Arch Resources Inc (ARCH) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Arch Coal, Inc. Third Quarter 2017 Earnings Release Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Ms. Logan Bonacorsi, Director of External Affairs. Please go ahead.

Good morning from St. Louis. 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; 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 solid financial performance in the quarter just ended, despite rail and geologic challenges that dampen the contribution of our met operations. These solid results in the phase of sub-optimal operating conditions underscores yet again, the quality of our mine portfolio and the value of our strong and complementary mix of met and thermal business segments.

In the third quarter 2017, Arch reported net income of $2.83 per diluted share, and adjusted EBITDAR of $104.3 million; that EBITDAR total does not include a $21.6 million gain resulting from the completion of the sale of Lone Mountain complex which closed on September 14. Our strong free cash flow generation during the quarter allowed us to continue to deliver on key strategic objectives, principally our capital return program. We believe our progress on this front is delivering exceptional value to our shareholders and is poised to generate still more in the quarters ahead.

During the quarter just ended, we bought back 2.2 million shares of stock at a total cost of $167 million, bringing the total buybacks to 2.9 million shares or nearly 12% of the shares outstanding since the launch of our capital return program. In total, the share buyback program combined with the dividend paid to date has resulted in approximately $235 million being returned to shareholders since the start of the program. In addition, the board has authorized the purchase of up to an additional $200 million of our stock on top of the $82 million of capacity remaining on the initial authorization at quarter-end. This development further underscores the confidence the board has in the company's future prospects and a strong focus on creating value for our shareholders.

We ended the quarter with more than $450 million of cash on the balance sheet, which we believe provides sufficient level of liquidity through all points in the market cycle. And we would expect to generate substantial free cash flow in the fourth quarter as well. As indicated, we currently expect to return excess free cash flow to shareholders via our capital return program, absent any unexpected developments.

Each of our operating segments contribute significantly to our third quarter result, and is well positioned for success as we complete 2017 and head into 2018. In the met segment, we achieved cost at the low end of the U.S. cost curve and generated attractive margins despite the challenges mentioned previously. With those challenges now behind us, we expect a significant improvement in the performance going forward.

In the PRB segment, we increased volumes, reduced costs and expanded margins by 30% sequentially. And in our Other Thermal segment, we had another strong quarter supported by strong international sales at our West Elk and Coal-Mac operations.

Turning to coal markets. We continue to be encouraged by the solid fundamentals in the global met markets. Even with the ongoing recovery in the Australian exports post-Cyclone Debbie as well as modest supply growth in other producing countries, demand and pricing for seaborne coking coal markets remain healthy. In addition, the future markets for 2018 delivery appears to be stabilizing recently at levels that would deliver solid margins for our low-cost operations. Supporting these sound market fundamentals, global steel and hot metal production continue to expand, with global hot metal demand up 2.3% through September, and steel prices well above last year levels in all key regions. The World Steel Association is forecasting recently solid growth in steel markets for 2018 as well.

Looking ahead, we believe that resurgent steel markets, strengthening Chinese manufacturing activity and a strong global economic outlook should translate into another constructive year in met markets in 2018. Moreover, we believe that most of the new production capacity that has been announced [was] entered the market carries a high cost structure, which should support strong pricing over time. Arch continues to believe that over the longer term, global met markets will find support in the $130 to $150 per metric ton range, which we believe is breakeven level for 10% or more of the global coking coal production capacity and a level it should provide Arch with healthy cash margins.

On the thermal front, strong international markets are providing good support to a domestic market is still in recovery mode. With Newcastle prices in the upper 90s, and Northern European prices in the lower 90s, more U.S. coal is moving into the global thermal markets, which is favorable development for domestic fundamentals. Moreover, Arch is participating directly through increase export movements from our West Elk mine in Colorado and our Coal-Mac mine in West Virginia. These export opportunities are particularly important given the fairly mild summer temperatures that resulted in both lower coal burn and lower natural gas prices.

