Arch Resources Inc. (ticker: ARCH) demonstrated robust performance in the fourth quarter of 2023, with an adjusted EBITDA of $180 million and a significant increase in their cash position by $107 million. The company has also made strides in their capital return program, emphasizing their intention to augment their cash balance by another $100 million, specifically for potential share repurchases.
With a solid outlook for the coking coal market and plans to enhance market penetration in Asia, Arch is poised for productivity improvements and cost reductions, particularly in their metallurgical segment, while expecting steady contributions from their thermal segment. The company also prides itself on achieving significant milestones in sustainability, including safety records and environmental compliance.
Key Takeaways
- Arch Resources reported an adjusted EBITDA of $180 million in Q4 2023, with a cash increase of $107 million.
- Plans to unwind capped calls instruments related to retiring convertible senior notes.
- Intends to boost cash balance by $100 million for potential share buybacks.
- Coking coal market remains robust; company aims to expand in Asian markets.
- Anticipates productivity improvements and cost reductions in the metallurgical segment.
- Thermal segment expected to continue solid performance.
- Significant sustainability milestones reached, including safety achievements and environmental compliance.
- Highest quarterly production level of the year at approximately 1.1 million tons.
- Expects a solid contribution in 2024, with a significant increase in cash generation in 2025.
- Negotiated shipment deferrals in the Powder River Basin due to market dynamics.
- Operating cash flow of $182 million in Q4, a 40% increase sequentially.
- Total liquidity at the end of the quarter stood at $444 million.
- $355 million deployed under the capital return program in 2023; diluted share count reduced by 5%.
- Capital expenditures of $160 million to $170 million expected in 2024.
- Thermal coal production projected at 4 million tonnes in 2024, with potential impact of 5 million tonnes.
- Metallurgical coal production expected to exceed 9 million tonnes.
- Wide differential between PLV and HVA coking coal prices due to market conditions and scarcity.
- Company to take advantage of arbitrage opportunities, selling coal at higher prices.
- Focus on cash generation from thermal assets and operational excellence.
Company Outlook
- Arch Resources plans to increase their presence in the Asian market, expecting to ship 50% of their tonnes there soon and potentially 60% thereafter.
- The company is transitioning to the V seam, which is expected to lead to higher volumes and stronger prices.
- Arch has commitments in place for approximately 50 million tonnes of PRB coal in 2024.
Bearish Highlights
- The company noted weakening market dynamics that led to negotiated shipment deferrals in the Powder River Basin.
- The US power market's declining reliance on coal and potential retirements of coal-fired power plants due to low gas prices present challenges.
Bullish Highlights
- Arch Resources sees strong fundamentals in the metallurgical segment and expects ongoing operational improvements.
- The company has reached its target cash balance, signaling readiness for increased share repurchases.
- Executives expressed confidence in the company's ability to manage costs and generate cash despite market challenges.
Misses
- Logistical issues are anticipated to reduce tonnage by 5-10% in Q1 compared to the average, but the company is working to resolve these issues.
Q&A Highlights
- The wide gap between PLV and HVA pricing was addressed, with expectations that the market will normalize over time.
- The company's strategy to build cash reserves in Q4 was discussed, highlighting their intent to have dry powder for market pullbacks and to be responsive to shareholder preferences for dividends or buybacks.
- Executives discussed the break-even point for share repurchases and expressed the view that the current share price presents a good opportunity for buybacks.
Arch Resources Inc. remains focused on operational excellence and rewarding shareholders, with a clear strategy to navigate the current market conditions and capitalize on growth opportunities, particularly in the Asian market. The company's next report is scheduled for May, with a continued emphasis on safety and health.
InvestingPro Insights
Arch Resources Inc. (ticker: ARCH) has shown a strong commitment to returning value to its shareholders, as evidenced by recent financial metrics and InvestingPro Tips. With a market capitalization of $3.19 billion and a remarkably low P/E ratio of 3.66, the company stands out in its sector. The adjusted P/E ratio for the last twelve months as of Q3 2023 is slightly higher at 3.74, still indicating a potentially undervalued stock.
InvestingPro Tips highlight that Arch Resources has been actively engaging in share buybacks, which aligns with their capital return program mentioned in the article. This is further supported by their high shareholder yield and a significant dividend, with a yield of 6.4% as of the latest data, showcasing their commitment to shareholder returns.
Moreover, the company's strong free cash flow yield, as suggested by the valuation, and the ability to cover interest payments comfortably with their cash flows, provide a reassuring financial stability outlook. Their liquid assets surpass short-term obligations, indicating good liquidity, and they operate with a moderate level of debt, which is a positive sign for investors concerned about financial leverage.
While the company's net income is expected to drop this year, analysts predict Arch Resources will remain profitable, which is consistent with their profitable performance over the last twelve months. The InvestingPro Tips also note a large price uptick over the last six months, with a 29.49% total return, reflecting investor confidence in the company's prospects.
For readers interested in a deeper dive into Arch Resources Inc.'s financial health and future outlook, InvestingPro offers additional insights and tips. There are 12 more InvestingPro Tips available, which can be accessed by visiting: https://www.investing.com/pro/ARCH. To enrich your investment research experience, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Arch Coal Inc (NYSE:ARCH) Q4 2023:
Operator: Good day, and welcome to the Arch Resources Inc. Fourth Quarter 2023 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would like now to turn the conference over to Deck Slone, Vice President of Strategy. Please go ahead, sir.
