Arch Resources Inc (ARCH) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Inc. Second Quarter 2017 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Logan Bonacorsi, Director of External Affairs. Please go ahead, ma'am.

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 related 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; John Drexler, our Senior Vice President and CFO; and Deck Slone, our Senior Vice President of Strategy and Public Policy. We will begin with some brief formal remarks and, thereafter, we will be happy to take your questions.

John?

Thanks, Logan, and good morning, everyone. I'm pleased to report that Arch turned in another strong operational performance during the second quarter, and we remain on track to achieve and, in some cases, improve upon our previously announced guidance on key volume and cost metrics.

In the second quarter 2017, the company reported earnings of $1.48 per share and adjusted EBITDAR of $95.4 million. Those numbers were dampened by the delayed timing of our coking coal shipments. We fully expect to move all our tons in the year's second half and, in fact, we've raised the midpoint of our annual coking coal sales guidance by 100,000 tons.

We also made excellent progress on several other important fronts, each which are driving value for our shareholders. For instance we returned nearly $60 million to our shareholders during the quarter via recently instated dividend policy and even more significantly through a robust stock buyback program. As you know, on our last call, we announced that the board had authorized the repurchase of up to $300 million worth of Arch Coal's stock, and we've acted quickly and aggressively on that authorization. During the second quarter, we bought back 711,000 shares of common stock, or 2.8% of our shares outstanding, at a total cost of $51 million and an average price of $71.82 per share.

At quarter end, we still had $249 million available under the authorization. Moreover we ended the quarter with $490 million of cash on our balance sheet, and we anticipate generating significant levels of additional free cash flow as the year progresses. Consequently, we're well-positioned to continue with a robust repurchase effort.

In addition, we recently signed a definitive agreement to sell our Lone Mountain complex, our highest-cost and lowest-quality Appalachian operation. This transaction further streamlines our operational structure and intensifies our focus in Appalachia on our 4 core coking coal operations. As you will recall, Lone Mountain produces a pulverized coal injection in thermal coals which, needless to say, are lower-value products than those produced at our coking coal operations.

Moreover, in light of the increasingly challenging cost pressures at the complex, the margins have been thin or negative in recent quarters. As part of the transaction, the buyer will assume all future reclamation liabilities and ultimate mine closure expenses. With this transaction, we've continued to sharpen our focus on large, modern coking coal complexes in Appalachia and a PRB-anchored portfolio of low-cost thermal operations.

Turning now to coal markets. We've been encouraged by the rebound in coking coal prices in recent weeks. After a dramatic rise to $300 early in the quarter, followed by weeks of retracing, the market's finally stabilized in late June and have since bounced back. At present, Platts assesses high-vol A coal, Arch's primary coking coal product, at $165 per metric ton [FOB] the vessel on the East Coast. Low-vol and high-vol B coals are assessed at $164 and $140 per metric ton, respectively. Given the highly competitive cost structure of our coking coal portfolio, those marks translate into a very strong margin for us.

Moreover, coking coal fundamentals continue to appear positive. Last furnace output is up 2.3% globally year-to-date, and that's driving increased coking coal demand in multiple regions. In addition, China appears on pace to increase coking coal imports by 20% or more in 2017 as several other high-profile mine outages have bolstered the market recovery.

On the flip side, there's also supply additions to be considered, and those tons will need to be absorbed. Higher coking coal prices have spurred increased output in North America, and volumes from Mozambique are increasing as well. All told, we expect 15 million tons or more of supply to enter or return to the seaborne market in 2017.

Even with these additions, we continue to believe that the market is in a relative healthy balance at present, and we would expect such balance to persist in the year's second half assuming continued sound economic activity globally.

The thermal side is still in a recovery mode, but we believe there's cause for optimism. While stockpiles at U.S. power plants remain inflated, they're well below the highs experienced at the start of last year. Natural gas continues to trade at levels above $3 per million BTU, both for the prompt month and further out on the curve. At those levels, we would expect solid demand for PRB coal, with the vast majority of PRB served plants dispatching in front of natural gas served plants. Hot weather is also improving coal consumption. Cooling degree days were up 2% year-to-date, and most forecasters are still calling for at least a normal summer.

Finally, strong international markets are spurring increased thermal exports, which is also helpful in restoring balance to the domestic markets. Arch is taking advantage of those higher prices in a direct way as well, particularly at our West Elk operation, where we've committed vessels for delivery into Asia in the second half of the year.

Given these developments, Arch currently expects generator stockpiles to end the year below 70 days of supply, nearly 40 days of supply lower than where we were 18 months ago. In summary, Arch has a superb operating portfolio and a rock solid balance sheet. We continue to generate significant amounts of free cash, coking coal markets are strong and thermal coal markets are slowly but steadily improving. We have an excellent plan to return excess cash to shareholders, and we're moving forward aggressively on that plan. We're enthusiastic about our ongoing prospects for cash generation and value creation and fully expect to end the year strong.

