Arch Resources Inc (ARCH) 2017 Q1 法說會逐字稿

Good day, and welcome to the Arch Global Incorporated First Quarter 2017 Earnings Release Conference Call. Today's call is being recorded. And at this time, I would like to turn our call over to Miss Logan Bonacorsi, Director of External Affairs. Please, go ahead.

Good morning from St. Louis and thank you 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 that 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 archcoal.com. On the call this morning, we have John Eaves, Arch's CEO; Paul Lang, Arch's President and COO; and John Drexler, our Senior Vice President and CFO; and Deck Slone, Arch's Senior Vice President of Strategy. We will begin the call with some brief formal remarks and thereafter we will be happy to take your questions. John?

Good morning, everyone, today I'm pleased to report that Arch has turned in another very strong quarterly performance. In the first quarter of 2017 the company reported earnings per share of $2.03 and adjusted EBITDAR of $120.5 million marking a meaningful sequential quarter-over-quarter improvement. Revenues reached $601 million even with lower sales volumes and 2 longwall moves in the Metallurgical segment. These results are a demonstration of our ability to execute upon our long-term strategy and a testament of our balanced lines of business, the size and scale of our operations, our low cost asset mix our an impressive financial condition and, of course, our committed and talented workforce. Arch generated strong free cash flow during the quarter, a function of incremental earnings, a prudent capital spending approach and an even stronger balance sheet.

In addition, after thoughtful and extensive evaluations of the company's balance sheet, capital needs and ongoing strategic initiatives, and given our confidence in the company's future cash flow outlook, Arch announced today a comprehensive plan to responsibly return cash to our shareholders. We are initiating a recurring quarterly dividend of $0.35 per share, as well as the initiation of a share buyback policy with the initial authorization for Arch to buy up to $300 million of common stock.

Turning now to our current outlook for coal markets. Although we've seen high volume met coal prices decline nearly 20% from the peak levels reached after Cyclone Debbie made landfall, we expect to global met markets to remain tight throughout 2017. Moreover, we continue to believe domestic thermal markets should also tighten as the year progresses. Beginning with the met market, Cyclone Debbie has captured everyone's attention over the last several weeks. Prior to the disruptions in Australia, it was our view that the global met markets were already in relative balance. So it was no surprise that the storm-related supply disruptions in Queensland sent the global coking coal market sharply higher. And while the effect of the recent storm did not rival the longer-term impacts caused by Cyclone Yasi, it reminded the marketplace just how dynamic the seaborne met market can be.

As you know, the principle Queensland rail carrier, Aurizon, is projecting shipment impacts of around 20 million tons from predominately coking coal. While the actual number remains to be seen, it's clear that ongoing shipment shortfalls due to haulage and speed restrictions are still in place and could linger and impact the global supply and demand balance for the next several months. Offsetting the Queensland losses to some degree are the forecasting of a moderate supply response to the recent coking coal market strength from other regions. The U.S. represents the bulk of that response as evidenced by the rise in the U.S. coking coal exports in the first quarter, which were up nearly 25%. But even with these supply increases, we believe met markets should continue to be well balanced even after the impacts of Cyclone Debbie are past.

While the cyclone has been the dominant driver in the met markets in recent weeks, there are other factors worth noting. Fuel demand has continued to hold up and Chinese metallurgical imports remained strong throughout the first quarter, up 6 million tons year-over-year. On a global scale, year-to-date steel production is up 5.8% through March and the World Steel Association now expects global steel demand to grow at 1.3% in 2017. Shifting gears to the domestic thermal markets, still inflated utility stockpiles continue to represent a significant overhang for demand and pricing. And will likely continue to do so in the coming months. However, there are a couple of positive developments on the thermal front. In particular, we've been encouraged by the persistent strength in natural gas prices, which continue to hold up well despite the exceptionally mild winter and significant increases in drilling activity in recent months. Prompt-month NYMEX is currently trading at $3.23 per million Btus, which as you know is a favorable level for our PRB mines. Consequently, coal burn is stronger than we anticipated and several large coal consumers have entered the market looking to shore up of their positions ahead of the summer burn season. As previously indicated, we do expect further reductions in stockpiles as 2017 progresses and, if the weather normalizes, we believe stock price could approach target levels by year-end. This should spur generators to reenter the market in a more significant way.