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 file with the SEC may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. I’d also like to remind you that you can find a reconciliation of the non-GAAP financial measures, 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 archrsc.com. Also participating on this morning’s call will be Paul Lang, our CEO; John Drexler, our COO; 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 call from start us on the call this morning. I'm pleased to report that during the fourth quarter, Arch continue to drive forward with our simple, consistent and proven plan for long term value creation and growth. Turning the quarter just ended. The team achieved adjusted EBITDA of $180 million. Generated $127 million in discretionary accounts. Bolstered of our cash position by $107 million, consistent with our stated objective of building additional optionality for potential future stock repurchases, initiated plans to unwind the capped calls instruments associated with now-retiring convertible senior notes. Prior to quarterly cash dividend of $32 million, or $1.65 per share, increasing the total capital employed in our shareholder return program, since its re-launched two years ago, for well over $1.2 billion and achieve independent Level A verification at the Leer mine under the globally recognized for sustainable mining framework, becoming the first U.S. mine of any types to do so. In short, we demonstrated strong progress in this many of our strategic priorities, expanding numerous critical areas of performance, including financial positioning, shareholder value creation, and sustainability. Critically, the team maintained its sharp focus on driving productivity improvements across the operating platform as well. They are truly made significant positive headwinds, as we achieved a 10% quarter-over-quarter reduction in the average cost per ton in our metallurgical segment. Secured nearly 25% improvement, in our average coking coal realization, and delivered an increase of more than 50% of our operating margins. Overall, the team delivered improved product sales, capitalizing on a strong market environment and continue to lay the foundation for still stronger execution in future periods. Before moving on, let me make a few additional comments about our highly successful capital return program. As we've stated many times in the past, the capital return program is the centerpiece of our value proposition. And the central tenant of that program is the return to shareholders of effectively 100% of a company's discretionary cash flow over time. In any given quarter of course, the amount of capital that is deployed in the programs can and will vary based on several factors, including upcoming cash requirements of our minimum liquidity target rely. But those are just timing issues and do not change the fact that over time, effectively all discretionary cash will be return to shareholders. On the Q3 call, as most you will know that we signaled our intention of increasing our cash balance by $100 million, which we believe serves to enhance the potential for opportunistic share repurchases in the event of a market pullback. During Q4 we accomplish that objective and enhanced $7 [ph] million to our cash position. With that completed, we believe we've now effectively position the company to continue the evolution of our capital allocation model towards a heavier share repurchases in the future. Matt, will comment on this subject further in his remarks. But a major step in this regard is to plan settlement the capped call instrument that we expect to complete in the near future. A settlement of the capped call in and of itself should result in the retirement of nearly 2% of our outstanding chips. Turning our attention to the market dynamics. Despite somewhat lackluster steel market fundamental, coking coal markets appear reasonably well-supported at presents. Arch’s primary products, High-Vol A coking coal is currently being assessed at $262 per metric ton on the U.S. East Coast, which while stepped down from the average price that prevailed last quarter is still highly advantageous, particularly in light of Arch’s first quartile costs performance. Meanwhile over the Australian Premium Low-Vol index is currently trading at $53 per metric ton, higher than U.S. East Coast price, which is creating an attractive arbitrage opportunity for select U.S. volumes moving into the Asian market. Needless to say, we're sharply focused on trying to capitalize on that opportunity to the fullest extent possible. Of course, that focus on these opportunities aligns perfectly well with our earnings well advanced objective of increasing our penetration in Asian markets. We expect future steel demand to be centered. Primary reason that coking coal markets remain well supported in our estimation. As a constrained supply stemming from ongoing reserve degradation and depletion, mounting regulatory pressures, limited capital availability, and persistent under investment. In 2023, according to trade data, Australian coking coal exports declined nearly 6% and compared to 2022, and brings the total declined in Australian exports to around 40 million metric tons, or more than 20% decrease since 2016. The peak year for the coking coal exports. For the U.S. and Canadian coking coal exports and aggregate bounce back moderately in 2023, offsetting the Australian declined to some degree, production for those two countries remains well below their respective peak levels. As a result of these factors, we remain constructive on the seaborne coking coal market, expect to continue to be in an excellent position to capitalize on this environment going forward. Looking ahead, we remain sharply focused on pursuing operational excellence relentless and hitting our volume and cost targets. Extending the reach of our high quality coking coal products into the fastest growing global markets. Continuing to reward shareholders to our capital return program, as we evolve towards a heavier share repurchase model, maintaining our strong financial position, our capitalize on the optionality it affords during periods of market pullbacks and advances in our industry leading sustainability projects. We believe we're well positioned to drive forward with all these objectives in 2024 and beyond. And in doing so, continue to generate significant value for our shareholders. With that, I’ll now turn the call over to John Drexler for further discussion of our operational performance in Q4. John?
