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Edited Transcript of ARCH.N earnings conference call or presentation 9-Feb-21 3:00pm GMT

·42 min read

Q4 2020 Arch Resources Inc Earnings Call ST. LOUIS Feb 10, 2021 (Thomson StreetEvents) -- Edited Transcript of Arch Resources Inc earnings conference call or presentation Tuesday, February 9, 2021 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Deck S. Slone Arch Resources, Inc. - SVP of Strategy * John T. Drexler Arch Resources, Inc. - Senior VP & COO * Matthew C. Giljum Arch Resources, Inc. - Senior VP & CFO * Paul A. Lang Arch Resources, Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * David Francis Gagliano BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst * Lucas Nathaniel Pipes B. Riley Securities, Inc., Research Division - Senior VP & Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Arch Resources, Inc. Fourth Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead. -------------------------------------------------------------------------------- Deck S. Slone, Arch Resources, Inc. - SVP of Strategy [2] -------------------------------------------------------------------------------- Good morning from St. Louis, and thanks for joining us today. While we are conducting this morning's call from Arch's Board room, I want to assure you that the team is widely spaced and following CDC guidelines closely. 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 too different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our 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 will be happy to take questions. With that, I'll now turn the call over to Paul Lang. Paul? -------------------------------------------------------------------------------- Paul A. Lang, Arch Resources, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Deck, and good morning, everyone. I appreciate you joining us on the call today. Let me begin by expressing my deep gratitude to the entire Arch team for their ongoing dedication during what is quite obviously a complex and challenging time. Even in the face of a significant step-up in infection rates over the last several weeks that mirrored the surge nationwide, the Arch workforce remains steadfast in its commitment to taking all the recommended precautions to protect one another and their families from the virus while continuing to execute at the highest level as essential service providers. We're fortunate to have a disciplined and professional team, and I'm proud to be associated with them. That same commitment to excellence was on display and Arch's list of accomplishments during 2020 as we work to reposition the company for future success. Despite all the requirements associated with navigating to global health crisis, our employees made tremendous progress in achieving a number of strategic objectives. Hitting on just some of the highlights. We maintained our strong momentum in the development of the world-class Leer South growth project, and we augmented our liquidity and funded the build-out of this transformational project through 3 successful financing efforts. The team maintained a first quartile cost structure in our core coking coal segment despite significant market-driven volume reductions. We continued our strategic shift towards steel and metallurgical markets through the contribution of the Viper thermal mine to Knight Hawk Coal company, and our employees yet again demonstrated their leadership in the environmental, social, and governance arena by capturing many of the industry's top safety and environmental awards and leading the industry on all these critical fronts. We streamlined our organizational structure with a voluntary separation program that reduced corporate staffing levels by 25% and cut our overhead costs by $10 million per year. Finally, we moved quickly to align our thermal output with the rapidly changing market dynamic and initiated an accelerated reclamation and closure plan in our Powder River Basin operations, even as we continue to explore strategic alternatives for those mines. In summary, we demonstrated operational excellence in all the facets of our business, pushed ahead with our plan to create an even stronger platform for future cash generation, and continued our strategic pivot to a pure coking coal producer in a logical and thoughtful manner. As you know, Arch began to shift its strategic focus towards steel and metallurgical markets nearly 10 years ago, and we've accelerated those efforts markedly in recent quarters. Most critically, we've delivered on our top priority of building a powerhouse U.S. metallurgical franchise, supported by an outstanding cost structure, a premium state of products, and a best-in-class growth project. With the addition of Leer South, we expect to cement our position as the premier producer of metallurgical coal in the United States and as a preeminent supplier of High-Vol A metallurgical coal globally. Just as importantly, we've built a platform geared to stand the test of time with the Leer and Leer South longwall projected to operate in tandem and to serve as our financial linchpins for the next generation. And at the same time, we continue to drive forward with a strong sense of urgency in optimizing the remaining value of our legacy thermal assets and in systematically reducing the long-term closure liabilities associated with them. We took a significant step in this effort at year-end when we contributed the Viper thermal mine in Illinois to Knight Hawk, which will operate the mine going forward. As part of this transaction, we reduced our long-term undiscounted mine closure obligations by about $21 million. As we move forward in 2021, we plan to accelerate our efforts to shrink the operating footprint of our Powder River Basin mines and to reduce the inflated state calculated bonding requirements and long-term closure obligations associated with these mines. The next significant step in this effort will come at Coal Creek, where we plan to reduce the asset retirement obligation by around 80% or $40 million over the course of the next 18 months. Significantly, we believe we can achieve this goal while still maintaining a cost structure in line with historic levels. Of course, the closure of Coal Creek will necessitate further reductions in our Wyoming workforce, but we expect to achieve that