Arch Resources(ARCH) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Arch Resources reported record earnings for the third consecutive quarter in Q2 2022, with significant cash generation capabilities [7][10] - Cash from operating activities totaled $268 million, despite a $124 million increase in working capital and a $60 million contribution to the thermal reclamation fund [31] - The company reduced total indebtedness by $136 million or 42%, ending the quarter with a net debt positive cash position of approximately $95 million [10][33] Business Line Data and Key Metrics Changes - The metallurgical segment faced challenges due to poor rail service and localized geological issues, which impacted sales volumes and increased operating costs [8][22] - The thermal segment generated around $93 million in EBITDA while expending just $4.6 million in capital expenditures, resulting in a significant cash generation ratio [25] - The company built inventory levels, ending the quarter with approximately 1.1 million tons of coking coal on the ground [21] Market Data and Key Metrics Changes - Coking coal prices have softened, with High-Vol coal assessed at $249 per metric ton, down from $480 per metric ton in April [14] - Year-to-date hot metal production is down about 5.5%, affecting seaborne coking coal demand and pressuring prices [15] - International thermal coal markets are strong, with prices around $415 per metric ton for Australian thermal coal, supporting coking coal prices [17] Company Strategy and Development Direction - The company aims to fortify its financial position while returning excess cash to shareholders through a capital return program [11] - Arch Resources is exploring opportunities to ship uncommitted coking coal volumes into thermal markets due to favorable pricing [17][28] - The company plans to maintain a minimum liquidity level of approximately $250 million to $300 million while executing its capital return program [34] Management's Comments on Operating Environment and Future Outlook - Management expressed frustration over ongoing rail service issues but remains hopeful for improvements as the year progresses [8][40] - The company anticipates significant improvements in productivity at the Leer South mine by late August [9][23] - Despite recent price pullbacks, management sees a constructive and profitable coking coal market in the long term [18] Other Important Information - The company declared a quarterly dividend of $190 million or $6 per share, payable in September [11][32] - Arch Resources has increased its buyback authorization to $500 million as part of its capital return strategy [12][34] - The company expects to maintain a strong cash generation capability from its core coking and thermal portfolios [30] Q&A Session Summary Question: What is the expected cadence of met coal shipments for the remainder of the year? - Management expects modest improvements in Q3, projecting around 2.3 million tons for the quarter, with a target of 2.6 million tons for Q4 [40][41] Question: What are the opportunities for switching met coal into the thermal market? - Management sees significant opportunities to switch met coal into thermal markets due to current pricing dynamics, while still prioritizing metallurgical customers [48][49] Question: What are the other uses being considered for the remaining 50% of discretionary cash flow? - Other uses include addressing dilutive securities and capital preservation, alongside potential buybacks [57][58] Question: What gives confidence that sandstone issues at Leer South will improve after August? - Management indicated that geological mapping suggests reduced sandstone issues in future panels, with favorable cutting conditions reported by continuous miners [63][64] Question: What is the expected cash cost for the metallurgical segment in Q3? - The expected midpoint cash cost is $89, with challenges anticipated but improvements expected in Q4 [66] Question: What is the pricing expectation for thermal coal volumes in 2023? - Management indicated that pricing for 2023 is expected to be above long-term historical averages, with a solid book of business being built [71][72]