John Drexler: Thanks, Paul. And good morning, everyone. As Paul just discussed, the Arch’s team executed at a high level during Q4, delivering significant improvements against numerous operating metrics, while turning in another outstanding performance in a critically important area of sustainability. In our core metallurgical segment, the team's strong execution contributed to significantly higher realizations, significantly lower unit costs, and much improved operating margins. In our thermal segment, the team achieved a return to form at left off, as well as a solid contribution from the Powder River Basin assets, despite a softening thermal market environment. The upshot was a greater than 50% sequential increase in discretionary cash flow, which, as Paul noted is the engine for our robust capital return program. Let's take a closer look at the performance of the metallurgical segment. During Q4, the metallurgical team delivered on one of its highest priorities, reducing its average cash cost by more than $10 per ton, or more than 10% when compared to Q3. That's a significant achievement, and one that serves to further solidify the metallurgical portfolios position in the first quartile of the U.S. cost curve. Importantly, the improved performance at Leer South contribute markedly to these stronger results. As anticipated Leer South experienced slower than normal advanced rates and lower than normal yields in the first two months of the quarter as the operation completed mining and panel five, where as you will recall, the coal seam was appreciably thinner due to its position at the outer edge of the reserve block. However, the mine made up for lost time once it transitioned to panel six in early December, resulting in nearly 20% increase in output in Q4 versus Q3. Looking ahead to 2024. We expect continued productivity increases for the portfolio as a whole, as well as continuing improvements at Leer South over the course of the year. As you will have noted, we are guiding to coking coal volumes of 8.8 million tons at the midpoint for full year 2024. In addition, we are guiding to an average cost for the metallurgical segment of $89.50 per ton, which is essentially flat versus 2023, despite inflationary pressures. Were noteworthy in my view is the expectation of still further improvements in the metallurgical segments performance as Leer South transitions to the second-long wall district in late 2024. As previously discussed, we expect better mining conditions in a materially thicker coal seam as the leader South long wall, advances in the district two based on our significantly expanded drilling program. At a time when many of our competitors are wrestling with a migration to less advantageous in higher cost reserves, we are fortunate to be moving in the opposite direction. Looking ahead, we currently expect a less than ratable shipping schedule for our metallurgical segment here at the outset of 2024. The constraint in sales volume relates to weather related disruptions as well as unplanned and accelerated maintenance requirements at Curtis Bay, including a force majeure event that will affect vessel loadings in Q1. As you know, the Curtis Bay terminal is an important link in the seaborne logistics chain for our Leer and Leer South operations. So this outage will have a volume impact. We currently expect Q1 volumes to be modestly less than random. However, we expect the impact to be principally on timing, which is to say, we expect to make up for the mid shipments as the year progresses. I might add that we have factored those events into our full year sales volume guidance. Let's turn out to our thermal platform, which includes our West Elk long wall mining Colorado, with its high quality coal and competitive access to seaborne markets, as well as our legacy Powder River Basin operations. During Q4, West Elk capitalize on the transition to a more advantageous area of the reserve base, by delivering its highest quarterly production level of the year at around 1.1 million tons. As most of you are aware, this is consistent with the normal run rates we have achieved at West Elk in recent years. While the lions overall financial contribution will continue to be muted to some degree by the need to make up for legacy price shipments that were missed in the second and third quarters of 2023. We expect a solid contribution in 2024 before a step up in cash generation in 2025, when we will be transitioning into the V seam mid-year. More encouraging still in my view, as with our metallurgical platform, West Elk expects to transition to even more attractive reserves in mid-2025, when longwall mining shifts to the V seam. As we have shared in the past the coal seam thickness is significantly greater and the coal quality appreciably better than the V seam, which should translate into both higher volumes and stronger relative prices. This positive trajectory coupled with the mines access to seaborne markets and its durable domestic industrial customer base underscores West Elk significant ongoing potential and further supports our belief that the mine will remain a value generating component of our operating portfolio for the next decade if not longer. In the Powder River Basin, the team made a solid financial contribution despite weakening market dynamics that resulted in a number of negotiated shipment deferrals based on customer requests. As always, we took steps to ensure that we preserve the value of our contract book with these negotiated agreements and parlayed the deferrals into additional sales and outer years. But those deferrals still resulted in lighter volumes in Q4. Looking ahead to full year 2024, we have commitments in place for approximately 50 million tonnes of PRB coal at a price generally in line with our average realized price in 2023. As we have demonstrated repeatedly in recent years, we believe we can maintain our cost structure and preserve our ability to generate cash, even it stepped down production levels should that prove necessary. Finally, let me emphasize once again that our harvest strategy which is to say our focus on optimizing cash generation from our thermal assets, remains very much intact. Since the fourth quarter of 2016, the thermal segment has generated a total of nearly $1.4 billion in adjusted EBITDA while expending just $172 million in capital. Before passing the call to Matt, let me now spend a few minutes discussing our efforts and sustainability which remains the very foundation of our corporate culture. During 2023, the company achieved an aggregate total loss time incident rate of 0.55 incidents for 200,000 hours’ work, which is nearly four times better than the industry average. Perhaps even more impressively, the Leer and Leer South mines completed 519 and 329 consecutive days respectively, without a single loss time incident. Those strings are nearly unprecedented for underground mines of their size and complexity, and further underscore our progress towards our ultimate goal of zero incidents, at every one of our mines every single year. On the environmental front, the company received zero environmental violations under SMCRA, versus an average of 11 by 10 of our large coal peers. And recorded zero water quality exceedances for the third year in a row, again an impressive achievement by the team. Finally, and as Paul noted, our Leer operation became the first U.S mine of any kind to achieve Level A verification, under the globally recognized towards sustainable mining framework. That accomplishment is further evidence of our deeply ingrained culture of continuous improvement, and of our intense focus on raising the bar in all areas of our operating execution. 