in an employee sensitive way, principally through normal attrition. In 2021, we anticipate producing around 2 million tons at Coal Creek, the final full year of operation at the site before discontinuing mining and commencing the reclamation of the last active pit in 2022, followed by the demolition of the facilities. While Coal Creek will be our near-term focus, we're also in the process of developing an accelerated plan for the Black Thunder mine. At this point, we've not finalized the details as yet, but our plan will be to maintain strong cash flows in order to provide funding for the ultimate closure, even as we seek to reduce final reclamation requirements. Balancing these dual objectives may translate into the establishment of a sinking fund or similar mechanism in order to facilitate putting free cash aside for future mine closure use. Of course, the speed of the wind down at Black Thunder will depend on a number of factors, including market dynamics and the state's willingness to consider reasonable reforms to its currently owner responding program. Regardless how we proceed, we're confident that the Powder River Basin segment is well positioned to continue to generate sufficient levels of cash to fund its own long-term closure obligations. Finally, I'd like to share a few thoughts on the metallurgical markets before handing the call over to John Drexler for further comments on our operating performance. As you're all well aware, the global economy has been shifting into higher gear in recent months in the wake of the virus-related lockdowns and disruptions of 2020. Nowhere is that resurgent more evident than in global steel markets, where production is now running well ahead of pre-virus levels. To give you a sense of that strength, the World Steel Association estimates that global steel production was up nearly 6% in December 2020, relative to December 2019. And 2020 as a whole, finished the year down less than 1% when compared to 2019 in spite of the pandemic's impacts. Pricing is up even more robustly with hot-rolled coil trading at levels of 50% to 150% above last year's pandemic-driven lows, depending on the regional market. Moreover, blast furnace utilization rates in North America have climbed steadily and now stand at 76% versus just 51% at the low watermark of 2020. That progress is emblematic of what we're seeing on the international stage as well. More to the point for Arch, of course, global metallurgical markets are being supported by this resurgence of the steel industry despite uncertainty surrounding Chinese import policies. As an indicator of this strengthening, the U.S. East Coast High-Vol A price assessment is up nearly 50% impressed when compared to last summer's lows. In addition to resurgent demand, the global supply cuts exacted suits the downturns began in late 2019, are also bolstering the market. Arch believes that more than 30 million tons of coking coal supply has been taken out of the market over that time frame. What's more, these production cuts came from not only the United States, but from Canada, Australia, Russia, and Mozambique, with a meaningful percentage of that total expected to be permanent. Moreover, global coking coal producers continue to announce plans to delay or even cancel the relatively modest number of expansion projects currently in the pipeline. Obviously, some of these projects will continue, but the cadence of development has been disrupted, serving to further tighten the supply/demand dynamic. While it's too early to say whether the current price strengthening will persist, we are encouraged by what our customers are saying about their future plans, and we're seeing strong interest in our remaining open 2021 volumes. In closing, let me reiterate that we remain highly confident in and deeply committed to our straightforward plan for long-term value creation and growth. As the world transitions to a post-pandemic future, we believe we're well positioned to continue to build on our proven track record of operational excellence and to excel with our low-cost metallurgical assets, our high-quality slate of products, our industry-leading ESG performance, and our best-in-class Leer South growth project. In short, we like our position and are committed to using our ever-strengthening platform to create long-term value for our owners and other stakeholders. With that, I'll now turn the call over to John Drexler for further details on our operating performance during last quarter as well as what were expected in 2021. John? -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [4] -------------------------------------------------------------------------------- Thanks, Paul, and good morning, everyone. I'd like to echo Paul's sentiments about the great dedication and tremendous contributions of the Arch workforce in recent months. 2020 has been a year like no other, and I'm so proud of how the team has executed despite all of the challenges and distractions. As Paul noted, Arch's single highest strategic objective remains the ongoing and successful build-out of our world-class coking coal platform. During 2020, we once again demonstrated the already significant capabilities of our existing portfolio, delivering a top-tier cost performance despite virus-related volume reduction, leveraging our sales and logistics expertise in a difficult market environment, and expanding the breadth and depth of our customer base. At the same time, we drove forward with the Leer South expansion project that should deliver a step-change in our portfolio's cash-generating capabilities. With the startup of that transformational asset in about 6 months' time, we expect to realize improvements in virtually every key metric for long-term success, including volumes, per ton costs, and average quality. For the year just ended, we achieved cash costs of $61.13 per ton, which was only slightly above the midpoint of our guidance at the start of 2020 despite a nearly 1-million-ton pandemic-driven reduction in our coking coal shipments. In fact, we were on track to hit that $60 per ton target level for most of the year until the significant step-up in infection rates in the second half of the fourth quarter. We estimate that virus-related impacts reduced our output by more than 200,000 tons in Q4 and increased our metallurgical segment operating costs