In total, Arch estimates that the coal burn for June through September was down approximately 20 million tons compared to the same period of 2016. Despite that fact, we believe that utility stockpiles continue to come down just at a slower pace. At present, we still expect utility stockpiles to fall below 75 days of supply by year-end 2017 and to reach average target levels of 55 to 60 days in mid-2018.

In summary, we remain enthusiastic about the prospects of a strong finish to 2017 and another strong year of value creation in 2018. With our solid cash flows, balanced operating portfolio, strategic marketing approach and efficient and responsible method to capital returns, Arch is well positioned to build upon our proven record of returning capital to shareholders and further capitalizing on dynamic global coal markets and still improving domestic thermal markets.

With that, I will now turn the call over to Paul Lang for comments on the operating and marketing performance in the third quarter. Paul?

Thanks, John. This morning, I'd like to spend a few minutes discussing the opportunities we see in our business as well as the challenges we faced during the last 3 months, and more importantly, how we overcame these challenges and still delivered strong overall results.

In the thermal segment, during the third quarter, Arch shipped 1.8 million tons of coking coal, at an average net back price of $99.21 per ton. Volumes were lower than expected due to rail disruptions at our coking coal operations in July and August, coupled with difficult conditions at both of the longwall operations in the segment. In particular, at Mountain Laurel, we confronted startup issues during the transition to the Cedar Grove seam, but it generally worked through them by the end of September. At Leer, we encountered an acute roll in the coal seam that forced the longwall to mine through an area of rock towards the end of the panel. This issue in turn impacted mechanical availability and slowed our rate of advance, pushing the longwall move into October.

Currently, we're finishing the setup of the machine in the new panel and should have the system back in operation late this weekend. We are expecting improved performance at both operations heading into the fourth quarter. However, while these issues were offset in part with higher production from Sentinel, in total, we lost approximately 400,000 tons of production, of which we believe will only make up about 100,000 tons by the end of the year.

As a result of this, excluding Lone Mountain, our cash cost for the period were $62.04 per ton and we've raised our full year guidance to $56 to $60 per ton. While higher than previously expected, this is still a solid cost structure that we believe places Arch to clearly near the low end of the industry cost curve.

During the quarter, we sold for 2017 delivery an additional 275,000 tons of coking coal at an average price of about $106 per ton, and we priced approximately 700,000 tons at about $120 per ton. We now have 6 million tons of coking coal committed for delivery in 2017 at an average price just over $100 a ton. We also have another 600,000 tons committed, but unpriced. As noted in the release, with our Q3 challenges, we have reduced our metallurgical volume targets for 2017 to between 6.6 million and 6.8 million tons, leaving us over 98% committed for the year at the midpoint of the range.

Looking ahead, during the quarter, we also sold approximately 850,000 tons for 2018 delivery. Of these new sales, about 500,000 tons were sold as a result of the annual domestic negotiations at a fixed price of $105 per ton. The balance of the new sales was contracted with global steel producers generally at index pricing. With these new sales, we now have 2.9 million tons committed for next year, of which 2.4 million tons are subject to index pricing. In 2018, we expect less than 20% of our coking coal sales will be in the North America -- will be with North American steel producers. While we continue to view the domestic market as an important outlet for our metallurgical volumes, the discounts we are being asked to consider were simply too great to justify our traditional 40% to 50% participation. Each year we'll evaluate our coking coal sales portfolio and work to strike a balance that garners the best value for our products.

Turning to the thermal side of the business, with -- starting with the Powder River Basin. We had a busy quarter as customers were actively in the market shoring up near and intermediate-term volume needs. As a result, we committed and priced 4.7 million tons for 2017 delivery at an average of $12.03 per ton. With these new sales, we now have 82 million tons committed, of which 81 million tons are priced at $12.47 per ton. The new sales [effectively sell out] our Wyoming mines for the year. Additionally for 2018 delivery, we committed and priced nearly 11 million tons at an average of $11.64 per ton. The recently committed volume mix for 2018 is largely representative of our production profile between the 2 mines in the segment. Including these volumes, Arch now has 50 million tons committed, of which 47.5 million are priced at $12.05 per ton, with the balance subject to index pricing. Based on our 2017 sales volume, we are about 62% committed next year with virtually all of our open position at Black Thunder.

