Arch Resources Inc (ARCH) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Inc. Second Quarter 2018 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, 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 like also 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 Investor 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 very strong results and excellent progress on a range of key objectives during the quarter (inaudible). Our mines ran well, our coking coal franchise benefited from the improving logistics chain and we achieved excellent margins as we capitalized on continued and persistent strength in global coking and international thermal markets. Perhaps more significantly, we continue to generate very robust levels of free cash. Cash that we put to excellent and value creating use through our aggressive and ongoing capital return program.

In total, we spent approximately $78 million during the quarter to buy back nearly 1 million shares of Arch stock. With those purchases, we increased our total share repurchases to more than 5.3 million shares since launching the program in May of last year. That translates into an excess of 21% of the share count since the program's inception just 15 months ago. We view that as good and significant progress and believe that it's emblematic of excellent cash generating potential of the enterprise.

Moreover, the board recently signaled its strong and continuing support for the capital return program by authorizing the repurchase of another $250 million of shares bringing our total current authorization to $331 million. The additional authorization represents a strong vote of confidence in the value-creating nature of the buyback program as well as in the company's assets, management team workforce and business outlook.

As indicated, the company's second quarter results provide further support for such confidence. We achieved strong prices and impressive margins in our coking coal franchise. We resumed the strong cost performance at our coking coal mines and effectively addressed the isolated operating challenges we encountered in the first quarter. We shipped higher than anticipated levels in the Powder River Basin and we, again, capitalized on strong international thermal prices by shipping significant percentage of our other thermal output in the seaborne markets.

I like to now take a few minutes to comment on the broader coal market conditions before turning the call over to Paul for further discussion on our operating results for the quarter. Let's start with the coking coal market. While prices have retraced somewhat in recent weeks, we still have the view that fundamentals are quite strong. Of course, steel markets are always a critical driver of coking coal demand, and the news there continues to be encouraging.

Global steel production is up 5% year-to-date, and global steel prices continue to be strong on a historical basis across all regions. Seaborne coking coal demand remains buoyant as well. While Chinese seaborne coking coal purchases are down 17% year-to-date, June imports were quite strong. That may be further evidence that, currently prevailing price levels, Chinese steel mills will continue to be buyers and thus provide an important price support in the marketplace.

We're also seeing good strength from India on a rapidly increased base of demand. Year-to-date, Indian coking coal imports are up 3.4 million tons or 16%. With continued and rapid growth in the Indian steel sector, we share that view that India may be on pace to become the largest importer of seaborne coking coal in the not-too-distant future.

In recent days, U.S. East Coast price assessments have started to reflect the premium over Australian hard coking coals, which is encouraging and reflects the strong fundamentals we're seeing across all demand centers. As of this morning, a High-Vol assessment stood at $173 per metric ton FOB the vessel, which provides some excellent net back in margin for our low-cost coking coal operations.

Moreover, High-Vol A, which as you know is our primary product, continues to be highly valued in the marketplace and is currently reflecting a $9 premium over Low-Vol coals and an $18 premium over High-Vol B products. On the supply side, we continue to see challenges and disruptions on both production and logistics front in Australia and elsewhere, and those persistent issues are helping to keep the market in a healthy balance.

Of course, we're seeing new supply enter the market in response to the recent high prices but the volume increases have been modest to date. For the most part, we're seeing high cost, previously idled capacity being pulled back in to the market. New investment continues to be scarce, which should bode well for continued market balance in the near intermediate term.

Looking now to the international thermal markets. Newcastle prices remain at a very strong $112 per metric ton for prompt delivery and API-2 prices for Northern Europe stand at $94 per metric ton. These are highly attractive levels for Arch's West Elk and Coal-Mac operations. But just as important, we believe the fact that the increased U.S. thermal exports overall are helping tighten the domestic thermal markets.

Also helping things here at home is a strong start to the summer, which has accelerated the liquidation of stockpiles at the U.S. power generators. Cooling degree days were up 37% through June when compared to normal, and that's helped accelerate the still needed stockpile liquidation.

At present, generator stockpiles are estimated to be just over 60 days supply, the lowest level we've seen in nearly 4 years. Given the ongoing liquidation and assuming stable natural gas prices, we would expect to see an increase in prompt buying activity if stockpiles approach target levels over the course of the next few quarters.