by approximately $3 per ton in that period. As for Leer South, we recorded another strong quarter of progress and are now entering the stretch run. The operating team is well on its way developing the first nearly 2-mile long longwall handling. All of the 212 longwall shields have been manufactured, and we expect to have the entire system on the site by the end of the first quarter. Additional significant milestones include completing modernization and upgrading of the preparation plant, completion of the new high capacity layout, and finishing the last ventilation shaft. One of the final major projects remaining is the cutover of the replacement to the existing [slope belt] with a higher capacity system that ties the underground network to the renovated and greatly expanded preparation plan. As it has been anticipated, this major system change will necessitate a 30-day outage prior to the start-up of the longwall. The culmination of this build-out, of course, will come with the start-up of the longwall system in the Lower Kittanning seam approximately 6 months from now. The excitement at the mine is substantial, as you might imagine. While we anticipate a period of several months during which we will be working [King South] and steadily ramping output, we should start reaping the benefits of the Leer South mine well before 2021 is over. I'm also pleased to report that the projected capital spend for the mine remains within the guidepost that we provided approximately 2 years ago, although we now anticipate gravitating towards the higher end of that original range of $360 million to $390 million, due in large part to the virus-related ship losses, quarantines, and other impacts. As we had contemplated, the opportunity to ramp production at Leer South into a strengthened market environment appears to be increasingly likely. Our marketing team has been busy in recent months, locking down close to 2.6 million tons of incremental metallurgical coal sales during the fourth quarter for delivery in 2021. The vast majority of these new commitments have been an index including our first-ever term business with a Chinese steel producer for 300,000 tons of Leer coal delivered ratably from Q2 2021 to Q1 2022. To give our overall metallurgical positions and perspective, we are 80% committed on this year's plan of 7.8 million tons at the midpoint compared to 60% committed to this time last year on a plan of 7 million tons, another sign of the strength of the market. As I noted, the build-out of our metallurgical portfolio is our top strategic priority, but complementing that strategic pivot is our intensifying focus on environmental, social, and government leadership. During 2020, we once again set the industry standard for large integrated producers with a lost-time incident rate across all of our operations of 0.93, which is nearly 3x better than the industry average and again, leads the diversified producers in the United States. In addition, we again set the bar for environmental compliance, recording just 1 [snapper violation] across all of our operations for the fourth year in a row as well as only 1 water quality exceedance against 168,000 parameters measured at 650 discharge points company-wide for a compliance rate of 99.999%, a truly remarkable accomplishment. In addition, and as further evidence of our clear commitment to ESG excellence, our operations claim 2 Sentinels of Safety awards, the nation's highest distinction for mine safety; the Department of Interior’s Good Neighbor Award, the nation's highest honor for community outreach and engagement; the Milestone Safety Award, the state of West Virginia’s top safety honor; and the Greenlands Award, the state of West Virginia's highest top reclamation honor. Leading the way were our 2 cornerstone operations, Leer and Leer South, which claimed 3 of these 5 awards, thus laying the foundation for continued excellence in the future. Now let's discuss our plans for our thermal assets in just a bit more detail. As you know, we are currently exploring strategic alternatives for our thermal mines, consistent with the recent move to contribute Viper to Knight Hawk. At the same time, and in the event, those alternatives don't materialize, we are moving forward with purpose down a dual track, with the objectives of reducing our thermal footprint in an accelerated fashion and optimizing cash generation at these assets for deployment in final reclamation and closure. Fortunately, we are well positioned to drive progress on both fronts simultaneously. That's because roughly 20% of our total ARO is tied to Coal Creek, even though that mine only produces around 2 million tons annually at present. In other words, we plan to focus our accelerated reclamation efforts at Coal Creek initially and our cash optimization efforts at Black Thunder where our margin potential is greatest. And we expect good results in both instances. At Coal Creek, we are targeting an ARO reduction of $40 million or around 80% of the mine's total in just 18 months or so. In fact, we have already made a good start on that effort after transferring around 40 people and a suite of equipment from Black Thunder to the Coal Creek mine in December to focus exclusively on the final mine reclamation. Over the year, we expect the PRB mines to ship about 48 million tons, the vast majority of which is already committed. We would also expect to achieve a per ton cost level generally consistent with these recent historical averages even with the accelerated reclamation work at Coal Creek. While the primary focus of our reclamation efforts this year will be at Coal Creek, we also intend to pursue several projects at Black Thunder to reduce its surety bond requirements and shrink its operational footprint. We remain confident in the ability of our thermal assets to generate sufficient levels of cash to pay for their own ultimate closure costs. While we are enthusiastic about our outlook for full year 2021, we are cautious about the continuing impact of COVID-19 in the early part of the year. Due to virus-related impacts that have already idled over 25 continuous minor ships at our metallurgical operations thus far in 2021. We expect only a modest sequential step-up in our Q1 coking coal shipments versus last quarter. Finally, as it's typically the case, shipping rates in the PRB tend