With that, I'll now turn the call over to Paul Lang for comments on our operating and marketing performance in the second quarter. Paul?

Thanks, John, and good morning, everyone. As John mentioned, metallurgical markets were quite volatile during the second quarter. Seaborne East Coast pricing assessments for all metallurgic projects -- products ran up to near record levels over 9 trading days and pulled back over the next 6 weeks to levels achieved in the early part of the quarter. Since that time, prices have rebounded, the market appears to have found a level of support, and we continue to believe premium quality high-vol A coals, such as our Leer product, remains scarce in the marketplace.

To date, we've committed 6.4 million tons of coking coal for delivery in 2017, of which 5 million are priced at about $97 per ton. At the midpoint of our sales guidance, we expect to sell approximately 7 million tons for the full year. This volume is slightly higher than our previously stated guidance, demonstrating our confidence and ability to place higher quality products into the seaborne market.

This past quarter, we shipped 1.5 million tons of coking coal at an average price of approximately $103 per ton. Overall, pricing on metallurgical shipments during the second quarter were anchored by index-linked volumes that converted during the period. Average pricing on those indexed sales was around $125 per ton at the mine.

Volume levels and expected new sales during the period were directly impacted by the limited amount of spot buying that took place during the quarter and the timing of shipments. Global fuel producers effectively stepped away from the market for a period, choosing to rely on previously purchased volumes and existing stockpiles to the extent they could.

During the quarter, we sold around 400,000 tons of coking coal for delivery in 2017, of which 300,000 were at a fixed -- were fixed at an average price of $107 per ton and about 100,000 were sold on an index basis. Just over 75% of these tons were low-vol and high-vol A, and the remainder was high-vol B. Looking ahead, we expect our coking coal shipments to increase in the back half of the year. We continue to be encouraged by the strength and depth of the global metallurgical markets. For the remainder of the year, at the midpoint of our guidance, we're showing approximately 1.4 million tons committed but unpriced and 600,000 tons uncommitted.

Turning to the thermal side of the business. In the Powder River Basin, we committed and priced about 6 million tons of Black Thunder coal for 2017 delivery at an average price of $11.75 per ton, a pricing level well above the indices that prevailed during the second quarter. Additionally, we selectively layered in 2.6 million tons for delivery in 2018.

As John indicated, generator stockpiles are still in the high side, the liquidation is ongoing, and we're encouraged by the continued interest from customers who want to supplement their 2017 commitments. We currently have between 5 million and 7 million tons open for 2017 at Black Thunder. Additionally, we have approximately 50% of our volume committed in 2018 based on current run rates. While we continue to believe there's upside in the current markets, the commitments we've layered in during the shoulder season are consistent and prudent with our sales approach.

In the thermal segment, realizations were down about 6% when compared to the first quarter of 2017, mainly reflecting the mix of customers between the operations. International fundamentals remained supportive, and there continues to be solid demand for West Elk as well as increased inquiries for Coal-Mac high-quality products in the seaborne thermal marketplace. In fact, we currently have about 1.7 million tons of thermal coal committed for export at prices that provide a solid net back to the operations.

During the quarter, we improved our already solid contracted position for this segment by committing an additional 1.5 million tons to international and domestic customers at an average price of about $30 per ton, the vast majority of which was from West Elk. As a result of this ongoing demand, we have elected to run both operations at higher production rates for the year, which should improve the segment's overall cost performance.

Turning to the operating side of the business. In the Metallurgical segment, cash costs increased $3.28 per ton as compared to the first quarter. This increase was driven in part by higher costs and increased PCI shipments from Lone Mountain. Additionally, during the quarter, we experienced challenging operating conditions in the last panel of the Alma seam at Mountain Laurel, which translated into higher cost of the operation. We recently committed -- completed the transition back to the Cedar Grove scene, where we're in the final stages of set up to start mining.

Looking ahead, we expect the divestiture of Lone Mountain will benefit the Metallurgical segment's cost structure over time. Despite the increase in cost in the second quarter, we're confident of our cash cost guidance of $51 to $56 per ton for the segment, which now excludes Lone Mountain. We believe this is an extremely competitive cost structure that places our metallurgical franchise well below the U.S. industry average.

In the Powder River Basin, as indicated last quarter, operating costs were up due to the impact of lower volumes, driven by typical shoulder season trends and higher repair and maintenance expense. Of note, Coal Creek had a major unplanned repair to its dragline that took the machine out of service for 4 weeks. Given the solid cost control in the segment and expectation we'd increase shipment levels in the second half of the year, we're lowering the top end of our cash cost guidance. We now expect cash cost to be in the range of $10.20 to $10.60 per ton which we view as a solid and sustainable level consistent with Black Thunder's anticipated run rate of 70 million tons per year.