In summary, we're pleased with the excellent progress we've made during the second quarter and we're feeling positive about the outlook for the remainder of 2018 and beyond. Our coking coal franchise is executing at its customary high level, market fundamentals appear supportive going forward and we continue to generate very substantial levels of free cash flow, and we have a clear plan in place for returning capital to shareholders in a highly value creating way.

With that, I'll now turn the call over to Paul for further thoughts on the second quarter performance. Paul?

Thanks, John, and good morning, everyone. As John mentioned, during the second quarter, we had both strong operating and marketing performances. On the sale side, we continue to move forward with our global initiatives taking advantage of still strong coking coal markets and expanding our exposure to robust international thermal markets. Operationally, we overcame the challenges at Mountain Laurel that hampered our performance in the first quarter and we're able to reduce our cash cost in both the metallurgical and the Powder River Basin segments.

Starting with the metallurgical segment, we shipped 1.7 million tons of coking coal during the second quarter, exceeding our internal volume expectations by almost 200,000 tons. The improved shipping level was a result of a better performance in the logistics chain as well as favorable timing on the scheduling, arrival and loading of export vessels.

As we've noted in the past, our greater participation in the seaborne markets can increase the variability and quarterly shipments making it difficult to forecast. However, looking ahead, we anticipate that our coking coal volumes for the next 2 quarters should be fairly ratable.

Moreover, our average realizations continue to be supported by strong index pricing on assessed coking coal products. Overall, our pricing on the second quarter coking coal shipment averaged over $119 a ton, with approximately 80% of the volume going to international steel producers and 20% staying with North American customers.

During the quarter, we committed roughly 800,000 tons of new coking coal sales for delivery in 2018. About 80% of these sales were priced at the time of the transaction and shipped during the second quarter. The balance of the tons were sold on an index basis for shipment during the back half of the year. Notably, we continue to expand our reach into Asia and expect more than 20% of our 2018 seaborne coking coal volume will go into this growing market.

At the midpoint of our coking coal guidance, we have approximately 600,000 tons left to sell for the year and another 1.5 million tons committed but subject to index pricing. On the operating side as indicated in the release, Mountain Laurel transitioned to a new panel in early June. While the complex is a relatively minor contributor to Arch's financial results, we believe that it could continue to generate value and we're pleased with its performance since the completion of the longwall there.

During the second quarter, segment cash cost declined $7 per ton as compared to the first quarter of 2018. This reduction reflects a larger percentage of shipments from the low-cost Leer mine and a much improved cost performance at the Mountain Laurel complex. Looking ahead, we remain confident in our annual cash cost guidance range of $60 to $65 per ton for the franchise. This is a cost structure that supports strong margins, enabling Arch to competitively participate in global coking coal markets during all phases of the cycle.

Moving to the thermal side of the business. In the Powder River Basin, we also recorded better-than-expected shipping levels, bucking the sharp decline typically seen during the shoulder season. Volumes were lifted by Black Thunder's ability to increase train loadings, despite heavy rainfall that impacted the southern portion of the basin in late May and early June.

Additionally, the early arrival of summer and persistent above-average temperatures worked to increase customer demand during the quarter while facilitating the ongoing decline in utility stockpiles.

During the quarter, domestic power generators returned to the market to supplement their 2018 requirements and shore up the near intermediate term volume needs. As a result, we committed and priced about 5.5 million tons of Black Thunder coal for 2018 delivery at an price of around $12.30 per ton. Given the midpoint of our annual target volume level of 65 million tons of Black Thunder, we had roughly 4 million tons left to sell for 2018 as of the end of June.

Additionally, during the quarter, we layered in about 5.2 million tons for 2019 delivery. Including these volumes, Arch now has around 34 million tons priced at $12.40 per ton and another 2 million tons that were 2019 committed, subject to index pricing.

Looking at the operating results, we had a solid quarter in the segment. Even with the sequential decline in volume levels, cash cost dropped by $0.11 per ton when compared to the first quarter. This lower-cost level was driven mainly by effective cost control and lower maintenance repair cost of Black Thunder that offset more than a $0.20 per ton increase in diesel prices. With this, we're tightening our previously stated cash cost guidance for the segment to a range of $10.50 to $10.90 per ton for the full year.

