Arch Resources Inc (ARCH) 2022 Q3 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the Arch Resources third quarter earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

And I would like to now hand the conference over to your first speaker today, Deck Slone, Senior Vice President, Strategy at Arch Resources. Please go ahead.

Good morning from St. Louis, and thanks 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 archrsc.com. Also participating on this morning's call will be Paul Lang, our CEO; John Drexler, our COO; and Matt Giljum, our CFO. After formal remarks, we'll be happy to take questions.

With that, I'll now turn the call over to Paul. Paul?

Thanks, Deck, and good morning, everyone. We appreciate your interest in Arch and are glad you could join us on the call this morning. I'm pleased the Arch team delivered a strong operating performance in Q3, generating a total of $454 million in operating cash flow while managing through rail disruptions in the West, isolated geologic challenges and inflation-related cost pressures. We view this record-setting achievement as clear evidence of one of Arch's most significant strengths are substantial cash-generating capabilities.

In addition, our record cash flow performance served to showcase yet another one of Arch's core strengths are powerful and value-creating capital return program. As you know, the Board relaunched the capital return program in February after a 2-year hiatus during the build-out of Leer South, and it now stands at the center piece of our value proposition.

Arch's capital return program is governed by a simple but carefully considered allocation formula that calls for the return to shareholders of 50% of the discretionary cash flow via a dividend and the deployment of the remaining 50%, principally through share repurchases and/or the settlement of potentially dilutive securities. With the $454 million in operating cash flow, netted against just $41 million in capital spending, we generated a total of $413 million in discretionary cash flow during the quarter. That level of cash generation translates quite clearly into strong value driving returns for our shareholders when we run through our capital return formula.

In keeping with the tenants of this formula, the Board has just declared a dividend of $206.4 million or $10.75 per share payable on December 15th. Complementing this dividend, we also expect to deploy a significant amount of cash associated with the other 50% of our capital return program in Q4. And while we've delineated several options for the use of this second 50%, we continue to view share repurchases as an attractive investment opportunity as well as an effective means of returning capital. In addition to the progress we've made in generating discretionary cash in Q3, we also made great progress during the quarter in deploying discretionary cash, while simultaneously managing our liquidity in a prudent fashion.

During the third quarter, Arch deployed approximately $76.8 million to repurchase nearly 429,000 shares or approximately 2.3% of our shares outstanding at June 30th. The Along with this, we used cash to settle an incremental portion of our convertible debt, thus avoiding an additional 101,000 shares of dilution. In short, we've already delivered in a significant way on the value-creating potential of the capital return program that was put in place just 8 months ago. As we look ahead, we expect to continue that momentum through ongoing returns as well as our sharp focus on generating additional discretionary cash and to continually recharge the program.

While the capital return program is the culmination of carefully crafted multiyear strategy, it is worthwhile to recap the team's significant efforts so far in 2022 that got us to this point. In sum, since the start of the year, we've generated more than $1 billion in operating cash flows. We fortified the balance sheet through the reduction of $427 million or 71% of our total indebtedness, contributed $110 million to our industry-first thermal mine reclamation fund, which brought it up to its targeted level of $130 million and grown our net cash position by $588 million, giving us a $323 million net cash position at the end of the quarter. In turn, these efforts have afforded us the ability to deploy a total of $678 million, inclusive of the December dividend under our capital return program, which, again, was just rolled out in February. This is a great deal of progress in a short period of time and a strong indication that we're committed to delivering on our clear, consistent and actual plan for value creation.

Before turning the call over to John, I'd like to spend a few minutes talking about the current market dynamics, starting with our core coking coal business. Even after the step down from historic levels achieved earlier in the year, coking coal prices remain at constructive and profitable levels. This is impressive given the recessionary pressures that continue to build around the world and more impressive still when you consider the knock-on effect these pressures have had on global steel production, which is down around 4%. We believe this resilience of the metallurgical markets is largely attributable to the profound underinvestment in coking coal supply in recent years. Despite strong coking coal prices for the better part of the last 6 years, global coking coal supply in the major producing regions continues to languish.

In Australia, which is the source of over 50% of the seaborne metallurgical supply, coking coal exports are down nearly 7% year-to-date, even when compared to last year's already weakened levels. In the United States and Canada, exports are up modestly versus 2021, but continue to dramatically lag pre-pandemic levels. At the same time, the outlook for Russian supply continues to dip in face of import bans in many countries, logistical challenges and an increasingly negative investment climate. While coking coal markets have come under pressure, global thermal markets remain at near historic highs. Importantly, these strong market dynamics are helping to buttress coking coal prices, while simultaneously creating attractive seaborne opportunities for Arch's legacy thermal products.