Looking at the operating results. We had a solid quarter in this segment with our total cash costs dropping to $10.27 per ton on increased shipments and good cost control. With this, we're maintaining our previous cash cost guidance for the segment at $10.20 to $10.60 per ton for the full year. In the Other Thermal segment, despite the longwall move at West Elk, shipment levels were on par with the previous quarter and we turned in a strong operating performance. Ongoing demand and good seaborne thermal prices continue to pull of the high quality West Elk and Coal-Mac products into the international markets for export, a trend we expect to continue in the 2018. This year, we expect to export 2.7 million tons of thermal coal from this segment to power generators in Asia, South America and Europe.

During the quarter, we sold about 900,000 tons for 2017 delivery at an average price of $36.08 per ton. As John mentioned, given the ongoing strength in the international thermal markets and stable domestic market, we've raised production at both West Elk and Coal-Mac to match that demand. Along with this, we've slightly lowered our 2017 cash cost guidance for the segment to a range of $22.50 to $26.50 per ton. We now have 9.3 million tons sold for the segment, all of which is priced. With the production increase in the Other Thermal segment, we now expect our total 2017 thermal shipments for the company to range from 90 million to 96 million tons, which is an increase of 2 million tons of our overall previous estimate. Even with this, using the midpoint of our guidance, we're essentially sold out for the year.

In closing, I want to recognize our entire workforce for their continued commitment to our core values of safety and environmental compliance. In particular, I want to congratulate our Coal Creek mine for surpassing 4 straight years of operating and injury free. In addition, I'd also like to highlight the dedicated employees who provided their time and efforts to our mine rescue team. This includes the employees of Leer, Viper and West Elk, who placed in the top 10 of the National Mine Rescue Competition and are the top performers from their respective states.

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

Thanks, Paul. Good morning, everyone, and Happy Halloween. During the third quarter, we continue to execute on our plan to generate healthy cash flow, maintain a strong and flexible balance sheet and execute aggressively on our capital return program. On the cash generation and liquidity front, during the quarter, our operating cash flows exceeded $100 million despite the operational challenges on our metallurgical segment. We believe our performance this period highlights the strength of our balanced operating portfolio, which is made up of low-cost cash positive operations in both our metallurgical and thermal segments.

During the quarter, we continue to make progress on reducing cash collateral that is required in our business. First, during the quarter, we were successful in negotiating the release of $19 million of collateral. Second, we have issued additional letters of credit from our inventory-only ABL that we implemented last quarter, freeing up cash that had been restricted to support those LCs. Both of those items allowed us to eliminate $42 million of restricted cash. As a result, and for the first time since 2015, we do not have any restricted cash posted to support the issuance of collateral. In fact, our strong operational performance combined with our pristine balance sheet has allowed us to secure the return of approximately $100 million of collateral since our public relisting in October 2016.

As John referenced, we have returned approximately $235 million to shareholders since the capital return program was introduced in early May. Breaking that down further, we have spent a total of $218 million buying back 2.9 million shares, representing close to 12% of the company's outstanding share balance. In addition, we have paid nearly $17 million in cash dividends to our shareholders. Furthermore, the Board of Directors has approved the next quarterly cash dividend payment of $0.35 per common share that will be paid on December 15 to stockholders of record at the close of business on November 30. Even with our capital return activities, we finished the quarter with cash and short-term investments of more than $453 million. Our cash balance combined with our total debt balance of $328 million leaves us with negative net debt of $125 million at September 30.

As we have discussed in the past, we are intensely focused on maintaining a healthy balance sheet and ample liquidity. Given our modest capital requirements, exceptionally low interest expense and limited legacy liabilities, we believe that our cash balance is sufficient and appropriate to meet expected and potential cash requirements throughout the full commodity market cycle. Moving forward, we would expect to maintain cash level similar to those levels we have seen since the beginning of the year.