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. As usual, I'll begin with the discussion of cash flows and our liquidity position. For the fourth quarter, operating cash flow totaled $182 million sequential increase of nearly 40% from Q3 levels. As expected, we had a small working capital benefit in the quarter contributing $7 million. Capital spending for the quarter total $55 million and discretionary cash flow was $127 million. As planned, we grew our cash balance over the course of the quarter, an increase of $107 million. We ended the quarter with cash and short term investments of $321 million and total liquidity of $444 million, including availability under our credit facilities. Debt at year end was $142 million, resulting in a net cash position of $178 billion. We have achieved our objective of enhancing our financial flexibility and do not anticipate needing to materially add to the cash balance in 2024. Before moving on, I wanted to note a recent development in our outstanding debt that we completed shortly after year end. As you will recall, we paid down the vast majority of Arch’s term loan in early 2022. Leaving a small stuff outstanding because of the interaction between the loan and other parts of our debt structure. Earlier this month, we refinance that stuff with the new $20 million term loan. While small transaction the refinancing allows us to maintain the financial flexibility that we have grown and accustomed to over the past seven years without any material change in our ongoing debt service obligations. Next, I want to highlight a couple of notable financial accomplishments from 2023. Starting with the capital return program. For the year we deployed $355 million under the program, representing nearly 80% of the year’s discretionary cash flow. That total includes dividends declared of $171 million, or $9.20 per share, and repurchases of common stock and dilutive securities of $184 million. As for the remainder of the discretionary cash flow, we expect to deploy that opportunistically in future quarters. The second accomplishment is the ongoing reduction of our diluted share count and a simplification of our capital structure. Going back to the beginning of 2023, our diluted share count total approximately 20 million shares, with more than 11% of that comprise the diluted securities, primarily the remaining convertible bonds and warrants. By the end of the year, the diluted share count was below 19 million shares, with diluted securities representing just 3% of the total. We reduced the total share count by 5%, while greatly simplifying the capital structure. As a final step in that simplification process, and another significant step in reducing the share count, which is plan to unwind the capped calls. By unwinding in the near term, we will receive shares representing the current fair value of the instrument and estimate that can be as much as 2% of the fully diluted shares outstanding. While we are accepting a discount on the dollar value of the capped call, we believe that retiring these shares now in advance of expected future capital returns, will prove more value creating and delaying the retirement until the maturity date in late 2025. Before turning the call on for questions, I would like to cover a few cash flow guidance and modeling items for 2024. First, we expect capital expenditures to be in the range of $160 million to $170 million, representing maintenance level spending. We currently expect that to be spread fairly ratably over the course of the year. Second, we expect Arch's share of additional maintenance and improvements at DTA, over and above the normal operating costs to be approximately $10 million. This is not included in our CapEx guidance, but is accounted for as an equity investment. I would also note that we expect this to be offset by additional income that we will generate from selling our excess capacity in the terminal to third parties. Third, with respect to cash taxes at current metallurgical prices we would expect our cash tax taxes for the year to be near the bottom end of our guidance range, as we continue to utilize our net operating loss carryforwards. Lastly, as we look at working capital trends, we typically see a cash outflow in the first quarter and would expect that to be the case in this quarter as well, as an outflow of as much as $40 million. As we look at the full year we currently expect to see a modest working capital benefit, which represents a tailwind of more than $80 million, as compared to the working capital build we experienced in 2023. To wrap up, Arch in 2024 are in a great position to continue to deliver robust capital returns, only maintenance capital spending, minimal debt service obligations. The ability to utilize NOL carry forwards to minimize cash taxes, and a more favorable working capital trend. As we look at how we execute the capital return program, the combination of a streamlined capital structure, that we weighting of the program toward share repurchases and the additional cash we currently have on hand positions us nicely for substantially reduced the share count this year. With that, we are ready to take questions. Operator, I’ll turn the call back over to you.
Operator: [Operator Instructions] And the first question will come from Lucas Pipes with B. Riley, please go ahead.
Lucas Pipes: Thank you very much. Good morning. I first wanted to ask about the met coal guide for 2024. And when I think about the midpoint 8.8 million tonnes and I compare that to 2023 sales of 8.6 million tonnes kind of called a delta there of 200,000 comes at the midpoint. Little surprise given the transition at Leer South, and so I just wondered if you could maybe walk us through maybe some puts and takes across the met portfolio would appreciate your perspective on that? Thank you.
John Drexler: Hey, Lucas, John Drexler. You know, as we look at the volume guidance for '24, we're comfortable, with what we have out there. We -- as we've discussed expect the continued opportunity to ramp at Leer South over the course of '24 district two for us, which we've been talking about and sharing with you guys as well is something that we'll be getting to towards the end of '24. So, that transition is continuing, the expectation for Leer South is around 3 million tons this year. And so that, for us is kind of comfortable. As you look at the rest of the portfolio, there's a lots of things that happen operationally between longwall moves, at each of our longwall operations over the course of the year, except for timing. But we're comfortable with that 8.8. I'll share with you the team is very focused on being higher than that numbers as we work over the course of the year. But as we kick the year off here, wanted to make sure we're all in a range that we were comfortable with. We're very focused on improving that numbers as we work over the course of the year.
Lucas Pipes: That's helpful. I'll appreciate the color. I'll turn over to the thermal side for a moment. And first, I wondered if you could maybe provide a mix expectation between West Elk to PRB and then also where we kind of see PRB pricing contracted for 2024? Thank you.
John Drexler: Yeah, Lucas. As we look at the thermal portfolio, we're excited about what we've seen in the progress we've made at West Elk. As we reported, we've gotten back, essentially to expected run rates for that operation. As we got through the fourth quarter, we were at a 1 million tonnes, that's kind of where we expect to be as we work through 2024. So a million tonnes a quarter, 4 million tonnes for the year, the balance then comes over to the PRB. At West Elk, I'll note, you know, the real excitement is, we're back to normal levels. But we're also going to be in a position where we're transitioning to the V seam, so development is occurring there. By the time we get to mid-2025, we're going to be, in an even thicker coal seam, better quality. So we're excited about that. In the PRB, the rest then spills back to the PRB. We've indicated that we're -- kind of that 50-million-ton level, if you look at our guidance, the midpoint of that guidance, our commitments are actually slightly higher. Where we sit today, you see where natural gas prices is that. As we reported, we took advantage of the opportunity of some of our customers in '23 that needed to look at their commitments and their inventories. And we were able to parlay that into additional volumes, with some rollovers, in '24 about 5 million tonnes. So as we sit here today, we don't think it'd be unreasonable to think of something else in that magnitude 5 million tonnes ish that could be impacted as we work through '24.
Deck Slone: Lucas, this is Deck. I think, I would just I would add this that. For the West Elk, we expect volumes to be higher, that's for sure volumes, really around 3 million tons in 2023. So we expect a meaningful step up to between 4 and 4.5 million tonnes in 2024. But prices are likely to be lower. So, obviously, the seaborne pricing has come down, we have some legacy contracts that we still need to service. So, there's sort of sideways contribution, despite the better results at West Elk from a production perspective, the better operations. Than the Powder River Basin, that pricing is now around $15 is kind of where we're committed to right now, we still think that creates the opportunity for us to generate $1 to $1.50 margin. So overall, for the thermal contribution, perhaps a small step down, given the volumes are likely to be lower, but still a substantial contribution from the thermal segment. I know that doesn't necessarily come across from the guidance table because things like export tonnes are missing, et cetera. But we still think the thermal segments going to contribute a significant amount of cash in 2024.
