Arch Resources: A Tailwind From The Recently Announced Index Inclusion

Core Viewpoint - Arch Resources is one of the largest coal mining companies in the U.S., with a significant portion of its adjusted EBITDA derived from the metallurgical coal segment, which trades at a premium compared to thermal coal [3][5]. Q4-23 Result - In Q4-23, Arch reported adjusted EBITDA of $180.0 million, up from $126.3 million in Q3-23, and net income of $114.9 million, compared to $73.7 million in the prior quarter, driven by a rebound in met coal sales prices and reduced operating expenses [8]. - The met segment saw a margin increase of $28 per ton, or 52%, compared to the previous quarter [8]. Annual Performance - For the full year 2023, adjusted EBITDA was $714.0 million, down from a record $1,260.4 million in 2022, while discretionary cash flow was a healthy $459.3 million [10]. - Arch has focused on buying back convertibles and warrants, with plans to decrease the basic share count moving forward [10][11]. 2024 Guidance - The company expects a slight decrease in sales volume and a significant drop in margins for the thermal segment in 2024, with adjusted EBITDA contribution likely below $50 million [13]. - The met segment is also expected to see a slight decline in sales volume, but operating costs are projected to remain flat year-over-year, indicating a relatively strong year for Arch despite thermal segment weaknesses [15]. Index Inclusion - Arch is set to join the S&P SmallCap 600 index effective March 18, with U.S. ETFs owning approximately 4 million shares, or 22% of the company, prior to the announcement [18]. - An estimated 1.5 million to 2 million shares are expected to be purchased by U.S. ETFs in the coming months, providing a substantial near-term tailwind [20]. Conclusion - The latest quarterly results align with expectations, with the thermal segment's contribution to the bottom line being historically low [21]. - Arch maintains a net cash position of $178 million and is committed to returning 100% of free cash flow to shareholders, with lower operating costs providing better downside protection compared to peers [23].