The Other Thermal segment recorded an outstanding cost performance for the second quarter. Cash cost declined 7% from the first quarter, benefiting from higher volume contribution from our low-cost West Elk operation as well as strong cost control at Coal-Mac and Viper. Going forward, we're lowering the annual cash cost guidance for the segment by $2 to a range of $23 to $27 per ton.

Lastly, I want to reiterate that we continue to focus on our core values. Over the last 3 months, we've turned in strong safety and environmental performances, and we even had 3 facilities achieving the perfect 0, which is no reportable injuries or environmental violations. In addition, every mining complex completed the quarter with a perfect environmental record. Across our operating platform, we're deeply committed to achieving our goal of operating the world's safest and most environmentally responsible mines and to foster best-in-class practices at all of our operating complexes. We'd like to thank all of our employees for their hard work, focus and outstanding effort.

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

Thanks, Paul. This morning, I plan to focus my comments primarily on the cash flows for the quarter and provide further detail on our capital return activities.

We finished the quarter with cash and short-term investments of more than $493 million, an increase of approximately $23 million from the end of the first quarter. While that was a relatively modest increase, there were several significant contributors to the end result. First, cash generated from the operations, along with continued low levels of CapEx, contributed approximately $35 million despite negative working capital changes of nearly $32 million; second, we achieved reductions in collateral requirements of more than $55 million during the quarter; and finally, as indicated, we returned nearly $60 million of cash to shareholders in the form of $51 million of share repurchases and $8.6 million in dividends.

The Board of Directors has approved the next quarterly cash dividend payment of $0.35 per common share that will be paid on September 15 to stockholders of record at the close of business on August 31.

With respect to collateral, we benefited from 2 items in the quarter. First, as we discussed in our first quarter earnings release, we entered into a new inventory-only ABL in April and, during the quarter, moved some of our outstanding letters of credit to the facility, freeing up restricted cash. In addition, based on our strong balance sheet and operating results, we were able to negotiate lower collateral needs with several counter parties. Most of the benefit from the collateral reductions totaling $55 million occurred late in the quarter, and we expect additional positive impacts to our cash balances in the back half of the year.

One other item to note during the quarter was that we entered into several interest rate swaps of various sizes and maturities to fix the floating rate on a portion of our term loan. Our existing $300 million term loan pays interest at LIBOR plus 400 basis points with a LIBOR floor of 100 basis points. With LIBOR recently rising above 100 basis points, we felt it was prudent to lock in a portion of the floating rate debt. The swaps, which required no upfront cash, have fixed rates that mirrored the forward curve. There is full disclosure in the 10-Q we plan to file later today, but for the next 12 months, we have fixed the LIBOR portion of the term loan interest for $250 million at a fixed rate of 1.37%.

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.

Moving forward, we would expect to maintain cash levels similar to the levels we have seen over the past 3 quarters and would expect that once we have contemplated capital needs for the business and absent other strategic opportunities, we will be looking to continue to return capital to shareholders.

I don't believe -- I don't plan to reiterate guidance for 2017, which is included in the press release, but will highlight an item outside of the operating cost guidance that Paul has addressed. As a reminder to our previous discussion regarding our taxes, we continue to have an excess of $1 billion in deferred tax assets. Under the accounting rule, 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. With the continuing benefit the industry receives from percentage depletion as well as the impact of timing differences, we 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 summary, 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. That plan has allowed us to return capital to our shareholders in the form of a recurring dividend and share repurchase plan. We will continue to focus on executing our plan and generating returns for our shareholders. We continue to be excited about Arch and its 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) And we'll take our first question from Michael Dudas with Vertical Research Partners.

My first question is relative to met markets. Certainly, trends have been better especially for the high-vol A products that you sell. Maybe you can share a little of your thoughts on what's going on in the U.S. with Section 232. Do you think there's any indication, discussion, some hope that some of the change in the metallics and the balance of where the steel is going to be needed produced to give Arch maybe other U.S. players a bit of advantage for more volume at better pricing?

Michael, we'll see. I think, U.S. Steel had their call yesterday. I guess, they got asked a lot of questions about it. I think, time will tell. Certainly, steel prices have been relatively strong recently. You look at the earnings in the steel companies, had been pretty good. I think we'll have to see what happens with 232. Deck, you got any comments on [the things going on in Washington right now]?