Paul Lang: Lucas, one thing I think I'd like to just kind of touch on again, and as Deck and John well fitted. But, I know it's a little odd, we're guiding below sold by about a 1 million or 1.5 million ton. I think it's just plain and simple the recognition of natural gas has fallen so much in the last couple of weeks that we're expecting pretty hard pushback, we'll get that value. I think it's the reality and I think we want to show in our guidance.
Lucas Pipes: Yes, thank you. That's exactly what I wanted to get out. If you look at the guidance table, you've committed at, call it $17 bucks and cash cost guidance is $16 to $17. So maybe to help us understand this better in today's new cap of price environment and what you have left to sell at West Elk, maybe domestically as well. Where would you expect that $17.09 to trend in today's market environment? Thank you.
John Drexler: So, Lucas, John here. I think right now you can look at it as the netbacks could be sort of in the 40, sort of, $40 plus range. But look, there are a lot of moving parts at West Elk. And again, we grant you that there's a little, you know, that guidance table might cause a little confusion. But, the reality is there are so many moving parts at West Elk, given, in the wake of the some of the quality issues we had in 2023. That, we do think there is a meaningful margin still to be gained. And even with what I just described in that sort of mid-$40 range of netbacks. You know, we still believe that when you sort of factor in some of the volumes that are priced again, you're going to see a widening out and a solid margin from the thermal segments all.
Deck Slone: Lucas, I mean, -- Deck on. With that additional export volume, even if these capital prices that are down from where they have been, that will move that number of it’s in the guidance table over the course of the year. I think that's kind of been the historical practice you would have seen from us as well if you go back to previous quarters, beginning of the year, et cetera.
Lucas Pipes: Thank you. And sorry if I missed it, how many West Elk comes are uncommitted on price today? And would they all go into the export market with that 40 something dollar netback?
John Drexler: So it was the -- it's close to a 1 million tonnes, that wouldn't be that would not the price as yet.
Lucas Pipes: Got it. All right. This is very helpful, gentlemen. I really appreciate all the color and I'll turn it over. Best of luck.
Paul Lang: Thank you, Lucas.
Operator: The next question will come from Katja Jancic with BMO Capital Markets. Please go ahead.
Katja Jancic: Hi, thank you for taking my question. Same, West Elk, how much did West Elk contribute in '23?
John Drexler: So, Katja. Once again, we're -- as we've indicated this past year, in '23 West Elk, while it was constrained and had issues and produced 3 million tonnes, we expect that to grow to 4 million tonnes. So, we do see an enhancement there, given where the international markets were and with some of the challenges we had, we still had nice margin at West Elk. Now you got as we just talked about some pressures in the markets themselves as we step into '24 West Elk, but you see a very meaningful increase in volume. So, the contribution is we see it is probably flattish between '23 and '24. And still resulted in a nice cash flow for that complex contributing to the thermal segment.
Deck Slone: And may be just a little bit more granularity, Deck again. Probably $10 to $15 margin is how you would think about that for the 3 million tons. If you think about that $10 to $15 margin, kind of what we're saying is like you can see that volume that John just described the 3 million times step up to 4 plus the made up margin gets compressed a little bit in the current environment. So maybe that's helpful.
Katja Jancic: No, that's super helpful. Thank you. And then on the met side, you're guiding 8.6 to 9, do you still overtime expect you can get to 10 million tons?
John Drexler: Well, Katja, I think if we've continued to have discussions around the met portfolio, you know, we are comfortable, especially as where South transitions into district two, that we're going to see volumes at that 9 plus million funding level. We'll continue to do everything to focus on getting that to the highest amount of production that we can out of that portfolio. And you know, we do expect it to be well north of 9. And that will be a great met portfolio. And if we can push it up to 10, we'll be working to do that as well. But it's too early for that product to really solidify some of that guidance.
Paul Lang: Katja, its Paul. The one thing I’d add in. I'll give John and team a lot of credit. As he noted in his remarks, we came through October, November, as expected, through some bad conditions. We hit December in the new panel, the mine volume as well as we've seen it run. And we know we can run the volume. So, I gained a lot of confidence in what I saw and what I saw the team produce. So, I still remain fairly optimistic on that.
Katja Jancic: Okay, thank you. I'll hop back into the queue.
Operator: Your next the next question will come from Nathan Martin with The Benchmark Company. Please go ahead.
Nathan Martin: Yes, thanks. Very good morning, everyone. Thanks for taking my questions. Maybe just a follow up on that most recent question, as we think about the met operations, in general, again, I think you guys in the past eventually get to that 10 million ton run rate. But just to be clear, does that include the thermal byproduct tonnes, because I know some people I think have likely assumed that was just coking coal. So, if that does include the byproduct tons, then in theory, or coking coal tons, you know, more likely in the low 9 million kind of range, just would be great to get your thoughts on the right way to think about that?
John Drexler: Well Nathan, we're talking about met, and these numbers, we're using and as the goal of ultimately maximizing the net sales, that's just the met, it excludes the thermal byproduct. As we mined across our portfolio as part of the production and processing, you are left with that product. So, that's incremental to the volume, the best volume that you have there. So, you know, if you add in the midst product, then yes, you're we will be over 10 million tons, when you add back the impact of the mid, as we look on return, absolutely.
Nathan Martin: Okay, John, just want to make sure that was clear for everyone. Appreciate that. And then I'll be sticking with met for a second. Any thoughts guys on this historically widespread between U.S. East Coast and met coal, High-Vol A and the Aussie met coal especially given your high portion of mix to HVA production? And then, you know, how do you see that possibly affecting your realized price return in '24? And what do you think it takes for the spread to kind of return closer to normal?