The price for thermal coal out of Australia currently stands at nearly $387 per metric ton and the price for thermal coal into Northern Europe stands at nearly $269 per metric ton. Arch has sold over 200,000 tons of coking coal to thermal customers for delivery in the fourth quarter of 2022, and we're actively exploring other such opportunities where it makes sense. On the legacy thermal side of the business, Arch's continued to deliver on its dual objectives of driving forward with an accelerated reclamation plan while simultaneously harvesting cash from these assets. By employing this logical wind-down strategy, we're delivering -- we believe we're delivering the greatest long-term value for our shareholders, while at the same time, providing an appropriate transition period for all of our stakeholders, including our employees, our customers and the communities in which we operate.

A major part of this responsible approach is our industry-first cash thermal mine reclamation Fund, which ensures there will be an appropriate level of funding on hand to complete final reclamation work at these operations when the time comes to shut them down. Following this strategy, Arch's legacy thermal operations delivered $97 million in segment level adjusted EBITDA during the third quarter, while expanding less than $5 million in capital. That brings the total amount of EBITDA generated by the Thermal segment over the past 6 years to just under $1.2 billion, while investing only $123 million of capital. While that's an impressive figure, we believe the stage is set for more of the same in Q4. What's more, given our significant book of contracted domestic thermal business and continued strength in metallurgical thermal pricing, we're becoming increasingly optimistic about our ability to replicate this year's strong thermal segment contribution again in 2023. -- in closing, let me reiterate that 2022 has been a period of great ongoing progress at Arch. Even with the typical mining challenges noted earlier, our expanded and upgraded coking coal portfolio continues to generate robust levels of cash.

In addition, we believe the medium-term outlook for significant and complementary contribution from our derisked legacy thermal segment continues to strengthen as well. In short, we believe the stage is set for continued success, ongoing value creation and most significantly, substantial shareholder returns.

With that, I'll now turn the call over to John Drexler for some additional comments on our Q3 operating performance. John?

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team delivered record operating cash flow and drove exceptional ongoing progress on our strategic plan during the quarter, even as we navigated through logistical challenges, inflationary pressures and localized geologic issues. Most importantly, the team executed at the highest level in the most critical areas of performance, safety, environmental stewardship and other key ESG metrics. On behalf of the entire management team, I want to thank the Arch workforce for their continued dedication to the highest environmental, social and governance principles.

Let's begin with the key drivers of our Q3 performance. As indicated, our core metallurgical segment generated robust levels of cash during the quarter, even as we address the isolated geologic challenges at Leer South that acted to suppress the segment sales volumes and pressure its unit costs. The good news is that as anticipated, we advanced through that area of tough cutting in early September and have been achieving much improved advanced rates and productivity levels ever since. Looking ahead, we fully expect productivity levels to continue to march upward as we progress through the first 5 panel districts. And based on what we have experienced in our ongoing development work, believe the conditions in District 2 should be better still. Again, we're pleased with the trajectory we are achieving at Leer South. We're off to a good start in October, and we fully expect meaningful improvements in both metallurgical segment productivity levels and unit costs in Q4, followed by further improvements in 2023.

Before proceeding, let's talk about what to expect for coking coal volumes in Q4. And -- as you may have noted, we are now projecting based on the midpoint of our revised annual guidance, an increase of around 15% in our coking coal shipments during Q4. That step-up reflects the continuing progress we are making at Leer South and also underscores the fact that we expect still further improvements in productivity in 2023 as we move towards our expected normalized run rate. It's also worth noting that, again, given our full year cost guidance for the Metallurgical segment, we are also anticipating a 10% or so reduction in average costs in Q4 when compared to Q3. While that represents significant progress, I want to stress here that we would expect still further improvements on the cost front in 2023.

As Paul mentioned, and embedded in our projected coking coal volume guidance for Q4, we anticipate shipping more than 200,000 tons of coking coal into thermal markets in Q4 at prices generally consistent with current East Coast coking coal marks. As we have stated in the past, we remain staunchly committed to serving the metallurgical needs of our long-standing steel customers, but we are also happy to redirect tons to thermal customers in the absence of more value-creating alternatives in the steel arena. In fact, we continue to work hard to identify additional crossover opportunities and believe our Q4 shipments could serve to garner further thermal market interest in our high BTU coking coal products.

During the quarter, we also entered into value-creating fixed price agreements with North American customers for a small percentage of our projected 2023 coking coal output. In total, we locked in approximately 1 million tons of business for delivery next year at an average netback of nearly $190 per tonne. Given our anticipated cost structure for 2023, this business should equate to a substantial contribution to next year's cash flows despite constituting only 10% or so of our projected 2023 metallurgical output. As we have stated many times in the past, our primary focus remains the 300 million ton plus per year seaborne market, where we can compete very effectively and where we have established an expansive marketing presence and an excellent reputation.