In the Other Thermal segment, ongoing demand and robust seaborne pricing continue to pull the high quality West Elk and Coal-Mac products into the international markets. However, shipment levels in the segment declined 9% when compared with the first quarter of 2018 due to less than optimal rail performance that impacted loadings at both West Elk and Coal-Mac.

In fact, the delay in rail loadings resulted in more than 200,000 tons flipping from May and June into the third quarter in just those 2 operations. So far in July, rail performance has improved somewhat and we believe we'll export more than 4.5 million tons from the segment in 2018.

During the quarter, we sold about 350,000 tons for 2018 delivery at an average price of more than $46 per ton, about 60% of this volume was for West Elk and the balance was for Coal-Mac. Additionally, and it's highlighted in this morning's release, we continue to capitalize on the strength of the international thermal markets to reduce our risk in future periods, while opportunistically layering in volume at pricing to provide attractive net backs for a portion of our international thermal sales.

We continue to view the seaborne marketplace as an essential outlet for our higher-quality thermal products, and believe taking in this position is a logical enhancement to our overall sales strategy. Furthermore, while cash costs during the period increased 9% due to a large portion of shipments from Coal-Mac, we remain comfortable with maintaining our full year 2018 guidance of $27 to $31 per ton.

In closing, I'm pleased with our operating and marketing performance in the second quarter. We successfully exceeded sales expectations and lowered cash cost in 2 key operating segments, while moving through logistical challenges in another. We continue to be encouraged by the persistent depth in the global coking coal markets and the enduring strength of the seaborne thermal markets. We'd like to thank all of our employees for their intense focus and hard work during the period, while at the same time delivering industry-leading safety and environmental performances.

With that, I'll turn the call over to John Drexler, who will provide an update to Arch's financial position. John?

Thanks, Paul, and good morning. During the second quarter, we continue to demonstrate our commitment to executing aggressively on our capital return program. As John described, our portfolio of Tier 1 assets generated healthy cash flows that allowed us to buy back 960,000 shares. Spending over $78 million at an average price of $81.54 per share. This represents the second highest quarter of open market purchases since the program's inception just 5 quarters ago.

Since May of 2017, we have returned a total of $419 million or over 21% of the shares outstanding at an average price of $78.40 per share. In addition, the Board of Directors has approved the next quarterly dividend payment of $0.40 per common share. That dividend will be paid on September 14 to stockholders of record at the close of business on August 31.

Since the initiation of the recurring dividend in the second quarter of 2017, we have paid $41 million in dividends to our shareholders. Between our share repurchases and dividends, we have returned $460 million of capital since the announcement of the capital allocation program. Looking ahead, we will constantly evaluate which uses of cash provide the best risk-adjusted return over the long term.

Having said that, we continue to view our stock as an excellent value. And given our current capital resources and the expectation of strong free cash flows for the remainder of the year, we expect to build further upon our proven track record over the course of 2018.

Turning now to our liquidity position at June 30. We had nearly $403 million of cash and short-term investments on the balance sheet. It should be noted that we do have, and expect to continue to have, excess borrowing capacity under our 2 short-term borrowing facilities: our accounts receivable securitization facility and inventory-only ABL. As a reminder, we primarily utilize these facilities to issue letters of credit supporting various obligations necessary in our industry. Inclusive of the unused borrowing capacity under these facilities, we had $420 million of total liquidity at quarter end.

As you know, the vast majority of our liquidity is in the form of cash, and we have consistently targeted between $400 million and $500 million of liquidity. Going forward, with the benefit of additional liquidity in the form of unused bowling capacity, we will continue to target liquidity levels between $400 million $500 million but are very comfortable with a cash balance that falls at the low end or even below the range.

We remain intensely focused on maintaining our industry-leading balance sheet and ample liquidity. We recognize that we operate in an industry that will experience cycles and a strong balance sheet provides crucial support through each phase of the market cycle. As Paul mentioned in his remarks, during the second quarter, we continue to take advantage of an improving international thermal market to fix pricing on select expected export sales for the remainder of 2018 and 2019 by entering into swaps.

As the physical sales have not transacted yet, we are not able to apply hedge accounting. As a result, as international thermal pricing strength send over the course of the quarter, we recorded unrealized mark-to-market losses of $15 million on these swaps. These positions will continue to be marked to market through the income statement until their expiration, but ultimately any losses incurred on the swaps will be offset by higher pricing on the physical shipments.