Deck Slone: Yes, Nate, it's Deck. And let me take a shot at that and others can join. And obviously, we don't have a perfect answer. This is a very wide differential. Historically, we think it's too wide, we think it will close over time, because it creates significant arbitrage opportunity. But as you notice, the average over the past seven years between the average differential over the past seven years has been a $10 or so premium for premium low vol. Looking to make the argument that that the spread could really be assumed to be around $20. That's the transportation differential between moving homes from the Australia into Japan versus the U.S. East Coast, into Japan. But the fact is, it's more than $50 today. Yes, one of the things I would point to is, different products play different roles in coking coal blends. And so, right now, as we discussed, as Paul noted, coking coal exports out of Australia are down 40 million tonnes, 40 million metric tons since 2016. And we continue to see operational challenges there. So there's real pressure on availability of premium low vol, and premium low vol does have a very specific role that it plays in blends. And so look, I think there's scarcity there, I would add the fact that this cost and royalties moving up in Australia, that also is supporting that higher premium low vol price. Not just say that's justification, because again, we think this creates a significant arbitrage opportunity for us to sell our tonnes in the Asian market, rather than into the Atlantic market and for the Asian buyers to reach on the U.S. East Coast to pick up ton. So, look, we still expect that, you know, that spread to contract. I do believe the fact that there are fewer U.S. producers who really have a lot of experience and exposure in Asia, as more U.S. producers get that exposure. I do think that creates more of an opportunity to see that, the collaboration of those two, those two prices. But look, we're glad to see the higher PLV price, we absolutely believe you know that HVA the other U.S. East Coast prices should be pulled up over time by the scarcity there.
Paul Lang: I think one of the interesting things Nate is with Leer, we have that unusual ability for the U.S. and that we can compete closer to a PLV because of the CSR plastic properties of the coal. And because of that, we do get an opportunity to participate in that arbitrage. Look, it's a little odd that I think Deck did a good summary of all the things that are going on that are creating. Right now, we have that ability to compete head to head and we'll take advantage of it while it exists.
Deck Slone: And Nate, we are selling I mean, we are taking advantage of it in some instances. So there are times we’re selling, you know, tie to PLV, and other instances, it may be that we there are buyers in Asia who aren't quite willing to pay that price, because they don't need that full quality. So we can we can sell a lower quality product with a little more ash and take advantage of a blend between PLV and some of the other indices and still get a premium, the U.S. East Coast price. So, we absolutely are tapping into that and taking advantage. But it would be nice to see the entire East Coast market lift. I think again, that would take some of our competitors following suit and being able to sort of penetrate into Asia in the way we have.
Nathan Martin: Appreciated those comments, guys. And then maybe one final question, Paul, or maybe Matt just, as it relates to the discretionary cash flow. Again, you guys mentioned your decision to increase your cash position quarter to quarter, obviously affected share repurchases. I think you only spent about $3 million in the fourth quarter there. Now, talk is moving to heavier more opportunistic share repurchases. So I guess first, can you provide maybe just some more details behind your decision to build that cash during 4Q? I think the average share price was below where it has been a start the year here? And then second, should we expect the return of discretionary cash flow obviously other than dividend to continue to kind of bit lumpy? And then finally would you expect to increase your buyback authorization as you shift to the buying back more stock?
Paul Lang: So, Nate I think I'll start this, but I think this probably a group effort. As I look back over the capital return program last few years, in fact, there's very little that change, arguably Arch took the lead in this area, really set the standard could call. The fundamental premise of our shareholder return program is really pretty simple. And we live by it, and this is the shareholder’s money, and we're going to return it. And we have shareholders that prefer dividends and we shareholders who prefer buybacks. And we've tried to be responsive. The decision to build $100 million on the balance sheet, totally unresponsive just from some of our shareholders, we thought we should really hold on to some dry powder, when we see pull backs in the market. Like everybody in the commodities business, we experienced significant volatility. And I'd expect that to be the case in the future as well. Now, while we remain very constructive on the currency for coking coal market, our story in general, you know our story in general also. And I think you see that by our willingness to accept the capped call. When we see pullbacks, generally coincides with lower cash balances on the balance sheet. And that's exactly what we're trying to take advantage of. So, I look at our buybacks. The history of it has, I think, been pretty good stewards of the shareholder money, the 12 million shares we've bought back over the last six or seven years, we've averaged about $90. I think at this price environment, it's a pretty good story. And, we're clearly not better at picking the timing on buying and selling to our investors, we want to be prudent on how we deal with the buyback program and building cash towards the upper end of the target. None of the goals trying to be a little more responsive.
Matthew Giljum: And, Nate, maybe just add a little bit to that. Just to give you a specific example, if you go back to the middle of last summer, we saw the stock price dip when the met prices dip. We are in the call it, $110 [ph] a share maybe a little lower. And you know, as we entered Q3 of that year, we were at minimum liquidity levels. So we had, you know, certainly we use the cash flow we were generating at the time to buy back, but if you look at our Q3 buybacks, you know, relatively weak and if we had had a little dry powder at that time, could really have done something more substantial. And that's really the type of thing we're trying to build in the ability to do today is really be able to take advantage of those times. There's going to be volatility in this industry. And, you know, we should be able to manage to take some of that volatility out of the trading for one, but also to take advantage of times when we think that the value has gotten a little lower than it really should be. So, I mean, I think that's the right way to look at the cash bill. When you think about the part of your question regarding the lumpiness of capital returns, look, for better or worse, the cash flows are fairly lumpy, the way the business runs. And so there's going to be some element of that. But hopefully, what we've done by buildings some cash here, is tried to smooth some of that out. And then as we look at the authorization, look, we'll continue to watch that I wouldn't be surprised if you're in the next quarter. So, we need to potentially refresh that authorization. But that'll be a discussion we'll have with the board when the time is right.
Nathan Martin: Very helpful, guys. Appreciate the time and best of luck in '24.
Operator: Your next question will come from Alex Hacking with Citi. Please go ahead.
Alex Hacking: Yes, good morning. Can you hear me?
Paul Lang: Yes, Alex.