Yes. I mean I guess, I'd say that we don't know about the timing of 232 at this point or how aggressive it's going to be. But clearly this administration is supportive of the domestic steel industry, and clearly that's an important market for us. So we do believe that the U.S. market is going to be well supported. In the meantime, you talked about the balance. I mean, it does look like international markets are fairly strong at present and with sort of Chinese consumption where it is, with overall hot metal demand up to the degree it is, we still feel positively about international markets as well. So again, 232 seems like it will be a positive support here domestically, and we feel good about that. But with hot metal up 2.5% globally, with Chinese consumption where it is today, Chinese steel consumption has been very strong year-to-date. As you know, Chinese imports continue to be very robust, some of that from Mongolia but also on the seaborne side, we continue to see significant purchasing from China. Chinese domestic coking coal prices are strong. So all of those things, I think, suggests that internationally, we should continue to see a healthy balance in the steel markets and certainly are positive about the fact that this president wants to support the domestic steel industry which, of course, is going to continue to be a cornerstone of our market.

And, Michael, just to follow on, I mean, you've seen a number of domestic RFPs coming out recently. The domestic guys are starting to think about their fuel supply for 2018, and so we'll see where that goes. But as Deck said, everything we see, domestically as well as globally, is positive. I mean, you've had 35 million tons of met imports into China through June. So that's on about a 70 million ton annualized clip, which is about 10 or 12 million higher than we've got in our internal forecast currently. So we hope we're wrong and they're right. So...

You must enjoy these nice, stable markets, huh, John?

Yes, yes. I think it's a new world that we live in.

And we'll take our next question from Mark Levin with Seaport Global.

Gentlemen, quick question related to the quarter and how to think about the back half of the year. So it looked like you referenced some geologic issues at Mountain Laurel that caused some cost -- the costs to spike there. Coal Creek issues that you had there. I think, you referenced met coal shipments picking up in the back half of the year. And then, obviously, in the PRB, you're impacted by the shoulder season, just the lower volume quarter leading to less fixed cost absorption. So given all of these factors against, I guess, the met prices come down a little bit, how should we think about like sequentially what EBITDA might look like in Q3 versus Q2? I mean, is it reasonable to assume that it should be meaningfully higher for the reference -- for the issues that I just mentioned?

Mark, good morning. This is John. Certainly, we don't give guidance for EBITDA. But if you look at the way the volumes are kind of allocated, obviously on the met side, you can see what we did first and second quarter, it's about 3 million tons. If we hit our midpoint of 7 million, we've got to ship 2 million tons in the third quarter, 2 million tons in the fourth quarter, which would indicate a more positive EBITDA in the back half of the year.

Oh yes, Mark, we, in our guidance -- and Paul talked about operating cost guidance, we provide committed sales, volumes and committed pricing. So hopefully we've provided enough direction there that, yes, you can -- you have what you need to interpret that. But I agree with your last comments.

Yes, no that makes sense. I mean it just seems like there are a lot of different issues that kind of hits you in the second quarter. And is it reasonable to assume like the cost issues that impacted you at Mountain Laurel in the second quarter, the cost issues that impacted you with Coal Creek in the second quarter are unlikely to have a residual effect in Q3 and beyond? Is that fair?

Yes, Mark, this is Paul. I think, kind of taking those one at a time, yes, the issue at Coal Creek was typical coal mine stuff. We had a boom issue. I think that repair by itself equated to about $0.09 a ton in the quarter, so obviously it had a huge impact in the quarter. But for the year, it was a one-time event. Yes, we really don't see that coming back. Mountain Laurel was a little bit different story. We're in the last panel in the Alma seam. I guess, obviously the last panel in the seam is usually your worst, and it was. We struggled the entire quarter. It was a tough quarter at Mountain Laurel. We really had a drag on our cost in the second quarter, but we're down in the Alma seam now -- or excuse me, the Cedar Grove seam now. And we are expecting conditions to improve.

Got it. Yes, that makes total sense. Let me ask you a more -- Mark, well, I'll stick one more Arch specific. With regard to the sale of Lone Mountain and trying to think about the impact on what your ongoing cash cost will be in 2018, any color you can provide there? I know you referenced it being the highest cost met property in the portfolio.

Yes, to give you a little color, Lone Mountain in Q2 had a cash cost of $77.11. If we excluded it from our segment cash cost, we would've dropped $3.92 to $56.74. Obviously, it's been a huge drag on our cash in the segment. It's the highest cost and lowest quality, as John said.

Mark, I think in our Lone Mountain -- the PCI market really hadn't gotten the traction that we've seen on the met side. The margins just weren't good there. We weren't really generating any kind of cash margins at all. They weren't making much of a contribution on the EBITDA. And as you well know, we've been very consistent in saying that if we have an operation that's not generating cash, we're going to do 1 of 2 things, we're going to close it or we're going to sell it. And we had an opportunity here to monetize that asset. We think it makes sense for the company. It allows us to focus on really the 4 operations that really create value moving forward.

And that makes total sense. Last question is market related to the PRB. You referenced some of the inventory situation. I want to think more specifically now about the 8400 market, which I know you guys aren't a big player in. You do have 1 mine. But with regard to the 8400 market and prices where they are today, I think, I was looking at the curve and it may be around like $9. Where do you think 8400 production would go next year in the PRB if prices don't recover? I mean -- are -- can producers make money in the PRB at current 8400 prices? Or and if they don't recover, do you think production in the 8400 market will get cut next year?