At June 30, we have entered into swaps for 1.9 million tons associated with this program, with the majority per volumes that will ship in 2019. As a reminder, we expect to ship 4.5 million tons of thermal coal in the international markets in 2018.

Our 2018 guidance, as reflected in the press release and Paul has provided thoughts on our sales and operating cost outlook, a few additional items to note. We now expect our SG&A expenses to be between $91 million and $94 million. This includes [$15] million of noncash equity compensation expense. This increase of $2 million at the midpoint from last quarter primarily stems from additional accruals for employee incentive programs. While we had a small onetime noncash benefit from a reversal of the tax reserve in the second quarter, we continue to expect our tax provision to range from 0 to a modest benefit for the foreseeable future.

In summary, Arch continues to be well positioned with its low-cost met and thermal franchises to generate strong cash flows in this environment. We've been quite clear through our actions that we are firmly committed to our capital return program and expect to continue to utilize the program to generate value for you, our shareholders.

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

(Operator Instructions) And we will take our first question from Lucas Pipes with B. Riley FBR.

I wanted to follow up a little bit on the capital allocation front. And obviously, you've returned a tremendous amount of capital back to shareholders over the past 5 quarters. I think it was $460 million is what you stated. But then when I look at the stock price is kind of -- it's roughly flat from inception, from late 2016 at least. And I wondered kind of how you make sense of that and if that has maybe caused you to think about other capital return opportunities?

Lucas, we've been quite clear and focused on that capital allocation and capital return program since its initiation. And I think that's kind of where the management team and where the Board of Directors feels very comfortable and optimistic about the opportunities for this company as we move forward given its low cost profile, given what we see markets moving forward, and sees the opportunity to invest in our shares as an excellent way to return that value. And so we're committed to that program, as we've indicated, and expect to move that forward.

Lucas, this is John. Look, we're always looking at how best to utilize our capital. We've looked at M&A. We've looked at organic growth. And as John said, is we're looking at -- the best option for us today is really to buy back shares. And that's something that I'm talking to the board with almost every quarter. As you've heard me say in the past, we've looked from an external M&A at about everything. Right now, we just don't see anything that really works for us. We've got some pretty attractive organic growth opportunities down the road, but don't feel compelled to do anything near term. We continue to watch the coal markets, the general business environment and make those decisions appropriately. But right now, buying back our shares, we think, is the appropriate decision for this company.

That's helpful. And to switch over to the industry and market fundamentals a little bit. Where would you put the marginal cost kind of for the U.S. met coal industry? Obviously, you are the lowest cost producer on my estimates, but where would you say kind of is the marginal ton produced on an FOB port equivalent in the U.S. and if you have a perspective on the global market -- on the global cost, marginal cost dynamic, I would appreciate that as well. And then, secondly, met coal prices by and large have held up really well. And as we head here into the second half of the year and think about 2019, domestic met coal contracts with U.S. steelmakers, have those discussions started? And if so, can you give us an indication of where prices are shaking out?

Yes. Let me take the first part of that Lucas, this is John. I mean, certainly, on cost side, we worked hard to be on the low end of the cost curve in North America. We think we're there. If I had to peg the cost today on a cash basis, and I'm looking at it on an FOB mine basis because the transportation can vary, I would call it about $75 plus or minus. And quite frankly, as North America brings on additional volume, that number has probably moved up a little bit. So it could be somewhere between $75 and $80. So with our $62.50 guidance, we think we're well below kind of industry averages. And when you think of the global cost curve, too, we think that with our cost structure, we can compete globally pretty effectively. I don't know, Deck, if you got a number on the global basis that you could provide.