Alex Hacking: Okay. So I guess just coming back to Nate’s question on HVA pricing, because your gap is pretty wide, right, I think, FOB Australia, HCC was priced around $290 a shot ton in the fourth quarter, you know, you guys are realizing $195. $100 gap, right. And a lot of that has to do with the pricing of HVA. I guess how much of the issue there is with all the new supply because, Leer South ramped up. And it seems like mine number four in Alabama is also transitioned to HVA. Like, is that the fundamental problem that we've just had a big chunk of new supply and the markets struggling to absorb it, or is there something above and beyond that? Thank you.
Deck Slone: So, Alex, yes, I mean, look, I think the right way to think about the spread with PLV is right now it's about a $53 differential. So, that is simply a function of sort of market conditions and the aspects we talked about. Now when you look at our average coking coal realization, the average HVA price in q4 was two $281. When you think about sort of the Arch blended portfolio, you know, we might be talking about, something more like sort $275 would have been sort of the average price that prevails. So you take that $275, and you say, okay, that's $235 metric, of $250 short, is going to fit your real rate that's $200. And then when we think about the fact we had North American volumes committed at 182, that were a fixed price for about 20% of our volumes, it kind of lands you right on top of that $196 number. So look, I would say we're really delivering on that U.S. East Coast HVA price, the U.S. East Coast prices, generally we're capturing that realization fully. So, you know, we feel good about that. And I still believe that the best proxy for us going forward is that U.S. East Coast pricing. Even though as indicated, there'll be instances when we try to move ton into Asia at the PLV price and instances where we can do that, or at a blended price in Asia. So look, we feel good about that. But I would say, back to the issue of sort of one the difference was between PLV and HVA. Again, some of those, some of those fundamentals that we discussed, certainly don't view this as a new supply issue. U.S. production did bounce back about 5 million tonnes or exports bounce back about 5 million tonnes in 2023. But Australia was down, 10 million tonnes. So, in reality, seaborne market was lost supply during 2023. So we certainly don't see that as the issue would suggest that the 5 million tonnes out of the U.S. was really just for the most part, ringing additional volumes out of the existing portfolio, there aren't a lot of shiny new assets being added. So we see sort of limitations to how much the U.S. can move up. But again, we think the market is really quite well supported, we think we'll continue to have opportunities to move additional volumes, in that. In Asia, we're shipping 40% of our tonnes in Asia today, we expect that to be 50%, and in relatively short order, and probably 60% thereafter. So, look, we're moving in the right direction into that sort of a center of the steel of steel making future, and so feel good about all of that.
Alex Hacking: Okay, thanks for the color, you actually kind of answered my second question, which was going to be around, the tonnage that's going into Asia. So let me just ask, I guess real quick, I apologize if I missed this. In terms of the shipments in the first quarter, they're going to be, weaker or impacted by some logistical issues. Did you quantify that? Or can you quantify that? Thanks.
Deck Slone: We indicated they'd be less than ratable for 8.8 million tonnes. The one we use was modestly, I think, from a ratable perspective, you could look to a 5% to 10% reduction from ratable on the 8.8. So, that's a vessel or to Alex. So, that's just the kind of timing that you're talking about here. And we'll be making that up as we go forward. We don't have any concerns about that.
Alex Hacking: Okay, perfect. Thanks guys.
Deck Slone: And that’s is missing, that's just missing, look, like two vessels 150,000 tons. It doesn't take much for volumes to slip from one port to the next. Look, I heard you say is, is moving quickly to resolve the issues. But, when you're talking about a Force Majeure event and an outage that you know, span multiple days that really does result in a change in kind of the efficiency and productivity of the facility. They did a great job of getting things lined out. But it was multiple days of outages. So again, could have a small effect that we want to be prepared for the fact that we could see a couple of vessels slip out of Q1 into Q2.
Alex Hacking: Okay, thanks, makes sense. I get it, every vessel counts. Thanks.
Operator: The next question will come from Michael Dudas with Vertical Research Partners. Please go ahead. You are muted Mr. Dudas.
Michael Dudas: Thank you very much, bad finger here. [multiple speakers] everyone. So…
Deck Slone: You usually started [indiscernible] Michael, go ahead.
Michael Dudas: So anyway, first thing on the met coal front, maybe Matt can go over you admirable with return falls flat. But, what are your budgeting for 2024 on some of the input costs, labor consumables or contracting royalties et cetera. What are moving at a better rate or higher rate than normal, or kind of contribute to help those costs as we move to '24. And is that something similarly given with expected better volumes we could think about for 2025 primarily?
Matthew Giljum: Michael, good question. I mean, you hit on everything. I mean, as the economy recovered as supply chain issues prevailed, we saw significant inflationary pressures from the industry. We saw supply chain issues, pushing things out, delaying, major pieces of equipment, you know, what have you. The team did a fantastic job of managing all of that, and continues to do a great job of managing all of those things. We continue to see higher inflation and certain things that repair parts and supplies that we're acquiring, we're seeing other things where inflationary has slowed down significantly. So that all gets factored in. From the Labor perspective, labor stuff in our industry, it really is, we've talked about this at length before, we're very fortunate that we've got great long live, low cost assets that operate incredibly safely have a great culture, our most important asset our employees. And when they feel that way, our turnover is lower than others. But still, labor is another impact that is affecting the costs. As we sit here today to be able to move flat from '23 to '24. Obviously, with some modest improvements in volumes, but still hard work by the team to manage cost across the board. As we stepped forward into '25, one of the wonderful things about our portfolio is our ability to continue to manage to that first half quartile cost structure, once again, high volumes, great assets, great people running them, and we think we're in a good position as we move forward.
Michael Dudas: Appreciate that. My second question, maybe for Paul, John, or maybe the group. Certainly, there's been a pretty sizable shift in the federal market in the U.S. So gas prices, meandering quite low. Maybe a sense of what your customers are thinking. Any thoughts on plant retirements, pace, speed up. And as you're thinking about the next several years, we have did have a nice recovery when prices are strong because of the Ukraine issue a couple of years ago. Then the pace of may be moderating or declining, what the PRB assets will contribute in the marketplace, given what maybe could be a little longer trough in the market, from a cyclical side relative to the secular issues that the face of your customers.