to be lower in the first half of the year versus in the second. Let me conclude by restating our commitment to driving operational excellence and continuous improvement across the entire enterprise. We are focused on executing at a world-class level with our existing metallurgical portfolio, finishing strong in the build-out of Leer South, expanding the breadth and depth of our market reach in advance of Leer South start-up, and intensifying our focus on industry leadership in the critical area of ESG performance. With that, I will turn the call over to Matt for thoughts on our financial performance. Matt? -------------------------------------------------------------------------------- Matthew C. Giljum, Arch Resources, Inc. - Senior VP & CFO [5] -------------------------------------------------------------------------------- Thanks, John, and good morning, everyone. Before getting into the financials, I would like to add a little to the discussion around our plans for the thermal operations with a focus on surety bonding. As Paul and John have mentioned, our initial priority is the accelerated reduction of the asset retirement obligation and related bonding requirements at Coal Creek. At the same time, John noted the opportunities at Black Thunder for more limited reclamation that will allow for bond reduction without any impact on our operational flexibility. The work we plan to perform over the next 2 years, along with the divestiture of Viper, should result in a reduction in bonding requirements of approximately $70 million, which represents nearly 15% of the total reclamation bonding for our legacy thermal operations. Clearly, that is a significant first step in reducing those obligations. The logical next step, as Paul alluded to in his prepared remarks, is to begin setting aside funds for future reclamation in line with the cash flows generated from the thermal segment in excess of current reclamation spending. Given the significant amount of reclamation currently underway, along with the typical seasonality in PRB shipping volumes, we would anticipate that funding to begin in the latter part of this year. Turning to the quarterly cash flows and liquidity. Fourth quarter operating cash flows of $5 million were weaker than the third quarter, following the trend in operating results and reflecting the semiannual payment of production taxes for our PRB operations. Capital spending for the quarter increased $23 million from the prior quarter, with both project capital and maintenance spending up sequentially. Total CapEx was $80 million, including nearly $57 million of Leer South project costs and more than $4 million of capitalized interest. Maintenance capital for the quarter was $19 million, with substantially all of that related to the metallurgical segment. We finished the year with total liquidity of $315 million and unrestricted cash of $284 million. Availability under our credit facilities was constrained at year-end given the divestiture of Viper, and the lower-than-expected volumes in the quarter. The metallurgical prices remain at current levels, we would expect the borrowing base under both facilities to improve meaningfully throughout 2021. In addition, I wanted to note 2 other sources of liquidity for this year. First, we have approximately $18 million remaining to be received from our 2019 federal land settlement, with substantially all of that expected in the first half of this year. And finally, approximately $6 million of restricted cash from this summer's tax-exempt bond offering remains on our balance sheet and will be available to us for qualifying expenditures made at Leer South in 2021. Next, I would like to expand a bit on some of the financial guidance provided in this morning's release. Beginning with SG&A, we are guiding to a midpoint of $79 million for total SG&A with cash spending of $62 million. Cash spend represents a reduction of nearly 7% from 2020 levels, even as we anticipate an increase in marketing activities as Leer South ramps up and COVID restrictions are eventually relaxed. When compared to our original SG&A guidance for 2020, total expense has been reduced by 15% and the cash portion is more than 16% lower. With respect to interest, we are guiding to net interest expense on our income statement of $24 million at the midpoint, which represents an increase of more than $13 million from 2020 levels. For modeling purposes, the 2021 expense breaks down to cash interest expense of $27 million, noncash interest amortization of $10 million, offset by capitalized interest of $13 million. The noncash interest component has increased substantially due to the accounting treatment for the convertible notes. Finally, we are targeting capital spending of $210 million at the midpoint. Of that total, approximately $107 million relates to Leer South, roughly $13 million represents capitalized interest, and the remainder is maintenance and land expenditures with more than 90% of that total related to our metallurgical operations. As you will recall, the Leer South spending includes $23.5 million associated with the replacement of longwall shields lost at Mountain Laurel, for which we were reimbursed in 2020. From a timing perspective, we expect the vast majority of the Leer South spending to occur in the first half of the year, while maintenance is slightly weighted towards the back half. Before moving on to Q&A, I wanted to briefly mention one ongoing financing initiative. As previously discussed, we expect to have the opportunity to complete the tax-exempt financing effort that we started in 2020. As you will recall, the $53 million that we raised last year was limited by the state of West Virginia's policies surrounding allocation of tax-exempt funds. We have worked with the state to obtain additional allocation, and now we'll look to raise another $45 million for the remaining qualifying expenditures. Given the attractiveness of this financing, recall that the original tranche carried a 5% interest rate, we plan to pursue this opportunity in the first quarter. With that, we are ready to take questions. Operator, I will turn the call back over to you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll go ahead and take our first question from Lucas Pipes from B. Riley Securities. -------------------------------------------------------------------------------- Lucas