Yes. Lucas, Deck here. And John was talking there, you asked about marginal costs. John was talking about the average cost being the $75 to $80 here in the U.S. Certainly, we think the marginal cost producer, FOB the mine, [certainly] is up close to the hundred dollar level in a lot of instances. Especially, as John said, with some of the productions to come back, when pulled back into the market, quite frankly, when the U.S. is being called upon to kind of fill the gap globally with higher-cost production and production rationalized in the last cycle, that's probably a pretty -- that's pretty encouraging from a longer-term sort of supply-demand outlook perspective. And then when we look globally, I think what we've seen and what's interesting is, we've said for a long time, we think it probably takes $140 to $150 FOB the vessel metric ton to sort of balance the market. But really, if you look historically over the last 10 years or so, that price has been more like $170 on average. And we've seen again and again here in recent months that as met coal prices have pulled back, as hard coking coal prices have pulled back into $170, $175 range, we've seen China come back into the market. So it certainly feels like the cost curve in China and everywhere else is moving up into the [indiscernible] pretty rapidly. So all that, I think, suggests that, as John said, pretty healthy margins for us, in our costs, in our ability to move coal into the seaborne market, but also a dynamic environment where costs are being pressured everywhere and again, we see that cost curve shipping higher.

And I'll let Paul jump in and talk about what we've seen from our domestic customers recently.

Yes. Lucas, this is Paul. I think through this week, we've seen all but 2 expected RFPs from the domestic or the North American steel producers. I think it's interesting it seems that this is starting out every year a little bit earlier and a little bit of concern, I think, from the domestic -- or steel producers about where the market is. Frankly, I think our position hasn't changed. Ideally, we'd like to stay as much as we can with the North American market. It makes sense from a logistics point of view. But at the same time, it's going to be where the value takes us. I think you saw us make the pivot in 2018 where we went from about 50-50 domestic, international to 80-20. And I think we'll just see where the market goes and where the steel producers are and we'll move with that.

Lucas, at the end of the day, Arch is going to go where we create the most value. And fortunately, we have a portfolio of products, the cost structure, the logistical options that allow us to choose the market that creates the most value for investors. And as Paul said, you saw us pivot pretty quickly from 50-50 to 8020. And we'll just have to see how those discussions go for the balance of the year, but we're prepared to do whatever creates the most value for this company.

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

First is a more of a bigger picture Arch question. After this quarter kind of seeing what's going on at Mountain Laurel, maybe talk a little bit about your confidence level in terms of getting the met coal cost structure in 2019 back to maybe where it was before some of the Mountain Laurel issues appeared most recently.

Yes. Mark, this is Paul. Pretty much as advertised, we made the longwall move at Mountain Laurel and the new panel is pretty well as forecast. And I've got to tell you, I've been underground at the mine 2 or 3x in the last couple of months or the last 2 months, and the face looks pretty good. So I continue to feel good about where we're at, at this point in time. The other thing I think that's coming up and, as you know, last quarter, I said that Leer was going to hit the lower coal in 2018 and we'll see that coming in the third quarter. But if you recall, we also -- the 2019, 2020, the coal thickens back up and the panels get longer. So longer term, I think it's a pretty good outlook on our cost structure.

So back to maybe that kind of 55 to 60-ish kind of range? I understand there's a price component to that as well that can impact where you are. But just generally speaking, kind of getting back to where you once were, you feel as confident today as you have in the past?

Yes. I feel a lot better than I did 3 months ago.

Sounds good. That's good to hear. Yes, John.

Mark, listen, we're starting our kind of preliminary budget over the next couple of weeks. I think over the coming months, we'll have a better assessment on what those costs look like post 2018. But as Paul said, the same height thickens out at Leer and it certainly is a good thing for our portfolio moving forward to 2019.

Got you. Got you. Got you. And when you think about like just Q3 and Q4, this is sort of my more modeling-specific question. When you think about Q3 or Q4 and you look at the various puts and takes, how will Q3 compared to Q2? And then maybe how will Q4 compared to Q3 just as you look at it directionally over the course of the year. I think you mentioned Leer and the coal you'll be in shortly. Also, I think you referenced the EBITDA impact of a few vessels that missed hitting the books in Q2 will hit Q3. But how will Q3 look to Q2 and then maybe how will Q4 look versus Q3 from an EBITDA perspective at least?

And I assume that you're talking overall company?

Overall company, exactly. Yes, overall company.

I mean, so typically, the power of base in Q3 is a little bit stronger shipping. Things are running well out there. In that segment, we'll have a few offsetting things. We'll have a [thinner] coal at Leer, but we'll be -- we think we're expecting a good performance out of Mountain Laurel. Then the Other Thermal segment, things -- we need to pick the shipping back up. And we're seeing signs of that, so I think we're expecting a stronger shipping in Q3 out of that segment. Pluses and minuses, I think Q3 is going to be stronger than Q2, but Q4 will have 2 longwall moves at both Leer and Mountain Laurel, and possibly 1 at West Elk. So I'm thinking it will be a little bit of an upside in Q3, then a little bit down at Q4.