Now I'd like to focus on a few things that Arch is doing to capitalize on the current market dynamics. First, we are prioritizing our met sales. We have modestly raised our coking coal volume guidance for 2017, increasing the midpoint by roughly 150,000 tons. Second, we're strategically layering in PRB and other thermal volumes, particularly West Elk, for current and future periods. Higher prices from competing fuels and declining generator stockpiles are supporting this effort and should provide the catalyst for improvement in our domestic thermal coal operations. Third, we are focused on maintaining a strong balance sheet and appropriate levels of liquidity to run our business effectively and efficiently, which will serve us well through the full market cycle.

In closing, I'd like to reiterate that global met markets are strong, domestic terminal markets are improving, and we're sharply focused on delivering continued strong financial results for our shareholders.

With that, I'll now turn the call over to Paul Lang for some additional comments on the quarter. Paul?

Thanks, John, and good morning, everyone. In light of the recent market trends, I'd like to begin by highlighting Arch's sales position then discuss cost performance for the quarter. Starting with the Metallurgical segment. We were pleased with our first quarter results, where realizations were up significantly versus the fourth quarter across all products. For our coking coal shipments specifically, realization increased 40% to a $105.51 per ton, illustrating higher prices on index-based tons which converted during the quarter and as well as new sales. Coking coal shipments in the first quarter totaled 1.5 million tons reflecting scheduled longwall moves at both Leer and Mount Laurel, as well as lighter shipments due to the seasonality of Great Lake deliveries. As John indicated, based on the midpoint of our guidance, we now expect to sell 7.7 million tons of metallurgical coal in 2017, with 10% of the total to be PCI sales. This volume is slightly higher than previously guided and reflects our ability to add incremental volumes of coking coal as we work to run our existing assets more efficiently.

Since our last update, we priced and/or sold at fixed price 860,000 tons of coking coal at an average netback of approximately $120 a ton, with the majority of these tons being our high-vol B product. In addition, we committed 510,000 tons of coking coal on index-based pricing. For full-year 2017, we now have 6 million tons of coking coal committed of which 4.1 million tons are priced at $96.06 per ton and 1.9 million are committed but unpriced. Based on the midpoint of our sales guidance, we also have approximately another 1 million tons of uncommitted sales, the vast majority of which are the higher quality high-vol A and low-vol products.

Looking ahead, we expect our coking coal shipments to rise over the remaining quarters of 2017. While pricing has declined in recent weeks, we continue to have a positive view of global metallurgical markets and expect to achieve continued strong and value-creating margins for our remaining unpriced and unsold volumes.

Turning to the thermal side of the business. In the Powder River Basin, we committed about 3.8 million tons of Black Thunder coal for 2017 delivery at an average price over $12 a ton. We also priced 550,000 tons of indexed sales during the quarter. Additionally, we sold about 3 million tons of Black Thunder for 2018 delivery at pricing levels favorable to current marks. Looking ahead, we have open volumes for this segment ranging between 9 million and 13 million tons in 2017. We believe that further correction in domestic power producers' coal stockpiles and reasonably strong natural gas prices could translate into improved pricing in future quarters.

In the other segment, realizations rose over 4% when compared with the fourth quarter of 2016 due to a favorable mix of customer shipments and the ability to capitalize on international pricing. We built upon our strong contracted position during the quarter by committing modest volumes for 2017 delivery, the vast majority of which were for the West Elk mine. Notably, there continues to be solid demand for West Elk in the seaborne thermal marketplace and we currently have approximately 1 million tons committed for export at prices favorable to the domestic market.

In addition, we have recently seen renewed interest in West Elk from Eastern U.S. customers wanting this high-quality product. Importantly, this new demand should enable us to operate the mine at a higher run rate for the year, which should improve the cost structure for the segment.

Moving to the operating side of the business. In the Metallurgical segment, cash costs increased $4.69 per ton as compared to the fourth quarter. Over 50% of this increase was due to higher sales-sensitive costs and the balance was due to lower volumes associated with 2 planned longwall moves in the region. Looking ahead, we're maintaining our cash cost guidance of $51 to $56 per ton for the segment, highlighting that of our mines remain in the low end of the U.S. cost curve.

In the Powder River Basin, operating costs were up due to the impact of lower volumes and coming off an outstanding performance in the fourth quarter. First quarter costs were also impacted by higher fuel prices and a large maintenance project. As we look at the remainder of the year, we are maintaining our cash cost guidance of $10.20 to $10.70, which we view is a solid and sustainable level consistent with Black Thunder's expected run rate of 70 to 80 million tons a year. With the anticipated drop in shipments usually seen in the shoulder season, we expect the second quarter to be the highest cost of the year.