Nathaniel Pipes, B. Riley Securities, Inc., Research Division - Senior VP & Equity Analyst [2] -------------------------------------------------------------------------------- Job well done on both a very difficult COVID year and then on the ESG front in particular as well. I wanted to first go into CapEx a little bit more. I think you touched on it in the prepared remarks, but can you provide a breakdown on kind of growth CapEx with Leer versus maintenance, sustaining capital in 2021? And then as we look half 2021, what should we expect? Of course, it's early, but can you give us a sense for where you think longer-term capital spending post-Leer would shake out? -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [3] -------------------------------------------------------------------------------- Lucas, this is John Drexler. As we've indicated, we're still within the guidance range of $360 million to $390 million at Leer South. We've indicated that we're going to be trending towards the upper end of that range given some of the challenges of COVID and some of the inefficiencies that we've seen here late in the fourth quarter. In addition, the CapEx includes the insurance recovery of $23.5 million for the longwall shields that we lost in 2019 at Mountain Laurel. So at the upper end of the $360 million to $390 million-plus the $24 million of that insurance recovery, and that begins to get you the total project for Leer South. Then we highlighted the maintenance CapEx of $13 million -- I'm sorry, capitalized interest of $13 million and then the remainder for this year would be maintenance CapEx. As we look forward, we've indicated that prior to Leer South starting up, our maintenance CapEx would generally run somewhere in that $80 million to high $90s million or under $100 million. I think with the start-up of Leer South and then the ongoing capital need there, that $100 million maintenance capital range or slightly above that is probably from a modeling perspective, where we would see maintenance capital going forward. We're excited to get Leer South up and running. We think it's a transformational project. It's been a big commitment for us here as we've worked through the depth and challenges of COVID and the impact on the markets. But we've got great confidence as we're coming to the finish line here and bringing this online into a strengthening market and the cash-generating capability as we move forward. -------------------------------------------------------------------------------- Deck S. Slone, Arch Resources, Inc. - SVP of Strategy [4] -------------------------------------------------------------------------------- And Lucas, this is Deck. Just to connect to that, really one more time clearly so that we address this. So to get to that $390 million for Leer South, that's another $84 million or so of spending that we have. We have the $24 million for replacement shields, which effectively is what we got compensated for in 2020 with the insurance recovery. So that gets you to with rounding around $107 million. The capitalized interest at about $13 million, so that gets you to about $120 million. And then $90 million or so for maintenance CapEx, which gets you to that $210 million at the midpoint. -------------------------------------------------------------------------------- Lucas Nathaniel Pipes, B. Riley Securities, Inc., Research Division - Senior VP & Equity Analyst [5] -------------------------------------------------------------------------------- Terrific, terrific. Very helpful. -------------------------------------------------------------------------------- Paul A. Lang, Arch Resources, Inc. - CEO, President & Director [6] -------------------------------------------------------------------------------- Lucas, one thing I did want to point out, and I think the team has been rather modest about this. But you think about it, it's pretty unusual in this industry to have this bigger project, this complicated project. It's effectively being brought in on-time and on budget. So just tremendous amount of respect for the team and everything that John and his group has done. -------------------------------------------------------------------------------- Lucas Nathaniel Pipes, B. Riley Securities, Inc., Research Division - Senior VP & Equity Analyst [7] -------------------------------------------------------------------------------- Yes. That's -- no, that's great to hear. My second question is on the 2021 guidance. And there's this kind of thermal bucket, and I wondered kind of -- I think in your prepared remarks, you touched on PRB costs being similar to recent historical rates. But then I look at this thermal guidance, and does the cost in there, $11.50 to $12, does that include some of your Western operations, for example, or what you'd say or maybe somewhat even if other thermal or can you help us place this guidance? Is this exclusively PRB or are there other moving pieces in there as well? And this applies not just to the cost, but also to the price volumes as well. -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [8] -------------------------------------------------------------------------------- Yes. Lucas, I'll start off here and others can jump in as well. As you know, as we continue Arch transformation to be exclusively focused on metallurgical coal, we had 2 additional thermal segments, the PRB and then Other Thermal. Other Thermal included our Viper operation in Illinois and our West Elk operation, our longwall operation in Colorado. With the contribution of Viper in the Knight Hawk, which kind of continues the path that we have here and focusing on that. That leaves us with the combination of both the PRB and the West Elk operation in Colorado, which we are now putting together into thermal. The guidance that we're representing for thermal, the vast majority of that, obviously, is influenced by our PRB operations and specifically Black Thunder. I think if you look back to last year in the PRB segment for 2020 despite the significant adjustments we needed to make in the PRB segment, we delivered cost at around $11.50 a ton for full year 2020. As you look to the guidance in that thermal segment, we're guiding $11.50 to $12, obviously, heavily influenced, the vast majority of that influence is the performance in the PRB. Our