During the quarter, we took a modest, but important step to lower our cost of capital further. We leveraged our balance sheet and took advantage of supportive debt markets to reprice our $300 million term loan dropping the interest rate from L plus 400 basis points to L plus 325 basis points. The rate reduction will save Arch in excess of $2 million on an annual basis. As a reminder, last quarter, we entered into interest rate swaps for a portion of the term loan fixing the LIBOR rate for the next several years. For the next 9 months, we have interest rate swaps in place that fixed the LIBOR rate for $250 million of principal at an interest rate of 1.37%. 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 approximately $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. With the continuing benefit, the industry receives from percentage depletion as well as the impact of timing differences, we expect to pay cash taxes and record a tax provision of between 0 and 3% in 2017. We have continued to assess our tax position and we now expect to have a cash tax and tax provision similar to that of 2017 through 2019.

To wrap up, we are confident in our strategy to prudently manage our balance sheet, maintain healthy liquidity levels and generate meaningful cash from our streamlined portfolio of large-scale, low-cost complexes. Going forward, we will continue to focus on executing our plan and creating significant value for our shareholders.

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

(Operator Instructions) We'll go first to Mark Levin from Seaport Global.

The first relates to the PRB and the 2018 contracting. I want to make sure, I heard you correctly, are you guys effectively sold out in '18 on your 8400 product, so effectively the only thing left to price in 2018 is the 8800, the Black Thunder product?

That is correct. I mean, we purposely went out and booked up our 8400. As I look at the markets [invested] segment that concerns me most and that's best we put it to rest.

Got it. That makes sense. And then secondly just around, just general PRB demand in 2018 over 2017. I think you referenced or may have referenced the mild summer that we had obviously preceded by a mild winter. Is your -- I realize you guys kind of produce about the same thing regardless, but is your view when you look at PRB demand in '18 over '17 that it will be flat with this year or do you think it could be lower? Or I mean, just assuming normal weather and gas right around where we are today.

I think that's pretty accurate recap of our view. I think, we're looking at '18 coming in pretty well right in line with 2017. The only thing I may add to that is I think there is a good chance the higher-quality mines will continue to chip away at lower-quality mines.

And then just one last question and it has to do with domestic met. I think you referenced committing, I guess, less than 20% into the domestic market as you didn't want to take big price discounts. And then, I think you also referenced an average price for what you had committed -- I think it was -- you booked 500,000 tons around $105. Can you maybe speak to the remaining portion under that annual contract? Would it be around that same price, would it be less, just kind of the mix around, what you didn't reference on that annual contract? And then, generally speaking, how much up year-over-year from a price perspective on the domestic component do you expect to be?

Mark, I may have lost you a little bit of that question, but I'll start off. We committed, as I said, about 800,000 of which $0.5 billion was domestic fixed price at about $105. That was a combination pretty close 50-50 low vol and high vol A. And honestly, the prices were pretty close to each other. Our open position that takes us to 2.9 million committed, which is as I said, that puts us in pretty good position heading into the international contracting season.

Mark, this is John. Let me jump in here. I think, and I spread from where we are today to where getting to the 20% maybe is where you going on domestic met, but we'll see where the pricing comes in on it. If you look at where prices are at Platts East Coast. I mean, those prices kind of back out there at $105, $110, so I would expect that any remaining domestic business we do would have pretty much that kind of pricing associated with it.

We'll go next to Lucas Pipes of FBR & Co.

Good job managing through difficult geologic quarter and all the rail issues. I wanted to just follow up a little bit, Paul, I think you mentioned in your introductory remarks, challenges that we are in, how they extended into October. So the first question is, if you could maybe give a little bit more color as to when the issues are put to rest, and then longer term you've referenced how you're still one of the lowest cost producers out there, if not the lowest cost producer. And I was just curious, putting everything together here as we look into 2018, what's a reasonable cost range going forward?