In the Other Thermal segment, cash costs trended up due to the impact of lower volumes shipped during the quarter and the sales mix between the mines. Going forward, we are lowering the cash cost target for the segment to a range of $25 to $29 per ton, reflecting the higher anticipated volume contribution from our low-cost West Elk operation.

In closing, I'd like to recognize the employees of Sentinel and Coal-Mac in the East and West Elk in the West for receiving high honors by third parties for excellence in safety and environmental performance. Also in the quarter, 4 of our operating complexes achieved a perfect record for both safety and environmental compliance. This is a tremendous achievement and one we remain focused on replicating company wide.

With that, I'll turn the over to John Drexler for an update on Arch's financial position. John?

Thanks, Paul. As John and Paul noted earlier, the ongoing execution of our long-term plan is going remarkably well. During the first quarter, we generated significant cash flow, reduced our debt levels and meaningfully lowered the cost of our debt. Additionally, in April, we amended our existing accounts receivable securitization facility and entered into a new inventory-only asset-backed lending facility, or ABL, providing increased liquidity.

As expected, during the quarter, we generated healthy levels of cash, in addition to using some of that cash to reduce our term loan, our cash and short-term investment balance grew $77 million to $470 million at the end of the quarter. With regard to our capital structure, in March, we successfully refinanced our term loan, decreasing it's size, meaningfully reducing its interest rate and extending its maturity. The term loan was reduced from $326 million to $300 million and pays interest at LIBOR plus 400 basis points, an improvement of 500 basis points from the previous facility. In addition, the maturity was extended 2 years and now matures in 2024. The transaction will reduce our already low interest expense by $18 million on an annual basis. Similar to the previous term loan, the new term loan has no financial maintenance covenants and is prepayable at par. Post the transaction, the combination of the reduced leverage and growing cash balance leaves us with negative net debt of $137 million, an improvement of $107 million since year-end.

Subsequent to the end of the quarter, we successfully amended our existing accounts receivable securitization facility and entered into an inventory-only ABL. This combined transaction will increase our borrowing base under the combination of the facilities and will reduce our costs. As a reminder, the accounts receivable securitization facility, which we had prior to and through the restructuring process, is instrumental in providing capacity for letters of credit to support a portion of our financial assurance requirements. The new $40 million inventory-only ABL, along with the amendment of the account receivable securitization facility, results in a combined $200 million facility. Importantly, on a pro forma basis, had this facility been in place in March 31 to issue letters of credit, our unrestricted cash balance would have been $30 million higher at $500 million.

As John addressed earlier, given our expectation to continue to generate strong cash flows as we progress through the year, we are initiating a recurring dividend as well as a share buyback program. As we have discussed in the past, we are sharply focused on maintaining a healthy balance sheet and ample liquidity through all points in the market cycle. Given our modest capital requirements, exceptionally low interest expense and limited legacy liabilities, we believe that our cash balance is ample to meet expected and potential cash requirements throughout the market cycle. Our dividend policy and share repurchase program will be implemented in a way such that we do not impinge on our strong balance sheet. Moving forward, we would expect to maintain cash levels similar to the levels we have seen over the past 2 quarters and would expect that once we have contemplated capital needs for the business and absent other strategic opportunities, we will be looking to return cash to shareholders through other mechanisms.

I don't plan to reiterate guidance for 2017, which is included in the press release, but I will highlight a few items. We continue to expect our SG&A expenses to be between $85 million and $89 million, this includes $9 million of noncash equity compensation resulting from equity grants made shortly after emergence. Approximately $2.4 million of this was incurred in the first quarter. As we discussed during our last update, associated with taxes, as a result of the bankruptcy and the substantial reduction in debt, we utilized a significant amount of our deferred tax assets. However, we continue to have in excess of $1 billion in deferred tax assets. Under the accounting rules, despite the fact that we are utilizing and expect to continue to utilize our deferred tax assets, these remaining deferred tax assets must have a full valuation allowance applied against them. As required by the accounting rules, we will continue to evaluate the valuation allowance on an ongoing basis as our profitability profile changes. We have further refined our expectation of the utilization of the impact of the remaining deferred tax assets and as a result, when combined with the continuing benefit the industry receives from percentage depletion as well as the impact of timing differences, we now expect to have cash taxes and a tax provision between 0% and 3% in 2017. We expect that rate to grow to between 6% and 10% in 2018, gradually increasing to an ultimate range of between 15% and 20% over the next several years.

