And Deck, you made a point earlier about pricing being in the cost curve, right? I mean if you look at assets in Queensland today, some of these mines are significantly loss-making already. So, hopefully, as you alluded to, we’re somewhere near a bottom in pricing, in which case, you guys could be sitting here generating cash flow through the cycle and maintaining a strong balance sheet and delivering capital returns even in a weaker market, which is kind of the ideal setup on paper and if you actually deliver on that, I’d probably work to all for your stock. So, thank you for all that and best of luck.

Paul Lang: Thank you, Chris. Thank you.

Operator: The next question comes from Nathan Martin from The Benchmark Company. Please go ahead.

Nathan Martin: Thanks operator. Good morning everyone.

Paul Lang: Good morning Nathan.

Nathan Martin: I wanted to come back to the coking coal segment just for a second, maintain full year shipment guidance there. By my math, it means you’re going to need to ship roughly, call it, 2.4 million tons a quarter in the second half, just to kind of reach the low end of that range. First, is that level achievable from a production perspective? Obviously, we just saw a record production quarter in 2Q. I don’t know if that repeats or not. There’s a question there on the production side. I think you guys also mentioned maybe some inventory there. I think 160,000 tons slipped into the third quarter that’s already moved, but any inventory there that would help that as well? And then maybe secondly, just talk to your confidence again around the logistics chain, both the rail and port to handle that additional coal in the second half. And then finally maybe really just cadence of shipments through Q versus 4Q? That would be great. Thank you.

Paul Lang: Thanks, Nathan. Yes, you hit on a lot of different items. So, I’ll touch on a few of them. Operationally, we positioned the portfolio at that level where we delivered record production. We expect to be producing at those higher levels as we continue to move forward. We’ve talked a lot about the opportunity of Leer South, transitioning and finishing the last longwall Amlin District 1 and transitioning to the District 2, where we’re going to see an improvement in core business of 15% to 20%. We expect to get there towards the beginning of the fourth quarter. That will have an impact and benefit for us as well. So, as a result of the production we saw in Q2 and with the constrained shipments that we had, given the sort of alter collapse, where we did build inventory.

I think we were around 350,000 or 400,000 tons of inventory built in the met segment. We indicated we just missed a couple of vessels at the end of Q2. So that gives us a jump start as we go into Q3 and beyond. But clearly, we’ve got to work very closely with our rail providers and port providers, but we have confidence that we’re going to be able to achieve the levels that we’ve seen are going to need in the back half of the year to get to the guidance.

John Drexler: And we’ve always envisioned that step-up, right? This is not new. We’ve always envisioned the fact that we’re going to need to step up as we get to sort of 9 million tons and perhaps beyond that $9 million ton level. And so this is something we’ve been working on for a very long time, quite frankly, rail service is looking good and solid, and we’re getting the training sets when you look at production so far in Panel 8, while we haven’t quite made it the District 2 and the thicker conditions in Panier star stepping towards District 2 and so far, really progressing very well in terms of reduction in Leer South. So, lots of positives. So, we do feel confident that, A, the coal will be there; and then, B, the rail will be there to sort of move it and, of course, feel very confident about the eternal side of the equation is wrong.

Paul Lang: And Nathan, we started Panel 8 and described stair stepping to District 2. Panel 8 is with close or relative proximity starting to be in the direction of where we’re going for District 2. We started in that panel. At the beginning of the quarter, the ramp was great in production here in several weeks in and that panel at Leer South in has continued to be very positive. So once again, it’s just giving us further confidence that as we get into the District 2 in Q4, we’re going to see that step up in the opportunity and production levels.

Nathan Martin: I appreciate that guys. Any thoughts on the cadence of shipments in 3Q versus 4Q, any remnants of issues with the port that would slow things down in 3Q versus 4Q or anything to consider there?

John Drexler: Yes. No, I think the recovery from the port has been good. I think there’s no real significant material remnant carryovers, if any. So, I think that case for that 2.4 million tons level quarter would be a heavy focus for us as we go forward.

Nathan Martin: Okay. Thanks John. And then Matt, you made some comments in your prepared remarks on the severance rebate. Maybe if you could just get a little more color there. What’s kind of the potential dollar amount there over time? Maybe what time period do you expect those rebates to occur? And I think you said some of it will depend upon market conditions.