Let me jump in here, Mark. And I'll let Deck and Paul jump in. Certainly if you look back over the last 5 years, the market share is really gravitated more to the higher BTU coal. I think as we move forward, it's going to continue to be challenging for the lower quality guys. And we would expect moving forward that the higher BTU coal and the fact that Arch is producing close to an 8900 BTU coal, we feel like we're pretty well positioned to grab some of that market moving forward. I don't know, Deck, if you got any to add on?

Yes. Clearly, Mark, that differential between 8800 and 8400 has widened out, and we do think that at these current prices that a number of the producers are likely to be struggling. Those are clearly depressed prices. As we look out over the next few years, we do see this continuation of 8800 increasing its market share relative to 8400. We'll see if that plays out. But certainly, we think that that's likely that there will continue to be more value placed on the higher BTU, PRB coals, which are going to tend to move further and better and be more economic in locations more distant from the PRB. So that continues to be our view. We do expect some step down next year in 8400 and then in the years thereafter.

And we'll take our next question from Lucas Pipes with FBR and Company.

It's Ed Beachley here for Lucas. So I assume that 2017 met coal cost guidance includes Lone Star Mountain for the first half but excludes Lone Mountain in the second half of the year, is that correct? And in addition, what is the cost range of your remaining 4 met coal mines?

Look, Edward, the way to look at the guidance is a little bit complicated. We took Lone Mountain out of all the guidance, but it does include Mountain Laurel. So effectively, we kept the price -- or the cost the same for the segment. I think the simple way to look at is removing Lone Mountain about offset the cost impact at Mountain Laurel.

Okay. And then one other quick question. Where do you put current net back prices for high-vol A and high-vol B at the mine based on recent Platts FOB port numbers that you mentioned? Where did you put it at?

Well, the current marks for high-vol A are around 1 60. Freight rates obviously raise generally with the indexes. So your freight's going to be in the 30 to 35 range. So keep the math simple, if you're at 1 55, converted to short tons, that's 1 40, take away $35 for port fees and rail, you're at about $105.

And we'll take our next question from Jeremy Sussman with Clarksons.

Just a follow-up on Mark's question on Lone Mountain. Did I hear you right, did you say the costs were $77 a ton this past quarter?

Yes, $77.11.

Okay, and so with PCI pricing at sort of $72 a ton, can I infer that you generated negative cash there this past quarter?

I think the best way to look at it is between Lone Mountain and the other 2 idle segments we sold, we were flat to slightly negative.

Okay. And just following up, how -- what are the liabilities that are being transferred in terms of magnitude?

Kind of round numbers, we had about $20 million in reclamation bonds posted. So those obviously go with the buyer. There were some employee liabilities that went along with the deal. I don't know if we've quantified those exactly for the disclosure, but it was a pretty clean break.

Jeremy, we did indicate in the earnings release that we do have a range of an expected gain of $15 million to $20 million when you take into account all of the components of the transaction, including the liabilities that were transferred. We'll have more detail for that once the transaction closes.

And just last question. It sounds like from some of your comments and then from some others, that a number of the domestic steel mills are already out for 2018 business. I guess, first, is this earlier than normal, at least from an order of magnitude of the number of mills that seem to be out? And then second, from a pricing standpoint, directionally, would you expect your 2018 domestic annual business to be up for Arch, I guess, given that at least at this point, with negotiations beginning, international pricing is obviously a lot higher now than it was this time last year.

There's no question that we're seeing more RFPs earlier than we had before. As I look back to last year, I think this time last year, we only had really 1 serious RFP, and I think we've received 3 now. So clearly the domestic guys are trying to get a jump on the market. Relative to pricing, look, I view the domestic market as very important. They're good customers. And historically, the domestic market's better than the international, if you look long term. But that's not at any price which we'd stay in that market. I think we're expecting to see pricing at least clearly with parity to the international markets on an annual basis. The difficulty always in pricing the domestic coal is that it's fixed price for the entire year as most of our international sales are index-based. So that dance is beginning. The RFPs are out early. My sense is I'm not sure they're going to conclude much before they normally do, though. John, do you have any...

Yes, Jeremy, we'll see. I mean, this could go on for a few months. It may get settled fairly quickly. It will be interesting to see. I think, we've been pretty open about our position and the importance of having a domestic piece of our business and an international piece. And we're not married to any percentages. I think, we've said 40% to 50%. That's something that we're always looking at as we move forward. But Paul said, we're certainly not willing to discount our product to keep it in the domestic market. But at the same time, we're running 2 big longwalls in our eastern met portfolio. We do like the ratability of having that volume for a portion of our production as well as price clarity for the full calendar year. But again, it comes down to price and us getting the appropriate value for those products domestically versus internationally.