In conclusion, we continue to execute on our long-term strategies of operating large-scale, low-cost complexes, prudently managing our balance sheet and maintaining healthy liquidity and generating meaningful cash across the full market cycle. Over the course of the past 2 quarters, that plan has allowed to generate substantial cash flow, access the capital markets to further strengthen our balance sheet and set the stage for returning value to our shareholders in the form of a recurring dividend and a share repurchase plan. We continue to be excited about Arch and it's opportunity to generate value as we move forward.

With that, we are ready to take questions. Operator, I will turn the call back over to you.

(Operator Instructions) Our first question comes a Mark Levin from Seaport Global.

I wanted to highlight a couple or at least ask questions around a couple of comments, John, you just made. One was around returning cash through other mechanisms. I think you alluded to that in your remarks. And then you mentioned also the phrase strategic options so maybe you could elaborate about what you were referring to with those 2 statements?

Well Mark, clearly as we've completed the first quarter and worked closely with our Board of Directors, we're clearly sending a strong signal here in our confidence in the company and its ability to execute and generate cash flow, with the initiation of the recurring dividend and the share repurchase program. I think we're always going to be looking at ways to generate value for the shareholders. That can take a wide variety of means, those options are always out there. But clearly, I think we've signaled here, with the conclusion of the first quarter, the initial direction that we're heading here.

Mark it's John, let me jump in here. I think, as we communicated to the investment community since the first quarter, we've said we wanted to reduce our debt and lower the interest expense, we've done that. As John indicated, we took it to $300 million and reduced our interest expense about $18 million, we also said we're going to have conversations with our board on how to responsibly return cash to our investors. We've done that with the dividend program, the share repurchase. As John said, we are always looking at strategic options. We think where we are right now, this is the right business decision. As this management team looks for the balance of the year, there's a couple of things that we're going to be focusing on. We're going to continue to try to maximize what we see in the met markets in the short term. We're seeing some opportunities on the thermal side that we'll participate in, whether it's PRB or West Elk. And then to manage our balance sheet and make sure that we've got plenty of liquidity for any kind of market cycle that we could go through, and we think we have done that. And we think we're well positioned right now and going forward. So not to say that we won't be looking at things, but right now we're pretty comfortable with what we have. And if you look longer term, our ability to grow organically is probably second to none.

That's a good point because that was leading me to Leer and possibilities about developing that reserve and maybe some updated thoughts as you went through the process of considering buybacks, dividends versus the development of Leer.

Well, no. Mark, I think as we look at the development opportunity beyond Leer on the Tygart reserve, as John indicated, we couldn't envision a higher returning opportunity that would be available to us, so it is something we are focused on. As we've indicated through several calls, we're actively out there working to permit the opportunity, but that's going to take a little bit of time here as we move forward. So those will be decisions that will be presenting themselves to us in the future. But as we sat here today right now and looked over the course of 2017, we felt this was the appropriate direction to head as we sit here today.

And Mark on Leer, as John said, we've probably got 12-plus months of permitting to do, mine planning, so it's not a decision that we have to make in the near term. And given where we are right now in the cycle, we thought returning cash to our shareholders was the appropriate thing to do.

And Mark, I think, clearly as we evaluated all the opportunities, you look long term. And once again, with the way the company is positioned with Tier 1 low-cost assets, with our ability to generate cash moving forward, we think that we're well set for -- as we move into the future.

Our next question comes from Lucas Pipes of FBR Company.

So I also wanted to follow up on the capital return story. And, John Dexler, if I understood your prepared remarks correctly, it sounded to me like you've built a comfortable cash position and cash that you generate from here on out that can be returned to shareholders, is that the right way to think about it in terms of a cadence of a share buyback program on would you maybe refine or elaborate on the way I put it?

Lucas, that's a good question and yes, I think as we described in my prepared remarks, over the last 2 quarters, we've had reported cash balances of $393 million, let's call that $400 million and today at $470 million as of March 31. So I think as we've looked at it, that puts us in a negative net debt position, generating cash. Obviously, a share repurchase program is one that we'll evaluate on a day-to-day basis. It will based on a number of factors, on whether we are participating or not. We won't get into a whole a lot of details from that prospective. But clearly at this point, we think there's an opportunity. We think our share price is undervalued. And so, we're comfortable with the liquidity, and we are going to be generating additional cash beyond that.