At Leer, we encountered, I think what would call the acute roll in the face. I think the best way to think about it is, we hit a fish bowl. It was about 300 feet x 400 feet and dropped about 25 feet. We chased it down for a little bit and ultimately just decided to mine through the rock. We cleared the roll actually in early September, but that rock that we're mining through a pretty hard sandstone and it really took a toll on the machine. We pretty well had things back on track for the rest of the panel in October and we finished the panel up late last week and started the longwall move. I am expecting the machine to start up probably late Sunday night or early Monday morning. I got to tell you, as you know these are tough call, I was at the mine 3 or 4 times over the space of about 5 weeks and we kept abating whether we pulled out of the panel or not. In the end, we stuck it out and I think it was the right decision. Those were the joys of longwalls.

Lucas, I think in terms of your '18 question on cost, I mean, we're in the planning stages right now. Over the next 4 to 5 week, we'll be finalizing our plan for 2018. Paul will be talking with our board about have a better idea on costs when we report our fourth quarter earnings in the first week or 2 of February.

And then maybe to switch to the capital allocation front, obviously, you've been buying back a lot of shares and have been indicated this morning that you intend to buyback more and I wondered has as a special dividend also entered the conversation and if so, what gave the preference to continue on the buyback now?

Lucas, let me kick it off here and John can jump in and where he sees fair. As we thought about how we return value to shareholders earlier this year, we had a lot of good constructive conversation at the board level and we really wanted to accomplish a couple things. One, we talked about the dividend and we really want a level dividend that we could do in any kind of market cycle and that's how we came up with the $35 million and we're still very comfortable with that. On the share buyback, we did the initial up to $300 million as you've seen, we've been very active on that program and we just refreshed that program for an additional $200 million. And we think given where Arch is that's the right approach and we talked about the one-time dividend, we tend to look at those as kind of one-off, not that we will continue to talk to our board about that, we think we're pretty comfortable with the dividend we got in place and $0.5 billion of share repurchases that we put in place. John, you get in and add in that.

Lucas, I think the only thing I'll add is, once again the whole commitment to the capital return program shows our conviction and confidence and our ability to execute and operate on our plan, which we've been acutely focused on since we have emerged from bankruptcy. And so I think that's the path forward for us right now. We'll continue to look at the cash generation and the opportunity to participate in the market, and I think, we feel real good with where we are right now.

We'll go next to Paul Forward of Stifel.

Just back to the question on capital return program and the expansion, could you talk a little bit as you considered the desire to expand the share repurchase program. How does the board or how do you in the board sort of stack at the various opportunities between new mine developments and we assume in metallurgical coal versus share repurchases versus acquisitions? And what led to the decision to go with the share repurchase expansion rather than the other 2 opportunities?

Paul, as we look at the business, it's always driven kind of business environment M&A opportunities, I mean, we're always looking external assets. Given where we are in the cycle, we just thought returning cash to shareholders makes the most sense right now. If you look at our portfolio, we worked really hard to make sure that we've got the cost structure in place on the thermal as well as the met on the low end of the cost curve, we think we've done that. So as we look at external M&A, we don't want to do anything that would impair that cost structure. I think the other thing that we've got that maybe so little unique to others is that we've got a tremendous organic growth profile, particularly as we look at Tygart Valley. And I think I mentioned on the last call, we did have our board at the mine in July. I think they were very pleased with what they saw. We continue to move those projects forward from a permitting mine planning standpoint, but we're really not at the point where we need to make a decision at this point. We'll continue to look at the business environment, the markets and make a decision at that point, but very comfortable with what we've done thus far on the dividend and the share repurchase.

Yes, Paul, the only thing I'll add to that is, it's an ongoing process. It's something that we'll continuously and constantly evaluate, but right now we feel very comfortable with the path we're heading down.