Matthew Giljum: Yes. Nate, in terms of the rebate first, I think I want to reiterate a couple of things I mentioned in my comments about this being a win-win for both Arch in the state. Obviously, the benefits for us are pretty clear today with the rebate that we’ve got and with Leer South online. For the state, our severance tax levels, if you look at what we paid since the time that Leer South came up a longwall came up there, we paid nearly $200 million in severance taxes over that time. That’s about — for our mine portfolio. Today, that’s about a 70% increase on an annual average compared to what we were paying back in 2019. So, clearly, we think this has been a good thing for both sides. There is a lot of work that goes into this, and I want to commend the folks that are operations in our tax department for what they’ve done to bring us to where we are today.

So all of that said, as we look ahead, I think the good news is we’ve taken, I think, the largest part of the benefit already what we have coming in the future will likely end up being overall smaller than what we’ve gotten so far. Obviously, that makes some sense. We’ve got to qualify expenditures going back several years. So the first bite was going to be the biggest. As we look at the rest of this year, we think there’s probably an opportunity for something along the lines of roughly half of what we got in Q2. And then as we look at next year, clearly, it seems like what the market price is and what the ultimate level of separate tax we pay is going to weigh into this. But as we sit here today, looking like something in the, call it, $5 million to $10 million range for next year.

And then, again, depending on how markets progress, there could be some additional amounts that trail into 2026 as well.

Nathan Martin: Okay, that’s very helpful. And then I also wanted to just ask about the CapEx reduction. Matt, what kind of drove that?

Matthew Giljum: Really just looking at what we’ve experienced for the first half of the year, certainly from where we set our guidance at the beginning of the year where pricing was at the beginning of the year, our results haven’t been what we plan quite frankly. And we’re doing everything we can to defer costs and capital in order to sort of rightsize the cash flows as much as possible. So really just taking things that we thought we would be spending this year and trying to defer those to future periods wherever we can.

Nathan Martin: Okay. I appreciate that. I’ll leave it there. Best of luck in the third quarter.

Paul Lang: Thanks Nate.

Operator: The next conference comes from Katja Jancic from BMO Capital Markets. Please go ahead.

Katja Jancic: Hi thank you for taking my questions. Maybe starting off on the thermal side. The expectation is that the contribution from the thermal side is going to improve in the second half versus the first half. Can you maybe provide a little more color how much of an improvement we could see?

John Drexler: I guess I’ll start out here, we can have others rain as well. I guess we’ve already talked about West Elk and even in this challenged environment that they have — they’re generating EBITDA. And we’ve indicated that we see the lion’s share of the improvement occurring with where we’re at in the PRV. And we’ve done a lot of work over the first half of the year, really, the first three, four months of the year where we saw the significant step down in demand we see into the year kind of targeting 55 million tons of shipments. We already had 50 million tons committed, but that was a challenging winter, low natural gas prices. We — and the rest of the base we see just a tremendous amount of pressure. The team at like West Elk did a great job.

They’ve done a great job of reducing the headcount aggressively. They’re doing that through attrition in furloughs. Their parking equipment, optimizing maintenance with the parked equipment. But what we did see is we had higher production and stripping that we had in shipments and so we saw a build in pit inventory. That pit inventory, we’ve incurred the cost to uncover that coal. We have probably twice as much as we would typically have. We’re at 8 million tons. We probably typically would run normally around 4 million tons. So as we get into the back half of the year, what we expect is an improvement in shipments compared to our production levels. And as a result, we’re going to get the benefit of having incurred the cost to uncover that coal that we incurred in the first half of the year, we’ll get that benefit and reduce costs in the back half of the year.

So, with all that said, I think if you look at our Thermal segment, we expect it to recover all the losses that had to be modestly cash positive as we step into the back half of the year.

Paul Lang: Yes, Katja one of the things we said is, look, at West Elk, kind of cash, we kind of, for the most part, have good visibility there. And like you’re looking at sort of high single-digit EBITDA contributions from West Elk each quarter, that continues. But the very thing that was the headwind of the PRB, which was stripping and inducing or incurring more costs than we otherwise would have because we were stripping more tons than we were actually shipping becomes a tailwind in the back half. So suddenly, you’ve got the high single uses coming from West Elk and then on top of that, we should have a meaningfully positive contribution from the PRB. So, while that’s not a lot of clarity, I would say this that it is a meaningful contribution in the back half.

The simple fact of shipping 2 million to 4 million additional tons that we incur the lion’s share of the cost in the back half will be very significant for PRB margins. So, the two together means that once again, we’ll be generating some pretty meaningful cash contributions from the Thermal segment.

John Drexler: I have a lot of things in the comfort we will float rolling they’ve become very good at reacting to changes in the market on a very short-term business. And I think what they’ve done in the last two months has set them up very well for the second half from here. We’ll have the money right sized, we’re having the effect of the tailwinds from the inventory changes. And we will redo well and that’s addressed whether that means or following or whatever we have today to cut costs, converting to reclamation or all those other things have been very well in the last couple of years, we were able to I still feel pretty good about what’s going on in the team.