That's my expectation as well. Great. And then on the met coal side, if I understood it correctly -- and this is a fairly simplistic question, you have 1.9 million tons unpriced and then at the midpoint of your guidance, I would assume for 2017, you have an additional 900,000 tons that are both uncommitted and unpriced. And I was wondering if you were to commit and price additional tons today, what sort of price would you be looking at? Is it near where you priced during the first quarter or, in the aftermath of Debbie, substantially above that? I would appreciate your perspective. And I think lastly, you also mentioned that the tons that you did sell during the first quarter were a majority high-vol B, if you could maybe elaborate a little more on the quality breakdown of the remaining tons, I would appreciate that color as well?

Well Lucas, this is Paul, as I said, we committed about 860,000 tons, we either priced or sold at a fixed price. And I think what's important to understand is 480,000 of these were new sales which were virtually all high-vol B, so our lower quality product. The range of pricing we saw was pretty wide on this product, it was from the mid $90s to the upper $140s. And the remaining 380,000 that we converted were from index pricing to sold. And the vast majority of that was -- 65% was high-vol A. If you think about what we've done strategy-wise, we fixed the price on our lower quality high-vol B product, which is in the greatest supply in the U.S. And if you think about it, what we have remaining, which is the 1.9 million and 1 million of unsold, that -- 80% of that remaining unpriced, and committed but unpriced, coal is high-vol A and low-vol coal. So we've left our highest quality coal, which should have the highest price, open for the rest of the year. And as I look at it, we are definitely looking at the East Coast assessment for the pricing on this coal.

And Lucas, just to follow on Paul's comments, I mean, as we've talked about, the best way to assess our capabilities us to look at that Platts East Coast index. And we have seen some pretty wild swings in that pricing at the end of the first quarter, the prices were high-vol A about $162, after the Cyclone Debbie hit, those prices ran to $295 and as of yesterday, I think high-vol A was $237. But when you look at low-vol off the East Coast, the high-vol A is actually still about a $25 premium to the low-vol and that gives back to that scarcity premium we've been talking about. We still think it's there. We still think a lot of our customers need that in their blast furnace from a fluidity standpoint. And as Paul said, we've got 1.9 million tons that we need to price, which will be priced in the seaborne market and then another 900,000 to 1 million tons that's fully uncommitted, that should be priced in that market as well. So, we'll see. The transactions have been fairly thin over the little last couple of weeks. We would expect that to pick up as we move through the year, but clearly we think we're well positioned to capitalize on those prices as they evolve.

I think, the only other thing that I'd add is that if you look at the difference between high-vol A and high-vol B at the end of April, it's almost $52.

Next question comes from Jeremy Sussman of Clarksons.

Just looking for maybe a little bit more color on the buyback, if you can provide some. I mean I think it probably equates to about 70% a year at current market cap. And if I just do some quick calculations, theoretically, if you were to do the whole buyback from just current cash on hand, I'd get you to just around 0.3x net debt to EBITDA, just based on consensus numbers. So I guess, my point is it doesn't seem like you need to wait on anything to begin executing this and maybe wondering if you can talk a little bit about this sort of time frame that you see on this front, if the share price kind of stays where it's at.

Jeremy, our plan is to, as we've announced today, we've been authorized, we plan to have it implemented in fairly short order and would expect, kind of given our view the company's undervalued, there may be an opportunity here. We'll evaluate that literally on a daily, weekly basis as we move forward, but there's real opportunity. We agree that we're in a great position with cash, with liquidity, with a protected balance sheet, with strong cash generation as we move forward. So our view is if there's an opportunity and we think we can buy the shares that are undervalued, we will execute on that opportunity.

I appreciate that John. Just off of my follow-up on the dividend, the newly implemented dividend of -- I think implies about a 2% base field. Is this sort of a base number that we should think about kind of on a recurring quarterly basis? Would you look to grow this? Would you look at special dividends to kind of top this off in years with strong cash flow? Since this is a bit new for us, maybe a little bit of color around that would be very helpful.