And we'll take our next question from Daniel Scott with MKM Partners.

I want to concentrate on capital allocation a little bit here. You have just under $0.5 billion of cash on hand, and you've said I think in the last 2 quarters that that's basically a level you could maintain throughout all points and all cycles. And if we look at certainly with this met coal price deck out there, the free cash flow profile is very strong. And well, you've done about $50 million of the share repurchase. By my model at least you could probably finish that share repurchase by the middle of next year without really changing things much. So at that point and as markets continue to stay reasonably strong like this, can you prioritize between maybe a raise in the dividend or a new share repurchase or what would it take to actually start thinking about the Tygart scene and doing Leer #2?

Dan, great questions there, and we agree with that. We have great confidence and conviction in our business strategy and our ability to generate cash here as we move forward. And so we do have that capital return policy in place. And we continue to execute on it. We continue to expect to execute on it. You do ask some interesting questions, and those are all questions that we think we're in a great position to be able to contemplate, consider, and as a management team and a board, make decisions upon. We don't see a higher return opportunity than what we have with the opportunities of additional capacity on the Tygart reserve, with similar quality production to Leer and a similar cost structure. And so we're going to continue to evaluate that. So we've got the luxury right now of continuing to watch where markets go, how they continue to develop, execute on our plan, currently continue to expect to be active in the share repurchase activity that's been authorized. And we'll move forward from there.

Dan, just a follow-up comment. As we looked at coming out of the fourth quarter and what we wanted to get done as a management team, as a board, there were really 3 things that we focus on. One was lowering our debt cost, which we cut that in half. And then looking at how we return value to our shareholders. And when we look at the dividend, we want to make sure that the dividend that we put in place was -- it was a level that we could continue no matter what the market cycle was. So we landed on $35 million, and we're very comfortable with that number. And then the share repurchase was something that we thought was significant. We didn't have a time limit on it. But certainly, you saw we were pretty active in the second quarter. We expect to be active in the third and fourth quarters as well. So we like the way we're positioned. John referenced our Tygart Valley. If you'll remember, we've got about 130 million tons up there that we own in fee. We actually had our board up there last week looking at the operation. We're very excited about it. We've got the ability to bring on 2 additional longwalls at cost structures that mirror Leer, it's the same high-vol A type product. So these are things over the next 9 to 12 months that we're going to be looking at, certainly discussing at the board level. But I think what we've done thus far makes good business sense for Arch Coal.

Great, appreciate that. And certainly in saying that's the highest return you see out there puts it well ahead of any potential M&A, I would imagine.

I mean, M&A is always something that we're looking at, but you're right. I mean we have to compare that external M&A with what we have organically. And we feel pretty good about the internal projects that we have.

Great, appreciate it. And just the last thing, could you remind us of your longwall moves schedule over the next, say, 4 quarters?

The Mountain Laurel longwall move, as I mentioned in my opening comments, may actually start up today or tomorrow. It's within days of starting up. We have a longwall move at Leer late in the third quarter, and we have a longwall move at West Elk in the third quarter. So we'll hit the trifecta this quarter with all 3 longwalls moving.

And from that perspective, Dan, we're glad to get out of that last panel on Mountain Laurel. That was pretty painful.

And we'll take our next question from Paul Forward with Stifel.

Just to follow up on that last point on the seam transition at Mount Laurel. I think the last 4 quarters, you did about 1.5 million tons. Just wondering as you look at the next 4 quarters -- or kind of next couple of years, is that still the approximate rate that you would anticipate producing at Mountain Laurel? Or would the new seam offer any opportunities for more than that?

No, Paul, I think, that's probably the upper end. I mean, it's Mount Laurel is getting long in the tooth. We still think it's a viable, strong operation particularly in this market. But as we continue to wind down the mine over the next 5, 10 years, the seams are going to get thinner and a little tougher. So I don't think you're going to see a big drop at any one period on the production, but it's going to continue to decline.

Okay. And just -- I know you've made the decision to sell Lone Mountain but that $77 cost number, it sounds like costs kind of ran away from you there a little bit. I was just wondering if you could talk about -- was it kind of labor turnover issues, was it geology, other issues that you might go through that caused you to make the decision that really, you're better off divesting rather than kind of sinking more money into the operation?

As you look at Q2, for the first half of the year in total, the costs there were about $72. So I think, obviously Q2 had a spike in -- I think it was predominantly the conditions we ran into. But obviously Q1 was not a great quarter either. So I can't really tell you that it was anything to do with labor or any of the associated things we've heard others talk about. We really haven't had those issues. This was purely geologically related.

And Paul, and certainly we hadn't been enamored with the market for that coal either. As I said earlier in the call, I mean the PCI really hasn't even tracked the met prices at all. And the industrial thermal market hadn't been very exciting either. So I think the geology challenges that Paul mentioned, combined with kind of the so-so market we saw, we just thought it was the right business decision to monetize that asset.