And I guess just on the question of the potential expansion at the Tygart Valley. What are the -- as you consider the long-term project there, what kind of limitations would you expect over the long run? Are there further concerns like, labor availability, rail capacity, the ability to access customer base that's going to be predictable either domestically or internationally? What might cause you to decide or to delay a decision to expand there, if in fact that's what you do?

Paul, this is Paul. As you look, you got to remember there's 2 projects. We ultimately could place another 2 longwalls into the Tygart reserve. And as we look at that reserve base, it's high valley, which still is at a very good demand, both domestically and in Europe and Asia. So as far as the overall picture, there isn't a lot of concern as far as the market and transportation, and if you recall, we expanded our position at DTA earlier this year, so we have capacity to get the coal offshore. As far as the labor force, look, I think it's always going to be tied up in that part of the world, but we successfully staffed Leer from greenfield position. And I think as I look at what's going on around Southern West Virginia, it may be easier in a couple years to staff those mines.

We’ll take our next question from Michael Dudas of Vertical Research.

[In view of] more and more discussion about the real issues you had in the quarter and where we stand today, how hopeful how the company's bid and solving some of the issues, and as you plan and enter into 2018 throughout your transportation and negotiations, are you comfortable with where the investment has been from the industry and to meet your needs going forward?

I got to tell you, it really came to light about 3 months ago on this call. We started seeing problems in late June and it started off with our domestic operation, our domestic runs and started spreading in July to the international shipments. But I got to tell you, we had a lot of conversations with the railroad. Once we got them engaged, they were very responsive and ultimately, we worked on several projects together to improve things. And look, it didn't get better till early September, but after early September 4, I really can't complain about the rail service we received. I think the most troubling thing -- a lot of the shipments end up being timing issues, but probably the most difficult part we had in the quarter was the merge on the vessels we missed, and look frankly, we're going to look to come back and get some of that value back from railroads.

Michael, this is John. Let me just also follow-on on what Paul said with the railroad. We really struggled, had a lot of concerns in July and August, but after a lot of tough conversations between the parties, they really stepped up and performed and continue to do so into the fourth quarter, and we would expect them to do that into 2018 as well.

Appreciate those. My follow-up would be, as you're negotiating with your utility customers for your thermal shipments, what kind of discussions are you having or planning 3 to 5 years out? Do you get a sense that utilities got a better handle given all changes with the administration and what's going on with gas, et cetera? That if you're comfortable where their mix is right now or given the net reductions in capacity, you probably are going to still see this couple years, is there still going to be pressure [succulently] on consumption for the industry, especially some of the higher cost players?

I'll maybe start off the conversation with -- the conversations I’ve had with the customers, and let John talk about the bigger picture. But look, the customers heading into 2018 are, they're nervous about gas, they’re nervous about inventories, they’re nervous about what kind of power consumption is going to be. I think what you're seeing in particularly is they’re pushing out a lot of buying, and what we're going to see, I think, in 2018 is a lot of inter-year buying, probably more than we've seen in the past.

Yes, I think, Mike, we've alluded that in previous calls. I think it's kind of the new norm as we go into a new calendar year, there's going to be a lot more volume bulk within that year. We've kind of rightsized our operations to make sure that we can manage to that. We think we're very comfortable with that. We’ve got 50 million tons sold right now in the PRB. We think that's a comfortable position for us as we look to 2018. So I think it's just kind of the new environment we're in and something that we think we can manage well.

If you look out to where your '19 and '20 business is, are you surprised how low or high or contracted you are currently, or is it just (inaudible) that's been the concerns with your customer base?

I think we're actually a little bit ahead of last year. For the 3 months, outside the 2 windows we talk about, we placed about 30 million tons of sales for the next couple of years.

And Mike, if you look at where we are, Paul talked about earlier, we've got coal crude pretty much committed for 2018. So everything that we got Black Thunder, which for us is approaching a 9,000 Btu coal. So we feel like there’s going to be major purchases made during 2018, it will be in play on most of those opportunities.

We'll go next to John Bridges of JPMorgan.

Just following on from the flexibility question, I was just wondering how you manage to find the extra coal this quarter. How did you manage the different lines to keep the coal flowing?