Got it. That's very helpful. And then my last question has to do with the railroads. So if the rates move higher when met prices move higher, do you expect to see some relief on your rail rates as met prices have come off? And would we see that relief in Q3 or is there a lag and you would expect to see that more and Q4 is met prices don't head back up again?

Yes. What you saw in Q2, Mark, was obviously -- and I think we've talked about it before, the rail rates tend to lag 1 quarter of the index pricing. So we had a pretty good uptick in rail rates in Q3 -- or Q2 in the price of $5, $6, $7 range. With the marks going down roughly $20 or $25, we'll see most of that brought back in, in Q3.

We'll now take our next question from Michael Dudas with Vertical Research.

Seems like you got some pretty strong negotiating with the U.S. steel companies getting into the third quarter, the spreads are, obviously, historically pretty wide relative to your High-Vol A and Low-Vol B. Do you see anything in the near to intermediate term that's going to alleviate that? And especially, it might be more difficult especially if the Chinese come back in and you start to see a pickup in the consumption in Asia over the second half?

Yes. I think the one surprise we've all seen is the strength in the High-Vol B market that you pointed out, Michael. It actually went up when the other indexes went down in Q2. Having said all that, I think we feel fairly confident heading into Q3 and the discussions with the domestic steel producers over pricing. Look, we're going to argue about full year numbers because that's a perspective we'll have to take and they'll have to take, but I feel pretty good about where we're at.

Michael, this is John. I mean, I continue to think that overall supply and demand are fairly well balanced. I think any time you get a little bit long or a little bit short, you're going to have real movements in price, we've seen that. But this morning, High-Vol A was at 173 [in the boat]-- I mean, net-net that's a very attractive number for us, and that's down quite a bit from first quarter. So we still feel like that the High-Vol A has what we call a scarcity premium in the market. That product will move around from time to time. But with our cost structure, we think we're in a good position whether that coal moves domestically or internationally.

I appreciate that. And my follow-up is turning to your export market. How much more productivity volumes can you squeeze out into that marketplace? And how -- given your discussion with customers, the sustainability of this still fairly tight global thermal market, is there visibility that could lead to some, obviously, continued strong performance of your export business, but also maybe tighten up this U.S. market quicker than people would have thought maybe 6, 9 months ago?

Well, I mean, we're certainly encouraged by what we're seeing in the international markets, Michael. Our internal forecasts have about 62 million tons of met going export this year and about 59 million going in the thermal market. I mean, that's quite a step up particularly on the thermal side. And I think if you look around the globe, there just hadn't been a lot of investment, whether it's met or thermal. And the U.S. has always been perceived to be kind of a swing supplier in that market, and I think you could see that changing. So as an industry, we're going to export almost over 120 million tons in 2018. I mean if you go back 5 years, that's pretty strong. So we like what we're seeing. As Paul and Deck said, we're going to put 4.5 million tons of a combination of West Elk and Coal-Mac in that market at much more attractive prices than we see domestically. So if you've seen coal inventories domestically come down, strong pricing in the international market, I think you're right. I think it does tighten up the domestic market going forward. And natural gas price is at $2.75 to $3, I mean, we like the way we're positioned from a cost standpoint.

And Michael, we're already seeing that, obviously, so great point. It's Deck. We're already seeing the stockpiles come down appreciably. Finally, we're getting into sort of what we would do as target range and it's been a long time coming. We saw stockpiles at the lowest levels or we think stockpiles are at the lowest level at the end of July, as they've been in 4 years, and so that's encouraging. And certainly, early summer heat has been a big part of that. But as you point out, the exports, the strength in thermal exports has also been a very substantial part of that story. And as you look out, the Newcastle curve stays above $90 through 2020. So it's not just current strength, I think there's a view that there's real length to this and that you're going to continue to see a fairly healthy balance in thermal markets globally. So we expect this to continue into 2019-2020.

And Michael, if you look at the forward prices, I mean, for the next several years, I mean they look extremely well for West Elk and Coal-Mac. So it's not really just 2018-2019, it's beyond that.