Yes, and I think the other thing that I don't think people have caught on is that the industrial market's actually better priced than the PCI market right now. The problem is the industrial market is not very deep.

Right. Well, I guess, following up on another point you just made, you've got a number of longwall moves in the third quarter that will be either already happened or will happen. I was just wondering if you could talk through you've had some shipment delays in met coal in the second quarter. Do you expect the inventory situation, like do you have enough inventory, at the end of the second quarter to kind of plan to ramp that inventory down and contributing to the higher coking coal sales levels that are implied by your full year guidance?

Yes, as you look at our inventories and John referenced we're at Leer last week. I think, in a perfect world, we would've shipped about 1.8 million tons in Q2. That coal is effectively sitting on the ground between the 4 mines. So I do have a concern on where CSX is heading right now. Clearly we started seeing problems towards the tail end of Q2 and, frankly, the problems have gotten worse over the last 10 days. Up to this point, the problems is with [CSX] had been predominantly on the domestic sales. But I think the most troubling aspects I've seen is that the -- we're starting to see problems on the shipments to the coast for export. Yes, this is clearly something we're going to have to watch over the next couple of weeks but as far as inventory, we're in good shape and ready to ship.

Paul, let me just jump in on the railroad piece. Certainly as Paul said, we started at the end of the second quarter, starting to see some deterioration really more domestically than internationally. And we've seen that kind of continue in the third quarter. We need and we expect the railroad to perform the back half of the year. We've had a long-term relationship with those guys. It's been a partnership, and we've held up our end of the bargain. We expect those guys to hold up their end of the bargain in the back half of this year.

And Paul, maybe just one last item to walk through the mechanics of the physical financial statements. I referenced in my prepared remarks a negative working capital adjustment impacting cash for the quarter, cash flows for the quarter, and so a part of that is the inventory build that occurred during the quarter that Paul referenced.

And we'll take our next question from John Bridges with JPMorgan.

Just following on from an earlier question. The weakness in 8400 coal in the PRB. In the past, you've always said that you've got a premium over the spot prices for the 8800 coal. Is the same thing true in 8400 or otherwise the price just looks weird.

John, I'm a little confused by your question.

Could you repeat that last half, John?

In the past, there's always been a comment that you get a bit of a premium over the traded price for PRB prices, particularly in the 8800 coal. I'm just wondering if the same thing is true in 8400 in order to try and get a better sense as to what how economic that stuff can be at the moment?

Let me jump in here and I'll let Paul and Deck climb on. I think we would expect as a marketing group to always try to do better than the marks. I mean, as tough as the 8400 is, we always try to beat those. It's probably not always the case, but it's a much more thinly traded market. Paul?

I mean, I think you look at Q2, the headline number was we sold an average at about $11.75. I think, on average, we beat the marks by $0.25 or $0.50. But we were completely out of the 8400 market. The other thing I'd add is that if you look at kind of what the true value of those tons were, they're probably closer to $12 when you take into account all the adjustments for quality. So we still see a very strong market in the 8800. But clearly there was a wide variance versus the marks. John?

Also on the 8400, I mean we've got a pretty well established contract base for that volume. We're not active in the open market at all. We got 9 million tons or 10 million tons that customers want. We've been able to continue that year after year. So I wouldn't say Arch is real active in the open market with the lower Btu coal.

And John, we think that's also the case with a number of the other producers. So there's probably not a lot of tonnage transacting at those prices but we certainly believe that at those prices most producers in the 8400 segment are likely to struggle. Those are very low prices. And as you know, we've seen some diminution in the production there and some underinvestment here of late in 8400. And I think it's a function of the fact that, that market has continued to be -- continue to see some weak marks there.

Okay, that's helpful. And as a follow-on, you've obviously got more eyes on the market than I got. The 15 million tons of new capacity that you referred to coming into the market from these mine restarts, when do you see that tonnage coming in over the next couple of quarters? Is that going to be Q4 loaded? Is it going to start coming through in volume in Q3? What's your expectation?

John, I think it's throughout the year. We've got about 15 million tons, and the majority of that would be North America as well as Mozambique. And actually, year-over-year, we've got Australia recovering some of the lost volume from the cyclone but still being down about that 5 million tons year-over-year. And so I mean, we think during the calendar year, that 15 million tons, plus or minus, will be in the market. And we actually think the demand side can absorb that.

We do. And then, obviously, John, we're also seeing a number of disruptions out there as well that are not contemplated in that 15 million tons. So we'll have to see how significant those are. And we got some labor disruptions in Australia at present. Some mines are struggling with geologic issues. We've seen some issues in Russia. So -- and even here in the U.S., we've seen a couple of high-profile mines that are struggling with geologic conditions. So we think the 15 million tons is reasonable. But as John said, we also -- we think that, that can be absorbed given the strength we see in fuel markets and in the hot metal demand at present.