Yes, Jeremy, as announced, we expect this to be a recurring quarterly dividend. And we would expect that we've set it an initial rate here, $0.35 a share. We'll move that forward. We think, over time, we'll continue to evaluate the market, cash generation, et cetera, and ultimately have opportunities to increase that at some point in the future. But at this point right now we're comfortable with the initiation at this level and expect that to continue for the foreseeable future, but then we will look at opportunities beyond that. As far special dividends, things like that, once again, we're in that great position to continue to have excess cash flows. We'll evaluate everything that's in the market but, once again, as John, as we've indicated with this earnings announcement today, this is clearly the direction we're heading out on here with the recurring dividend and with the share repurchase program.

Our next question comes from Michael Dudas from Vertical Research.

What a concept, a U.S. coal company returning capital to shareholders. Let's hope there are more that are listening out there. My question for you, John Eaves or maybe Paul, a year ago at this time, no one could've dreamt what the met market provided your company and others in the U.S. Looking out maybe a year from now, it sounds you're a bit more -- you sound more encouraged about the direction of the U.S. thermal market, maybe you could -- maybe elaborate a little bit more on some of those drivers. And are you going to manage the sales process differently in your high-quality coals out of Black Thunder given that you've got such a great cash and margin position out of your metallurgical business?

Michael, let me start off and Paul can jump in here. I think, as I indicated, we are always going to be in the market. I've said many times, we're not smart enough to catch the top of this thing. But we came into the year with pretty high inventories. We've been, actually, pleasantly surprised at where natural gas prices were. We think that we're going to be drawing those inventories through the summer with any kind of normal weather and would hope that we could approach normalized inventory levels by the fourth quarter. But even with that said, we're seeing some really interest in our PRB coal from some pretty large customers currently. So I am encouraged, with any kind of normal weather, that it could be setting up for a pretty significant buying season for 2018. The other place that we've seen some encouragement is our West Elk coal. We've been pretty pleased with the demand we've seen internationally, but recently we've seen some domestic interest in that product as well and, as Paul indicated, it's going to allow us to run that mine at a little bit higher level. So I think that we feel good about where we are right now. I think our marketing strategy works. I think we need to always be in the market. I mean, obviously, if we miss, we'll adjust. If we hit, we'll adjust on business. And that's a prudent way to approach it. Paul, you got anything to add?

Michael, I think the one thing I would add is that we entered this year and, as you looked at our guidance, we gave a pretty wide guidance on our thermal, and it was mostly because we were little concerned about the mine activity we were seeing. We got burn forecasts like everybody else that were pretty anemic. The last couple of weeks, we've seen several of our large customers revise their burn forecasts and coming out for volumes. I think the one big change we're seeing is that these are all short-term deals, 1-month, 2-month, 3-month. We are even seeing single and 2- and 3-train deals, which is pretty unusual for the Powder River basin. So clearly, I think the customers are starting to look at where gas is and a they're starting to look at their inventory. So as John said, we think this could be setting up. I don't think it's going to be a Q2 event but clearly, hopefully, in the back half of the year into '18 that we'll see a correction in pricing.

It's Deck. And I'll add 1 other point here, which is, look, since the end of '15 we're going to see, if John is right, if we're right, that, by the end of this year, we're going to be back to sort of close to target levels. We are going to have seen about 75 million to 80 million tons pulled out of stockpiles over the course of the last 2 years. Those tons have to be made up. So we're going to have to see increased shipments, if stockpiles are now going to normalize and we're going to see this liquidation end, they're going to have to see some increase in shipments into '18, that's certainly attractive. One of the things we don't know is -- we can talk about target but end-of-the-year but, as we know, utilities are sort of on a distribution in terms of where they are with stockpiles. And so, certainly even as we get into the fall, you could a see certain group of generators, maybe a significant slug start to buy again. As John said, we're already starting to see that with the much higher gas prices. For the rest of the year, the strip is about $3.39 for natural gas, for next year, $3.13. Those are great numbers for our Powder River Basin assets. So certainly we think that the dynamic is going to evolve and we're already starting to see some indications, even though, right now, stockpiles are still fairly inflated. So we do see positive direction there into '18 and are encouraged by what we're seeing.

Next question comes from Paul Forward from Stifel.

You had a slight raise to the coking coal volume guidance for the year, 150,000, I think you said, at the midpoint. Just - and I think Paul Lang, you talked about running the assets more efficiently to get there. Just maybe if you could provide a little bit more color on that? How are you running the assets more efficiently? Is there any overtime involved? Any additional capital being deployed in response to these really strong markets? I guess, I would say, how are you getting there? And then as a follow-up, as you look into 2018, is that a sustainable level around 7 million tons?