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

The question goes back, I guess, to what Mark was asking about kind of the next 2 quarters on the coking side. I think you guys said in the comments that the back half the year should look closer to ratable. What is the kind of ratable run rate we should think about for the company? Is it the 6.3 to 6.7? Or is there upside to that? And I guess tied to that is what is the longwall schedule for the next 2 or 3 quarters, the moves?

Dan, I think, right now, we think the 6.5 is a good number. I mean, I think if you want to model third and fourth quarter, I'd assume about 1.7 roughly plus or minus third quarter and 1.7 fourth quarter. Is that a fair assessment, Paul?

Yes. That's correct.

Okay. And is longwall moves for Leer, in particular, coming up?

Leer is in Q4. I think there's a chance Mountain Laurel will fall into Q4 and we also have West Elk that could fall into Q4.

Okay. And then, John, I think I ask this every quarter. But with the capital allocation obviously doing a lot of return of cash to shareholders, Leer 2 is still an option out there for you guys' organic growth, but not a lot of your peers have. Any changes on thoughts and timing there, permits being pursued, milestones, that sort of thing?

Dan, we continue to push that forward, the permitting process continues. I mean, as you know, it's a very attractive project. We actually control 200 million tons (inaudible) there. We'll look for the appropriate market environment, business environment, something we continue to talk to the board about when the right time is. But as I mentioned earlier, we continue to look at any external M&A opportunities and we always have to benchmark it against Leer, too, and we just hadn't really found anything that's comparable to that. So at the appropriate time, we'll make that decision. But right now, we're very comfortable with our capital return program through a dividend and share buyback program.

I appreciate that and I think that's, at this point, the right decision versus M&A. But if the conditions all of a sudden were right, how long would it take from decision to the first coal?

Just round numbers. It's about 3 to 4 years. And by that, I mean longwall coal.

We'll take our next question from Chris LaFemina with Jefferies.

I have one question about your cash generation and then a second bigger question about capital allocation. So first on the cash generation, I think you had about a $50 million working capital cash outflow in the first half of the year. Should we expect some of that to reverse in the second half of the year or into 2019? And I guess, what is really the reason for the big working capital cash outflow in the first half of the year? Is there some seasonality behind that and how is it going to look going forward? And the second question, sorry, just about capital allocation. Obviously, you guys are in the enviable position of generating more cash than you can spend. Buying back shares, certainly, mathematically is pretty compelling, I mean, as earnings accrete, evaluation is inexpensive. But at what point do we have to worry about a lack of liquidity in your shares because you bought back so many? And does the board -- and I guess the question really comes down to a question of buybacks versus dividends because your yield, right now, I think is around 2%. Probably not high enough to attract marginal income investors into your stock which is a large pool of capital in the world. And if you want a 4% or 5% yield, which you can easily do, I would assume that you're going to get incremental buyers of your shares who are buying in for the yield that you might not be getting now. So it seems like the decision of buyback versus capital returns via ordinary or special dividends, I would argue, over time, leans more towards dividends as liquidity in your shares decline. And I'm wondering how the board and how you guys think about that in general.

Chris, this is John Drexler, so we'll jump into those questions. I guess, first, in regard to the working capital, you're correct, we did have a fairly large negative working capital adjustment for the first half of the year. The majority of that was experienced kind of in the first quarter. We had rising receivable balances, rising inventory levels. And as we talked about in the first quarter, our expectation over the course of the year is that, ultimately, we'll normalize as we play back over the remainder of 2018. So that will play itself out as we work through operating plans, shipment schedules, obtaining the cash from the receivables, et cetera, as we move forward. So hopefully, that addresses that question. In regards to the share repurchase program, the capital allocation program, as John indicated earlier, it's a constant discussion between management and the board. As we sit here today, clearly, we've indicated that, that share repurchase program is the focus, for us. It has been how we've executed since the initiation of the program going forward. As you noted, we didn't put in place a recurring, sustainable dividend and so that will be a constant discussion that we'd have as a manager team with the board. Right now, we are comfortable continuing to buy back shares. Feel that there is appropriate liquidity in the stock as we move forward and feel it's a right value-creating opportunity for us as we look at the uses of capital within our portfolio.

We'll take our last question from Vincent Anderson with Stifel.