Katja Jancic: And maybe quickly on Leer South with now — with the mine entering District 2 and the production — or the steel being thicker, heading into next year, is it fair to assume 3.5 million tons plus is where Leer South could shake up?

John Drexler: Katja, I think we’re not providing specific guidance. But once again, with a meaningful improvement in that proceed business, 15% to 20% improvement since — from what we’ve incurred in District 1. We have high expectations for Leer South and what you’re describing absolutely from my perspective, without having provided any further guidance yet is absolutely within the range of expectations.

Matthew Giljum: And the guidance we did provide Katja, s you’ll recall, is kind of 3 million tons this year sort of — or at least a 3 million ton run rate. So look, if we go from a 3 million ton run rate, so 750,000 tons per quarter, and we get the higher yields that we anticipate in District 2, then obviously it implies a meaningful step-up from that 3 million ton level. But again, as John said, no formal guidance at this point.

Katja Jancic: Okay. Thank you.

Operator: The next question comes from Michael Dudas from Vertical Research. Please go ahead.

Michael Dudas: Good morning gentlemen.

Paul Lang: Hey Michael.

Michael Dudas: John, maybe you could share a little bit how Baltimore and DTA, how operations are, how the activity has been? Is it back to a more normalized level? There still fits and starts? How do you assess that given all the tremendous work that’s been done and all logistical issues that everybody needs to overcome?

John Drexler: Yes, Michael. Good question. I think we commented a little bit on it to expand further. I think post that bridge collapse post the closure of the Port of Baltimore for practical purpose, that was a significant event clearly. We talked about it — we’re logistics team working with our logistics partners did a fabulous job reacting and responding to that event, keeping the coal flowing, adjusting the coal flows. Our partner, DTA, 35% ownership in that stepped up well. The PSX stepped up well. And so we’re really proud of what we were able to achieve in the second quarter despite the significant challenges. With all that said, the port opened the for without restriction, essentially June 10th. Since that time, I would say everything has really kind of gone back to the traditional flows.

And so I don’t see any residual impact going forward. And so we’ll work to optimize on the traditional flow experience that the team gained through the process. I think makes them stronger going forward as well. And so we’ll take this, put it behind us. As Paul indicated in his discussion and move forward and move forward positively. So no residual with that.

Paul Lang: And Mike, maybe add to the fact that look, DTA performed really well during those challenging times, too. And in fact, probably we have a different appreciation for what’s achievable there in terms of throughput that we can probably achieve higher levels than we thought we could because, again, there is a really highly efficient movement out of DTA and an impressive performance by the team there. So, we sorted a fair number of things and actually believe that there may be more throughput capacity at both facilities going forward.

John Drexler: I mean let me end, Michael, I don’t know even say a lot of good things about the , but unfairly, but CSX did a ranging job. We ended up having the hole exact numbers, but roughly 1 million tons from Baltimore down to DTA. Now that’s an extra 300 miles, the halls of the rare or else, we’re not set up to go the way we acted very quickly in tenth management jobs. So, nothing but complements for people with [Indiscernible], the core of engineers and resolve the problems and selling the transit as long as the warrant.

Michael Dudas: I’m sure Joe Hendrik will appreciate that not out for you, Paul. Thank you very much.

Operator: The next question comes from Alex Hacking from Citi.

Alex Hacking: Yes, thanks. Good morning. I just wanted to ask on the industry outages that we saw. Unfortunately, there were a couple of outages in the quarter due to 5s. I think Grove is fairly well understood. But what’s your perspective on the Longview fire? Like how much capacity has that taken out and for how long? And does that have any impact on your end markets? Thank you.

Paul Lang: Yes, both those events are very tough, and I see a Baltimore management teams and the employees, they are difficult plans to grow. I think you touched on the binary, it’s pretty well known. The issues that longer the mine, which is about 10 miles south were South, they had a fire also — as we understand it, the fire still active. And as you think about that buying, it’s a longwall mine, somewhat the size and capacity of our route from that line, the run all came on in December. We were expecting it to do, call it, around number 3 million tons in 2024. Those tons are effectively out of the market or rate. I think as you look at my comments earlier, what we think we’ll see is about a 2% to 3% reduction in seaborne is but it’s hard to guess for either who brings how long these outages will occur.

But my rule of the phone on a mine in the U.S., and it’s a minimum of 90 days, maybe 180 days if they hit it back. That’s if there’s been an equipment damage or residual promo tough situation for those guys. I wish them all in the best, but it’s going to be — it’s going to take some volume out of the market.