Paul, I'll try to answer it for you. The increase in production we're showing of about 150,000 tons, it really comes out of our 2 high-vol A mines, Sentinel and Leer, and our low-vol mine, Beckley. And it really revolves around 3 things, at Leer we're increasing the shift schedule -- or changing the shift schedule to allow more time to operate the longwall. We had some room built into scheduling in last year, and we are simply rescheduling the employees to pick up some of that slack space. At Sentinel, we actually added a CM section to the operation late last year and picked up about 100,000 or 150,000 tons there. Then at Beckley, we entered into an area with higher seam, and we could have stayed with the lower profile equipment but went ahead and put in higher productivity equipment at the operation. So kind net-net those are what brought the increase in production up, and those are all sustainable things going into the future.

Great. And I think you'd mentioned a little bit about the reserve adjacent to Leer. I was just wondering, as you looked at, I think, 2 -- 7-plus million tons might be sustainable for 2018. As you look beyond 2018, how important is new mine developing going to be to replace depletion that might occur at other mines? Or is that -- or do you see that 7 million tons approximately, kind of, annual production in coking coal as something that you can sustain for several years without large new projects that will require a lot of capital?

You know Paul, I think, as we talked earlier, the Tygart reserve is a huge asset of Arch's and with that reserve, we've got several options on kind of a continuation of -- or a continuum of both capital and operating costs which we could invest and add incremental tons or replacement tons. Leer is only in the third inning of a long game, so Leer is in pretty good shape. What we've got to be thinking is these are all long-term permitting and engineering design projects. We're going to keep a pipeline of these projects going, and we're going to particularly focus in the Shelby Run area, which is part of the Tygart reserve adjacent to Leer. As I've said in the past, this operation is about equivalent to Leer. It's going to be a little higher cost, maybe 10%, but even if it is 10% higher, this operation is going to be at the bottom the U.S. cost curve.

Great. And I think, John Eaves, you had mentioned 12-plus months permitting and mine planning. I was just wondering, just on the permitting side, any help from the new administration coming in, streamlining permitting processes across the business, from what you're seeing so far?

We certainly hope so, Paul. As we have a governor in West Virginia and a new administration in Washington, we hope both of those would be helpful as you move forward with that project. Obviously, those communications are taking place as we speak, and we'll try to move that [possibly] as quickly as we can. But the other thing, we want to make sure that we're comfortable from a market perspective before make that final decision, but again, we've got 12 months or so before we have to make that decision with our board and that's something we'll be working towards.

So far, it's going well, Paul, and it seems to be moving smoothly. So we feel good about the process.

And our next question comes from John Bridges of JPMorgan.

And thanks for watering down all the accounting to a glide path for your tax rate. That's very helpful for non-accountants. I was just wondering, I know the normal game is to keep your best quality coal unpriced, but given that what we've had sort of 2 black swan events already in the last 12 months, namely China and the Hurricane Debbie, I'm just wondering had you thought about locking in some of the better quality coal as well.

John, I guess I'll start then I'll ask -- and I think one aspect of the cyclone, I don't think many people have focused on is that the cyclone hit Queensland, and this area produces hard and semi hard coals. It doesn't produce the semisoft coals that compete with the U.S. are -- excuse me, the semisoft coals are produced in New South Wales. And that's the coal that competes in Japan and Korea with the high-vols out of the U.S. Particularly the high-vol Bs. So I think -- we felt it was pretty prudent to lock down our lower-quality coals and leave the higher-quality coals open. And if you look at the assessments off the East Coast, particularly at the spread between the high-vol A and high-vol B, this sure seems to have been the right judgment to make.

Okay. And then there's a discussion going on about consolidation in the industry and that sort of hinged, I guess, on what the FTC's view is on that. I remember, Deck, you spent a lot of time inside the Beltway, I was just wondering if you had any thoughts as to how government under the new administration might look upon consolidation in the coal industry?

That's a tough one, John. Certainly, I would say that, for the most part, there are opportunities out there to see consolidation. It's still a relatively fragmented industry in lots of basins, so there certainly are opportunities for consolidation. We think that would be healthy. We expect to see that continue, particularly continue, given that thermal demand is not likely to grow, it is likely to be relatively flat over the next several years. So we expect that. I think this administration will be supportive of that concept. Clearly the industry has gone through some difficult times and consolidation is one way to address that fact. And so, we think it will be generally supportive. There are probably basins where there is -- where it will be more of a discussion, but overall, we think consolidation will occur and don't see a lot of impediments there.