West Elk operation contributes to about 2.5 million tons on an annual basis. We've worked to reposition that asset here. There has been some opportunity here. We've not gotten into discussion on the markets, but what we've seen in the Newcastle market to get volumes placed there as well. So we feel good, obviously, about the thermal segment. The guidance there is both the combination of the PRB operations and our West Elk operation and that's how we carry forward. -------------------------------------------------------------------------------- Matthew C. Giljum, Arch Resources, Inc. - Senior VP & CFO [9] -------------------------------------------------------------------------------- Lucas, as John said, we thought it made sense to roll the legacy thermal assets together, given how the strategy, given how we're proceeding with our strategy. Additionally, West Elk would have been a segment by itself. So we didn't have comfort sharing that kind of specificity on West Elk alone. -------------------------------------------------------------------------------- Lucas Nathaniel Pipes, B. Riley Securities, Inc., Research Division - Senior VP & Equity Analyst [10] -------------------------------------------------------------------------------- Understood. I appreciate that clarification. And then last one for me, coking coal volume outlook, quite robust. Can you share with us kind of what we should expect in terms of cadence in -- on the volume side, Q1, Q2? 3, 4, second half of the year more broadly? And how would you recommend we think about that ramp up over the course of the year? -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [11] -------------------------------------------------------------------------------- So Lucas, as we indicated in our prepared remarks, we're continuing to see the impact of COVID here. And we think over time, we'll continue to manage the COVID effectively. We're encouraged with the vaccine rollout. That's going to influence the first quarter shipment levels, where we're guiding to, we believe, rates that would be similar to what we just experienced in the fourth quarter. As you know, we've got the opportunity here to bring the Leer South operation online here in the third quarter is what we're guiding to. Obviously, once the longwall comes up and starts to run, we'll be working out kind of the nuances of starting that up. It typically takes a month or so to continue to work through that. And then over time, we'll continue to focus on ramping up and optimizing that asset. But with that longwall coming online, you can expect to see an increase in shipments in the back half of the year. So right now, from the portfolio we have -- we've indicated flat shipment levels for Q1. I think you could look to some of our historical trends in modestly better quarters historically to kind of build Q2 and then it should continue to ramp up as we step through Q3 into Q4, ultimately, to that, what we're guiding to now that midpoint of 7.8 million tons. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) And we'll go ahead and take our next question from David Gagliano from BMO Capital Markets. -------------------------------------------------------------------------------- David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [13] -------------------------------------------------------------------------------- On the -- just wanted to ask a little more on the met coal side, first of all. On the pricing dynamics, obviously, you gave us the 80% that's sold committed on volumes. Can you just walk us through each of those buckets in terms of how they're actually going to be priced as we go through the year as well? -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [14] -------------------------------------------------------------------------------- So, Lucas, I'll start here once again, others can jump in. So we feel real good about the book that we've built. As we indicated, having 80% committed at this stage of the game with the vast majority of that commitment being unpriced and exposed to market pricing. We feel a very strong position. You know the portfolio of our production prior to Leer South coming online between Leer and the Sentinel the predecessor to Leer South operation. You're running at about 5 million tons of coking coal with that being High-Vol A, then you've got Mountain Laurel, High-Vol B, which is 1 million tons and you got rectally longwall, which is 1 million tons. So we're real proud of that portfolio. What we've seen, and I'm very proud of the marketing team is a very strong market environment. We put a lot of met coal to bet over the course of the last quarter. And with all of that, it indexed pricing, pricing in a market that was improving. You can kind of take that and spread the market prices across the qualities and an average back to build the rest of the model. -------------------------------------------------------------------------------- Paul A. Lang, Arch Resources, Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- As you look, David, obviously, we've got about -- if you look at the midpoint of our guidance, about 25% could be a fixed price. So that leaves about 75% of our remaining position subject to index pricing. And I think more specifically, as I understood your question, the vast majority of that's priced off East Coast index industries or assessments. Although there's a small percentage that has off the Australian PLV. -------------------------------------------------------------------------------- Deck S. Slone, Arch Resources, Inc. - SVP of Strategy [16] -------------------------------------------------------------------------------- David, so it's Deck. And so most of our Asian business is priced off of that, as Paul said, off of the Australian PLV price. And so you will see here in the first quarter, a reflection of that fact, the fact that the PLV had lagged pretty significantly. You'll see that in our pricing in the first quarter. Having said that, with the recovery, that will be short-lived. And so that business we've signed into Asia based on Queensland pricing should rebound significantly and reflecting what we've seen in terms of the balance in terms of PLV pricing. Additionally, we did note that we sold about 300,000 tons into China. That is CFR business. And so that would be priced based on the delivered