Paul Lang: Michael, its, Paul. I'll start off and let the other jump in. As I said the past we look at this situation from a pretty pragmatic point of view. The last coal fired power plant in the United States was 10 years ago, last year, we saw about 13 gigawatts of coal fired generation shutdown. And there's expected to be another 7 million seven gigawatts in '24. The funny thing is, though, at the same time, 2023 was a record year for global coal consumption. And our shipping -- 2022 was 2023 is looking like it also is going to be another record year. The thermal market as well as the seaborne thermal, as well as seaborne coking coal market, still remains very strong. And if you have assets in the U.S. that can get coal offshore, it still has a very good outlook. And West Elk is a prime example of that where it's a coal that sits very well in the Asian market, because it's low ash and low sulfur and higher CV [ph]. So I, I think there is a diminishing role in the U.S. for call. Our kind of internal view is that the PRV will continue to drop about 5% or 10% a year. And I think what you're seeing are we could see in 2024 has been an early part of year is, okay, $1.70 natural gas, it's a pretty tough road to go forward.
Deck Slone: And I would agree with Paul, obviously. But, last year, utility consumption was around 390 million tonnes in the U.S. Going back to 2008, it was $1.1 billion. So clearly, there's been a pretty, a pretty steep glide path here. We are absolutely prepared if we start to see a plateau, we're prepared to continue to produce at higher levels have the ability to do that. We'll take advantage of it. But I think we've been right to prepare for that sort of decline and do all the things that you know we've done, shrink the footprint, build federal mine reclamation fund, the PRV shipped up 230 million tons in total, in 2023, as Paul said, right now, we expect that to continue to step down 10% per year or so probably makes sense. We could definitely see some delayed retirements of power plants that you know, that $50, or that $70 natural gas price right now is a green light saying, you're okay to close. I will say this, concerns about reliability are growing, there is more discussion, we'll see if we end up with some, some more significant delays. We've seen a few here lately. So we're prepared to go into direction, if it continues to decline the way that it has, we're prepared to bring the plane in for a soft landing in Powder River Basin. If suddenly we see a plateau, we're also ready to capitalize it.
John Drexler: And Michael, I'll round out those comments with just the wonderful folks out at our operation that have done an incredible job, through the entirety of that cycle, and through the decline over many years, to continue to manage the asset and nimbly, and to do it in a way to manage the costs. You go back to high watermark for the Powder River Basin or Black Thunder was 117 million tons. You know, this year, it was 60. Right now, you see us guiding to 50. Through the entirety of that decade of change. The team there is embraced and continued to manage the cost and to be able to put us in a position to continue to generate cash. And we got high confidence no matter where that goes as we go forward that we're in a position to do the same thing as well.
Operator: The next question will come from Chris LaFemina with Jefferies. Please go ahead.
Chris LaFemina: Hey, thanks, guys. It's Chris LaFemina. Just had a question. I had a question about the capital return strategy. So Paul, you mentioned accumulating this cash as dry powder you've talked about in the past as well, you've targeted $100 million of cash build, which you achieved in the quarter. So as you go forward from here, let's assume that you don't get the pullback in your stock price. Should we then assume that all free cash flow will be returned to shareholders? And it's really just a question of whether it's dividends or buybacks? Or do we continue to accumulate more cash waiting for that potential pullback to happen? It's my first question.
Paul Lang: Well, Chris, I think the real simple answer is that, we got ourselves to where we said the kind of the upper end of our cash ranges and we're ready to move on. I think we've positioned ourselves very well. And I think there's two strong arguments for moving forward with heavier share repurchase right now. I think first and foremost, is the discussion here earlier, the fundamentals for metallurgical segment are still pretty good. I’ve seen is, looks pretty strong over the medium to short term. And that's probably not baked in the dynamic or it's not reflected in our share price. The second is, John pointed out, we expect ongoing operational improvement in '24, and '25. So, I think we set ourselves up well, for what's coming. And I feel good about the position we put ourselves.
Matthew Giljum: You know, one thing I'll add, Chris, we're -- as Paul said, on the cash balance, we're at the level we wanted to be at, and I think I was pretty clear in my prepared remarks, we don't see the need to build that here in 2024. Maybe one data point, as we look at the capped call, which is going to be something similar to a share repurchase, the break, even if you look at where we're at today from a share price perspective, and where we would need to be in 2025, to make this a better bet to do it today, currently sits at a little less than $200 a share. And if we look at it that way, and we look at our plans, we look at what we think we'll be able to achieve in terms of capital returns over the next couple of years. We think it's better to do this today. And so, you know, taking that and translating it to share repurchases. We think we're in a position that in today's share price environment, we've got a lot of a lot of cash we're going to generate, to buy back shares. And then if we do see a pullback and in the world where we don't have a pullback would be one of the first times I think we've seen something like that in a long time in our business, but we don't see a pullback, we're going to be spending 100% of the cash flow, as we sit here today, returning that to shareholders.
Chris LaFemina: And is there a kind of number on a pullback that you'd be looking for -- certainly I know, you answer that question, but you know, your stocks down 15% from its recent high, is that enough of a pullback or does it have to be much more significant than that?
Matthew Giljum: I don't think we want to get into, where we're going to be a certain price points. I think where we sit today what the stock has done in reaction to this, I think we'd be fairly active in the repurchase program.
Chris LaFemina: Excellent, thank you.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Paul Lang, for any closing remarks. Please go ahead, sir.
Paul Lang: Thank you again, for your interest in Arch. As I noted earlier, we remain focused on pursuing operational excellence delivering on our volume and cost targets while driving continuous improvement across the portfolio. At the same time, we continue to reward shareholders to our capped return programs. We’re intensifying our focus on share repurchases, and opportunistically shrinking our diluted share count over time. With that operator we’ll conclude the call and we look forward to reporting the group in May. Stay safe and healthier, everyone.
Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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