John Drexler: And Alex — look, pulling back a little further. Obviously, as Paul said, those outages are unfortunate, we talked a fair amount about kind of subdued nature of the market right now. But we would say this. And look, the market doesn’t feel if it’s imbalance, it’s not imbalanced by a significant amount. If you look at hot metal production year-to-date in the world excluding China, which is what we tend to track, it’s up 1.4%. That’s obviously a positive. India continues to click along despite the fact that they’re in the middle of sort of monsoon right now up 2.7% year-to-date. The Chinese seaborne imports are on track to be up 10 million tons. And while one-third of that or so is sort of lower-quality volume from Russia and they’re being opportunistic, two-thirds of that is higher quality seaborne.

So, that’s a positive. On the supply side, you’ve got Australia, the U.S. and Canada in aggregate, which is, of course, where all the high-quality pool comes from the seaborne market, up only about 1 million tons. So, again, that’s supportive. We talked about the mine outages of 2% to 3%, which are really going to hit lower sort of back half of the year. So look, the reality is that there are a lot of positives here. In fact, we start to see demand reassert itself, we could indeed see a pretty quick move in the market. Now if they stay down for longer, we’re really sanguine about that, right? We’ve talked about where we are in the cost curve, a little pressure, a little rationalization of high-cost supply is good for any market environment.

So that’s great if it plays out that way. But we are looking at an environment that feels relatively well, try to calibrate it right now. We’d reiterate again that we have had great interest — continue to have great interest from Asian buyers. We talked a lot about Vietnam, Indonesia, we’re now looking at a major buyer in Malaysia, and that is progressing well in addition. So there are a lot of positives out there. I will finally say this. And while the market might be a bit subdued, we’re getting no pushback on volume, which I think is always indicative of the fact the market is relatively well balanced. It’s really — everyone wants their toll is taking their coal, they’re just not buying with urgency. So I feel pretty good about what we’re seeing out there in the market, Rod.

Alex Hacking: Thanks. And, I guess, just a follow-up on those comments deck, like the logical conclusion would be that the Asian mills are just destocking, right? Because China imports are up, India steel production is running strong, growing is out. But the met coal price has been falling fairly consistently now for a few weeks. Are we effectively in a destocking moment?

Deck Slone: I think that’s right now. So again, it doesn’t mean that this can’t persist for a while. I think the Asian buyers aren’t buying with great urgency because they’ve seen what’s transpiring elsewhere. Obviously, Europe has been pretty slow and continues to be capacity factors there low. We had the level of interest from Asian buyers and new agent buyers. They look longer term continues to grow. And we talked about the three Southeast Asian countries where we’re seeing a lot of interest in China as well. If you go back three years or so ago, we were mainly just selling the brokers there. Two years ago, we started to sell to sort of midsized producers on a spot basis. And a year ago, we started to do term business with those Chinese buyers.

And now we’re really talking to the largest steel makers in the world in China who want more volume than really we can agree to provide to them because we’ve got to balance out our customer base. So that does all feel positive, and I don’t want to suggest that there’s not this sort of subdued tone in the market there absolutely is. But it feels like if the market is oversupplied, it’s oversupplied very modestly and I agreed that would have destocking could be a component of that.

Paul Lang: Yes, Alex, one little piece of color I would add to what Deck said. And it’s something I worry about in [Indiscernible] when prices are down and no question of destocking of occurring. The one thing we’re not seeing this push back, customers have taken their bonds. As long as customers take their volume, but I don’t like when the pricing product particularly, but at the same time, I get nervous very quickly when customers start pushing back. We’re not seeing that. So I think as Deck said, I don’t want to be overly optimistic, but I don’t think what’s going on is bad.

Alex Hacking: Thanks. I appreciate the color.

Paul Lang: Thank you, Alex.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Paul Lang for any closing remarks.

Paul Lang: Well, thank you again for your interest in Arch. I hope you will agree that the challenges in the past few months are served to underscore the key aspects of our value proposition, including our low-cost asset base, our exceptionally strong balance sheet and our ability to act quickly and every to changing circumstances, particularly the marketing and logistics arrange. I would again commend the Arch team for rising and the challenges to improve. Going forward, we plan to build on this positive momentum and maintain our focus on continuous improvement in the operations, while simultaneously driving costs on the entire platform. I have great faith in our team, and we fully expect that the current period of market softness was set the stage for any of the strongest. With that, operator, we’ll conclude the call, and we look forward to reporting in October. Stay safe and healthy.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.