Okay, cool. Just also I was looking at the MSHA data, and your production out of Illinois was down both in Q1 and Q2. What's going on there? I know it's not a big part of your world, but just wanted for modeling purposes?

John, we're almost completely mining off to a single utility there, and our production's pretty well what they burn. So if the burn's down, we're down. The mine had a great 2 quarters. It's simply an artifact of what the utility is able to burn.

And we'll take our next question from Patrick Marshall with Cowen and Company.

First of all, would you mind repeating the mix of coal that you sold in 2Q, the met coal?

The met coal, it was -- the 400,000 tons, 75% of it was low-vol and high-vol A, so about 25% was high-vol B.

Got it. And then also, I guess, this is more of a housekeeping question. How many -- do you guys have any idea how many of the warrants have been exercised for your stock?

It's -- if you remember, we had 1.9 million warrants that were out there. It's been a relatively immaterial impact, still roughly rounded 1.9 million warrants that are out there.

And we'll take our next question from Wayne Cooperman with Cobalt Capital.

I had a pretty simple math question on the interest expense. You termed out your whole term loan at like -- I forgot what you said, like 3%. Where is this $25 million of interest expense coming from?

So the term loan, the $300 million term loan, Wayne is L plus 400. So it's effectively at a 1% LIBOR, it's 5%. And then what we've done is we've locked in LIBOR for $250 million of it at 1.37%. So you still have to add the 400 basis points on top of that. And then that should get you with our other debt back to within our guidance, which we've left it at that.

Yes, it still doesn't get me to anywhere close to $25 million. I was kind of nitpicking, but...

Remember though the first quarter was still at L plus 900.

Okay. So but your run -- if I was looking for next year, it would be back -- it would be more like 10 or 15 or something like that?

Well, I mean, it's...

John, I believe, it's got some equipment leasing not just pure interest.

Right. You've got $30 million of other items that are in there. But right, let's call it 5% on the $300 million is would be your basis, and then add another $5 million to that for a run rate. We've not provided guidance for 2018 on that front but that would be reasonable for model assumptions.

As long as we're talking about 2018. Can you guys give a little CapEx guidance? I know you -- I mean, you just sold one of your facilities, and your PRB production's going down. Should we look for CapEx to be about the same next year as this year, if you were going to kind of just draw out a number?

No. I think as I mentioned last quarter, Wayne, this year was an unusually low year. As I look out the next 2 or 3 years, we look at going back to I'd call a normalized rate of $1 to $1.25 a ton. But it's not going to happen in one bunch. It's going to happen over a 2 or 3 year period. The fact is Lone Mountain, in that situation it was, we only spent money on health and safety and environmental things. So there wasn't a lot of capital being spent at Lone Mountain because it wasn't generating anything.

Okay. Other than that, I mean, I guess, the quarter was sort of just -- your costs go up when your volumes go down but -- so I'm assuming when you pick up the sales in the back half of the year, that's what's leading to the cost guidance actually being lower than they were before the quarter.

That's the best way to look at it.

And due to time constraints, we'll take our last question from Lucas Pipes with FBR and Company.

So John, I wanted to ask a little bit about your vision for Arch. I understand that the coal industry is coming back out from a pretty tough time and, I think, you are focused on the share buyback and returning that value to shareholders. But if you could kind of wave a magic wand and create your Arch Coal in this new coal industry, restructured coal industry, what would it look like?

You know, Lucas, I think we have. I think, we've got a focus on low-cost metallurgical products. We just stream that even a little bit more which, over time, will help our cost structure. We certainly like our ability to expand in that arena as well. Again, low-cost, high-quality products that we think the domestic and international markets want. I think, our low-cost thermal position, which is anchored by PRB, is exactly where we want to be. I think, those 2 business lines actually complement each other with our operational and our marketing expertise. So I like where we are, I like where we're going, I like what we've accomplished as a company thus far. We've got some great opportunities that we referenced earlier in terms of organic growth. Again, our board got up close and touched on that last week. We feel good about that. And I think that the market will determine on how and when that project comes to market. So I think this management team feels very good about where we are. We're laser focused on cost control, making sure that we manage the balance sheet very effectively and we return value to our shareholders. I mean, that's -- what a difference a year makes, but we feel good about where we are today and where we're going.

And at this time, I wish to turn the conference back to you, Mr. Eaves, for any additional or closing remarks.

Well, I want to thank everybody for their interest in Arch Coal. I also want to thank employees for Arch during the second quarter for their focus on safety, environmental performance and cost control. And we're excited about the way we're headed. We look forward to executing in the third and fourth quarter and look forward to updating you on the third quarter in October. Thank you.

And that does conclude today's conference. We do thank everyone for your participation. Please have a great day.