Look, I think the team did an outstanding job and really got to call out the guys at West Elk and Coal-Mac. But you got to remember, West Elk in particular, we're running that mine, we started off the year thinking that sales were going to be 3-6. That mine has been able to run as high as 7 million tons. Coal-Mac was similarly situated. John, we've just come to the conclusion that we need to get better running our mines up and down and just not focus on running them at full blast.

John, I think it’s a perfect example. We talk a lot about having a balanced portfolio and certainly this played well during the quarter. We had 2 of our largest met mines that had challenging geology at the same time we offset them with other met mines as well as West Elk, Coal-Mac and our PRB operations. And that's why we really like our portfolio the way it sits today.

Just a bit of a bookkeeping question on Illinois because we see the Viper numbers, but just looking at the S&L breakdown, it shows production from Blackhawk and Viper, but also Hawkeye, Prairie Eagle, how does all that fit in to your reporting?

John, that's all recorded as an equity investment, our investment in Knight Hawk, so that's -- yes, that's all rolling through the other income and expense line item.

Viper, West Elk and Coal-Mac are in the Other Thermal.

That's correct.

Right. I know where the Viper goes. I was just wondering about all these other mines. Okay, that's helpful. That's great and many thanks and best of luck for the rest of the year and contracting for next year.

We'll go next to David Lipschitz of Macquarie.

Yes. Just a quick (inaudible) 6.6 to 6.8, does that include the PCI that you've already sold this year?

You broke up there. Can you repeat that question?

Sorry, just for the coking coal guided for 2017, does that include the PCI shipments you've already shipped this year 40,000 tons - 500,000 tons of PCI, is that in 6.6 to 6.8?

David, the PCI was always reported separately, and since we sold Lone Mountain, we're out of the PCI business.

No, no, I understand that? But when you gave, you used to give guidance...

It's a separate line, if you look at the chart, it's met coal PCI and Other Thermal...

Yes, there is no met buy in that -- excuse me...

No, I understand. When you guide to 6.6 to 6.8. Historically, I think that was in the last quarter I think. So is that just non-PCI 6.6 to 6.8, so if I just do a run rate from your first 3 quarters you are going to do almost 2 million tons in the fourth quarter, is that correct?

That's correct.

We'll take our final question from Wayne Cooperman of Cobalt Capital.

Just a clarification on the share count. Can you -- what was the ending quarter share count? What would you estimate that the diluted count will be for Q4 '18, kind of not -- I think, I realized you bought a lot of stock in the quarter and probably it would back-end weighted. I just kind of want to get a real share count.

So Wayne, we bought as we indicated 2.9 million shares. So take that off the 25 million shares, so 22.1 million shares was the ending of the quarter share count. We are not going to indicate what our activity will be moving forward, but that becomes the starting point...

Is that -- and how much should I add in for options and stuff, just on a fully diluted basis, so that is fully diluted?

Yes. If you look at the face of the income statement, is about 400,000 shares, 500,000 shares, that is the difference in the existing quarter and the current quarter between our basic and diluted share count.

And just assuming nothing else, you will probably report 22.5 million fully diluted shares for Q4. Is that pretty close?

That would assume that there will be no additional share repurchases in the fourth quarter. That is correct.

Yes, that's what I was trying to get. Okay, great. I mean, you might buy more, hopefully. But -- that, I got that.

We indicated that we're confident in our ability to execute and believe that participating in the capital return program via the share repurchase program is a good way for us to go.

I mean buying back stock at double digits, free cash flow multiples are pretty good use of cash.

We believe so as well. We would agree, Wayne.

At this time, I would like to turn the call back over to John Eaves for any additional or closing comments.

Thank you. I want to appreciate everybody's interest in Arch Coal. We look forward to finishing 2017 strongly, and continuing to create shareholder value in 2018. So we look forward to updating our fourth quarter results in the first 2 weeks of February. Thank you.

That does conclude our conference for today. We thank you for your participation.