Okay. And the shale gas issue, do you think that will might have changed the attitude of the utilities towards consolidation?

Certainly, we don't expect the utilities to have great concern, again talking broadly about some consolidation, it takes out costs, it allows -- it takes out overhead and costs, so we wouldn't expect that. And absolutely, we're competing every day head to head with natural gas in the marketplace in certain regions. As you know right now in the PRB, we win those battles at current gas prices, but there's no doubt that it's a much more competitive environment from a fuel perspective, and so we do think consolidation again is doable and likely over time.

This is John Eaves. Just as a follow-on. I mean -- I think, as Deck said, we don't see any real growth in demand in terms of power generation and industrial thermal. We've got it at about [$7] to [$7.25] and regardless of whether there's consolidation or not in the Powder River basin, we think we're were positioned to do well at demand levels like that, particularly from the PRB. In terms of how the consolidation -- if the consolidation evolves over time, we'll just have to see. We like the way we're positioned today. We like our assets. Our goal was to be on the low cost of the thermal business, primarily PRB and the low costs on the metallurgical in Appalachia. And we think we've done that -- that along with our solid balance sheet. I think we're probably as well prepared as we could be moving forward.

And our last question come from Wayne Cooperman from Cobalt Capital.

Two quick ones. Share count was, like, 25.5 million this quarter, that's lower than I was expecting. Is there a bunch of other options or whatever out there works or is 25.5 million the right number? Second question, just any CapEx guidance for '18 and beyond? And third question, and then I think it's been pretty well covered, but just on the buyback, is it kind of your plan -- if the cash isn't going to go up and the cash isn't going to go down, should we think that every day you'd earn $1, you're going to take $1 and buy back stock, I mean, not that obviously but something along those lines in simplistic terms?

So Wayne, let me jump into the shares outstanding is the first question there. So 25 million shares upon emergence, if you remember we did have warrants upon emergence that were provided to the unsecured holders. I think we did an update on the last call that those unsecured holders at the type of emergence or through the bankruptcy were given the option to either take cash or the warrants. So it was 10% originally of the 25 million share count, and we disclosed that there was essentially 1.9 million that elected the shares, so that is kind of one of the bookends. We do show there's a net settlement provision in the warrants. So what you're seeing on the face of the income statement, the 0.5 million or 400,000 shares, is essentially that net position. So I would say the range there is between 400,000 and 1.9 million, in that range. We would expect ultimately, over time, a lot of those warrants get net settled. So I hope that answer the question there.

So what should I use for '17 or '18 for shares? Can you -- do you have a number?

Right now, with what you're seeing on the income statement, that 25.4 million is probably as good of anything as we have right now going forward.

Wayne, this is Paul, on the capital question, we're forecasting CapEx for 2018, which, in our case, includes land and reserves, we maintained our guidance of $52 million to $60 million. That's about $0.58 a ton for CapEx. And obviously, at some point, we're going have to return to a normal CapEx cycle but, as I said last quarter, I think it's going to take a couple of years. And the way I see it evolving is, probably over the next 2 to 3 years, you'll see it go up kind of in chucks of about $0.25 a ton and ultimately get to about $1 or plus or minus $1. For penciling in, figure that's about '19.

Then on the buyback, Wayne, I think, we've indicated that we're comfortable in that level kind of between what we've experienced over the last several quarters, call it $400 million to $500 million of cash. So you are correct, things that are in excess of that, this management team, this board will be evaluating what we'll be doing with that. Initially here, we've announced the recurring dividend and the share repurchase program. That share repurchase program is dependent on a variety of factors: where the stock is trading, what our outlook for the market is, what our near and longer term cash needs are, but rest assured, the management team and the board will be looking at ways to enhance shareholder value here. And I think with the initiation of the recurring dividend and the share repurchase program, we've shown a strong signal in our confidence in the company's ability to generate cash flow moving forward.

And now I would like to turn the conference back over to John Eaves for any closing remarks.

Thank you, very much. We certainly appreciate your interest in Arch. The management team continues to execute on the plan that we've outlined. We have reduced our debt and lowered the cost. We've initiated a dividend along with a share repurchase plan. For the balance of the year, we'll focus on capitalizing on met markets and thermal markets and make sure we're managing our balance sheet for liquidity. We look forward to updating you on the second quarter results in July. Thank you.

And this does conclude our conference for today. Thank you so much for your participation. You may disconnect.