price of the China, which, as you know, is quite strong right now, well over $200. And so that's advantageous as we sit here today. -------------------------------------------------------------------------------- Matthew C. Giljum, Arch Resources, Inc. - Senior VP & CFO [17] -------------------------------------------------------------------------------- So Dave, I mean, even if you look at the averages for High-Vol A, our primary product, U.S. East Coast, for the fourth quarter, those averages were $121 a metric ton delivered to East Coast. Through the end of last week, the High-Vol A is averaging at close to 1 50. So clearly, over a $25 increase in that primary market for us, strength across all of the markers. So we feel good about how the book is built and how it will perform as we move forward. -------------------------------------------------------------------------------- David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [18] -------------------------------------------------------------------------------- Okay. That's helpful. So I think I got most of that down. I just want -- so 75% open. And can you just break that bucket, that 75% piece, can you break that into -- on a -- maybe just frame it on a percentage basis or on a ton's basis. How much is actually linked to that Atlantic Basin price that is significantly higher than the Pacific Rim price -- specific basin price? And how much is actually linked with the specific price? -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [19] -------------------------------------------------------------------------------- Dave, it would be more than 75% would be that U.S. East Coast price. -------------------------------------------------------------------------------- David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [20] -------------------------------------------------------------------------------- Okay. Okay. That's helpful. -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [21] -------------------------------------------------------------------------------- And of course, the vast majority of that being because to the High-Vol A, the High-Vol A marker, specifically given that that's how we're weighted pretty heavily. -------------------------------------------------------------------------------- David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [22] -------------------------------------------------------------------------------- Okay. Perfect. And then I just wanted to switch gears to the surety bonding reclamation topic. And I apologize, I'm not fully up to speed on this subject. But I'm just wondering if you could help us frame the size of this -- the potential size of this sinking fund, right, that you find? -------------------------------------------------------------------------------- Matthew C. Giljum, Arch Resources, Inc. - Senior VP & CFO [23] -------------------------------------------------------------------------------- Yes. So, Dave, this is Matt. I'll start on that. In terms of the reclamation work that we will ultimately have to do in the PRB, I'd characterize it in really 2 distinct things. One is work that we can do on an ongoing fashion while production continues. And the other is work that essentially can't be done until we're done mining and no longer generating revenue. And second piece kind of the end of the mine life that we think makes sense to build a sinking fund for the remainder. And we've worked with our sureties to make sure they understand the work that we're doing and the focus we're putting on that. The remainder we think as long as we're remaining as current as we can be, there's no need to build funding towards that. So as we look at this year, just to kind of frame-up what we're talking about, based on the thermal guidance, if you use roughly 50 million tons and an average price, rounded to $13, we're going to generate about $50 million to $60 million in the thermal operations, the CapEx needs are going to be less than $10 million. So there's going to be, call it, roughly $50 million -- $40 million to $50 million available. We're going to spend the majority of that on reclamation work being done today, probably $25 million to $30 million at Coal Creek, and it's going to leave somewhere in the neighborhood of $15 million to $20 million that would be available to put into a fund that will go for those end of the mine life activity. So that's kind of the way we're thinking about it here in terms of what that fund builds up to overtime. At Black Thunder, there's probably roughly half of their ARO is in that second bucket. So something in the neighborhood of $100 million to $120 million over time that we would have to build to. But that's how we're thinking about it today. And as I mentioned, have had good discussions with our surety partners about that concept. They're very supportive of the work we're doing today and the fact that we're meaningfully going to be reducing both the ARO and the bonding and think that's a good path forward. -------------------------------------------------------------------------------- Paul A. Lang, Arch Resources, Inc. - CEO, President & Director [24] -------------------------------------------------------------------------------- And Dave, I think Matt laid that out very well. Just a couple of other items may be to comment on. We couldn't have 2 better examples in the portfolio that we're working on, Coal Creek and Black Thunder. Coal Creek as we've indicated, at the end of its mine life, we're in a position now where we can make significant advances in final closure of that operation that does 2 things. It not only reduces the bonding requirement, but it also eliminates the ARO, the reclamation obligation recorded on the balance sheet. At Black Thunder, where we continue to have the opportunity, given markets to generate meaningful cash. Our focus is on reducing the footprint while simultaneously producing that coal, generating cash, and using that cash generated to shrink the footprint. And then also, as Matt indicated, provide for that sinking fund overtime for the final mine footprint as we look to the future. So hopefully, that gives you a little more color and insights on that. -------------------------------------------------------------------------------- Deck S. Slone, Arch Resources, Inc. - SVP of Strategy [25] -------------------------------------------------------------------------------- David, it's deck. And just one final point on that. Just -- and I know it's a question that some have had. It's a multifaceted effort and a multifaceted engagement with the surety. Certainly, we're conveying to them that strong commitment to a conservative balance sheet. You saw that with the 3 financings we did during 2020. So making sure that it's clear that we have lots of cash on the balance sheet and a very strong financial position generally. We've kept them apprised of Leer South coming online, which is going to greatly expand our cash-generating capabilities. We continue to convey, as John just described, that we're well committed in the PRB, and we will continue to generate meaningful amounts of cash in the PRB. We have the aggressive reclamation and closure plan that we continue to expand upon. As announced today, the closure of Coal Creek as the next step, and this really accelerated closure of Coal Creek. Matt laid out the sinking fund mechanism that we are contemplating. We're focusing on both the reducing the bonding as well as the asset retirement obligation, and then we're going to be providing sort of ongoing progress. So we think all those things should provide a lot of comfort to our providers and feel good about where those discussions are today. -------------------------------------------------------------------------------- David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [26] -------------------------------------------------------------------------------- Okay. That's very helpful. So when you take all of that together, is it expected that the thermal coal business, the cash generated from the remaining thermal coal business will sort of be ring-fenced and/or whatever and isolated, and that will be enough for the surety bonding requirements? Or is there an expectation that some of the free cash flow associated with the net business will also end up funding maturity bonding requirements? -------------------------------------------------------------------------------- Matthew C. Giljum, Arch Resources, Inc. - Senior VP & CFO [27] -------------------------------------------------------------------------------- Yes, Dave, this is Matt. I think our expectation today is that given the -- certainly, the committed business we've got in the near-term, but also the plants that we're selling to and our view for the PRB demand over the next handful of years that there's enough cash that can be generated in the thermal business to pay for the obligations that are there. -------------------------------------------------------------------------------- John T. Drexler, Arch Resources, Inc. - Senior VP & COO [28] -------------------------------------------------------------------------------- And Dave, that's a reflection, I think, of just once again, the Tier 1 nature of the asset that we have out there that for years despite the significant changes we've seen in volume levels. The outstanding team we have out there is continuing to deliver on costs, costs would allow us to generate cash. And as we sit here today, we've got great confidence that we'll be able to continue to do that moving forward. -------------------------------------------------------------------------------- Paul A. Lang, Arch Resources, Inc. - CEO, President & Director [29] -------------------------------------------------------------------------------- David, as John mentioned, I mean, you look back over the last 10 years as we've systematically reduced production, we have maintained a margin that has been pretty consistent over that time frame. And so we have the ability to flex as we need to flex, still generate cash. And yet, over time, that 50 million tons will become 40 million tons and will become 30 million, but still generating meaningful amounts of cash. We've also talked extensively about the conservatism built into some of our assumptions, on the liability. So we feel quite good about the thermal assets being able to continue to sort of pay their own way here, pay final closure costs from those ongoing cash flows. -------------------------------------------------------------------------------- Deck S. Slone, Arch Resources, Inc. - SVP of Strategy [30] -------------------------------------------------------------------------------- David, without pushing this down the road too far, I think as you stand back, the way I look at this, it's pretty simple. First, I think what we're doing, we're taking positive control of this situation. We're controlling the things that we can steer. The other thing is, and it's -- just from my experience, reclamation never gets cheaper or easier. I think if we get it done and we get it done quickly, we have always tended to get it done cheaper than what we have in the liability. So that's kind of the Hölderlin philosophy of what we're trying to do here. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- And it appears we have no further questions. And with that, that does conclude our question-and-answer session. I would now like to turn the call back over to Paul Lang for any additional or closing remarks. -------------------------------------------------------------------------------- Paul A. Lang, Arch Resources, Inc. - CEO, President & Director [32] -------------------------------------------------------------------------------- I'd like to thank everyone again for your interest in Arch and take the time today to participate in our quarterly call. As you can tell, our optimism and enthusiasm continues to build as the start-up of the Leer South longwall drills closer. While we're trying to get the market -- while trying to guess market timing is always [sought with peril,] it appears that we could be very well positioned to take advantage of a post-pandemic era, in which many countries are looking to stimulate their economies at the same time that pent-up consumer demand is starting to materialize. However, that timing plays out, we intend to be prepared with a significant step-up in capabilities that we're going to recognize with our expanding coking coal platform. With that, operator, I will conclude the call, and I look forward to reporting to the group in April. Stay safe and healthy, everyone. Thank you. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.