Arch Resources(US:ARCH)2020-04-23 20:46Financial Data and Key Metrics Changes - In Q1 2020, Arch Coal reported a cash outflow from operating activities of $12 million, primarily due to negative changes in working capital of nearly $35 million [31] - Capital spending for the quarter totaled $87 million, with $62 million allocated to the Leer South project, expected to be the highest spending of the year [32] - The company ended the quarter with $323 million in total liquidity, including $234 million in cash, which is below historical targets but deemed sufficient for operations [35] Business Line Data and Key Metrics Changes - The core metallurgical segment shipped 1.5 million tons of metallurgical coal, maintaining performance in line with expectations despite seasonal shipping channel closures [23] - The average cash cost for the metallurgical segment was $58.42 per ton, positioning Arch Coal well on the U.S. cost curve, approximately $20 to $25 per ton below the median for U.S. coking coal mines [24] - Both thermal segments reported negative cash margins due to low natural gas prices and weak power markets, with expectations of continued margin compression in Q2 [28] Market Data and Key Metrics Changes - The steel markets have weakened considerably, with major producers announcing output curtailments, impacting global metallurgical markets [19] - The company has commitments totaling over 58 million tons in the Powder River Basin and 3.8 million tons in other thermal segments, aiming to restore profitability in these areas [29] Company Strategy and Development Direction - Arch Coal is focused on the rapid development of the Leer South mine, with nearly 45% of the projected capital already spent and a longwall startup expected in Q3 2021 [15][25] - The company is adjusting its corporate support structure to align with its strategic direction, including a 30% reduction in corporate staff through a voluntary separation program [16] - Arch Coal is pursuing a joint venture with Peabody to combine thermal operations in the Powder River Basin, which is expected to create a stable and cost-competitive supply platform [16][17] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about improving results in the second half of 2020, despite the challenges posed by the ongoing economic shutdown [14] - The company is taking steps to maintain liquidity throughout the crisis, including trimming $20 million from capital spending plans and suspending quarterly dividends [17][34] - Management emphasized the importance of a strong balance sheet and the ability to adapt to market conditions, with plans to respond to improving market conditions as the economy stabilizes [20][36] Other Important Information - The Federal Trade Commission has challenged the proposed joint venture with Peabody, with court proceedings expected to commence in mid-June [17] - The company has implemented safety measures in response to COVID-19, including staggering shifts and limiting meetings, which have minimally impacted operational performance [22][57] Q&A Session Summary Question: Transition of CEO and future leadership - David Gagliano congratulated John Eaves on his transition and inquired about capital allocation and liquidity strategies in light of market conditions [39][40] Response: Capital allocation strategy - Paul Lang highlighted the unique opportunity presented by the Leer South project, emphasizing its potential to lower costs and produce high-quality coal [41] - John Drexler noted the expected cash flow generation from Leer South, reinforcing the decision to proceed with the project [43][44] Question: Impact of COVID-19 on operations - Michael Dudas asked about the operational impact of COVID-19 and safety measures implemented [55] Response: Operational performance during COVID-19 - John Drexler confirmed that operations have continued to perform well despite safety measures, with minimal impacts on productivity [56] Question: Customer inquiries and market conditions - Michael Dudas inquired about customer inquiries and potential benefits for Arch Coal amid market challenges [59] Response: Customer engagement and market positioning - John Drexler indicated that Arch Coal has received inquiries from customers seeking reliable supply amid market disruptions, positioning the company favorably [60][63]