I wanted to dig in to the Asian export strategy. With freight rates where they are on a delivered basis, you're probably going to be the most price sensitive of the major suppliers to that region. Is this more opportunistic given where markets are or is this a more deliberate shift where you run into the concern that in a lower price environment you'll have to find a new home for that coal some place closer by? And is this -- or is this just more of a factor of you not really willing to compete for more share in Europe and risking a negative price reaction there versus just sending it to Asia?

Vincent, this is Paul. I guess the easy answer is it's a little bit opportunistic and a strategic shift. We've clearly done well in Asia and I will also tell you, our longest-term met contract is with an Asian steel producer. We entered into a 5-year agreement. So clearly, this is a coal, particularly out of Leer, that the Asian steel mills like and -- but there's also a little bit of an opportunistic phase to it, we'll go where the value is.

That's helpful. And then just a little bit higher level in case you have some insights. The most recent reports out of China, they're continuing to go after their overcapacity in steel and it's on net been a huge benefit, of course. However, the most recent rounds have specifically targeted BOF production, so I don't know if you have any insights on to what you think initially the supply-demand impact will be. Obviously, still supportive of steel prices, but really favoring EAF. So if you have any thoughts on that, that would be great.

Yes. Let me jump in and Deck can follow on. Certainly, it's a fact in China that EAF is growing. But I think as we look at the globe over the next 5 or 6 years, we're actually seeing about 35 million tons to 40 million tons of demand growth in met coal, and obviously the biggest piece of that is India. And -- but we're also seeing some growth in Europe, which is a big market for us, South Korea as well as South America. So we think China holds their own. But really, as I've said in my opening comments, we see India as kind of an up and comer, and a lot of that growth over the next 5 years will come from India. Deck?

Yes. Vincent, it's Deck. So absolutely agree to what John just said. India is now importing more than 50 million tons of coking coal. That's moving them very close to where China is. Certainly, in the next few years, we can see India surpass China. But we believe China is going to continue to avail themselves of the seaborne market. And you're right, of course, there is a push for additional EAF, but it's a pretty slow process. We would expect that to take substantial amount of time for that to change appreciably. Right now, as you know, BOF represents more than 90% of the output in China. And so a change of a few percentage points is a huge increase in EAF, but really doesn't move the needle that much in terms of coking coal demand. And even if we reach peak steel in China or if we are approaching it, the fact is that China is a massive consumer. You've got about 70% of the steel mills in China that are in coastal provinces that are going to get some benefit from looking to the seaborne market from a logistical perspective. Have some advantage to looking at the seaborne market often and certainly from a (inaudible) perspective. I mean, China has been mining their metallurgical reserves at a phenomenal pace, something we've never seen before, obviously, over the course of the history of the industry. And so at that pace, they are certainly putting pressure on their cost structure, pressure on quality. So we think they're going to be looking to the seaborne market for the kind of premium coking coals that are available from Australia, but also from the U.S. As Paul said, there are opportunities for us there. So we see China continuing to be a significant player in the seaborne market. And even as we potentially see China step out of the market from time to time, as we've seen for the first 6 months of this year -- or for the first 5 months of this year, as prices have pulled back, China has come back looking for the best economics. And so again, we see them as a significant player and aren't overly concerned, but certainly we'll watch that trend.

I'm glad you brought India back up because I do want to end on that briefly, and I promise this isn't another capital allocation question. But strategically, when you look at the Indian market, a lot of major exporters of commodities -- bulk commodities to that market find it beneficial to have some kind of hard assets on the ground whether it's a distribution network or some kind of trucking capacity. Is that similar in this sense and is that something that you think as that market continues to grow in importance, you would explore investing in?

Vincent, that's a question we've asked ourselves quite a bit over the last couple of months. Currently, we handle all the Indian sales out of our Singapore office and frankly, it's worked very well. But as we continue to look at India and its growth potential, I think at some point in time, we may have to have a physical presence in the country.

And that concludes today's question-and-answer session. I will turn the conference back to Mr. John Eaves, Arch's CEO, for any additional or closing remarks.

I want to thank everybody for their interest in Arch Coal. I also want to take a moment to thank all the employees, their hard work and focus during the second quarter really generated some positive results. We feel good about the way we've positioned the company to execute on our plans the second half 2018 and look forward to updating you on third quarter results in October. Thank you.

That concludes today's presentation. Thank you for your participation. You may now disconnect.