Transitioning now to the legacy thermal side of the business, I'm pleased to say that we continue to deliver on the plan for the Thermal segment by generating substantial amounts of operating cash flow while managing CapEx tightly. Fortunately, we are confident we can accomplish this even while continuing to manage through significant rail service issues, specifically in the PRB. As Paul noted, the Thermal segment has generated nearly 10x more segment-level EBITDA than it has invested in capital over the past 6 years, and the thermal team delivered more of the same in Q3. To reiterate, the thermal operations generated $97 million of EBITDA during the quarter against less than $5 million in capital.

Moreover, we believe we are exceptionally well positioned to maintain that impressive ratio of cash generated to capital expended in 2023. -- in terms of top line considerations, we have a very profitable book of business already in place for our thermal operations for both 2023 as well as for several years into the future, along with the logistical network and throughput agreements needed to move a limited but highly leveraging volume of thermal coal into extremely tight seaborne thermal markets. As for the PRB, we are now more than 90% committed for 2023 when measured against projected 2022 shipping levels at average realizations that should drive another very strong contribution to cash flow next year.

In addition, our West Elk operation is essentially sold out for next year at a capacity of 4.5 million tons. Given the high percentage of our sales committed at fixed price-- fixed pricing, combined with the opportunity for incremental export volumes against a very favorable 2023 futures curve, we believe that the thermal segment's prospects for replicating its projected 2022 cash generation are strong and improving. We will provide a complete update on 2023 guidance at the fourth quarter earnings call. Before turning the call over to Matt, let me conclude with a few words about our Q3 performance in the ESG arena, where we continue to build on our already industry-leading execution.

Through the first 9 months of 2022, Arch's subsidiary operations have achieved an aggregate lost time incident rate of approximately 3.5x better than the industry average over the same period. In addition, our subsidiary operations recorded no environmental violations during the third quarter, while extending their string of 0 water quality exceedances to 31 months.

Finally, the Coal Creek mine, where the Arch team has completed roughly 75% of final reclamation work over the course of the past 21 months was honored by the State of Wyoming with the 2022 Excellence & Mining Reclamation Award. In short, it was another impressive performance by the team, which remains committed to raising the bar even higher in this critical area of performance.

With that, I will now turn the call over to Matt for further discussion on our financial performance and results. Matt?

Thanks, John, and good morning, everyone. I'll begin by providing additional detail about third quarter cash flows, which, as Paul noted, were highlighted by record operating cash flow of $454 million. To put that into perspective, that amount exceeds any full year total that Arch has generated in the last 10 years.

In addition to solid underlying operating earnings, we benefited from favorable changes in working capital with the decline in our accounts receivable contributing $247 million to the quarter's total. While this trend was expected after the significant working capital increase in the second quarter, the actual amount was a good deal higher than anticipated.

On the other hand, operating cash flows were adversely affected by a $30 million contribution to our Thermal reclamation fund, with the accelerated payments into that fund now complete. Turning to the investing and financing cash flows. We spent $41 million for capital expenditures in the quarter while utilizing $186 million in the capital return program with nearly $110 million in dividend payments, $57 million invested for share repurchases and $19 million used to retire additional convertible bonds. Discretionary cash flow for the third quarter was $413 million. And under our capital return formula, our Board has declared a dividend of 50% of that amount or $10.75 per share. The dividend will be paid on December 15 to stockholders of record on November 30. We ended the quarter with cash on hand of $501 million and total liquidity of $593 million, including availability under our credit facilities.

The timing of customer collections late in the quarter, including some payments that were made prior to their due date, pushed cash and liquidity to levels that were well above our target. As I stated last quarter, our goal is to end each quarter with minimum liquidity of $250 million to $300 million, supplemented by enough additional cash to cover a substantial portion of the following quarter's dividend.

Before moving on, I wanted to note one additional liquidity highlight from the quarter. In August, we finalized the amendment and extension of both our accounts receivable securitization facility and our inventory credit facility. The term of both facilities now extends to August of 2025 and the size of the securitization facility was increased from $110 million to $150 million. These facilities continue to enhance our liquidity and provide necessary letter of credit capacity. We are appreciative of our long-term bank partners and their continued support of the company.

Looking forward to the fourth quarter, while we expect improved operating performance, discretionary cash flow is likely to decline from third quarter levels. The favorable changes in working capital in Q3 are clearly not repeatable. And in fact, we would expect to see a working capital increase. Accounts receivable at the end of September were at much lower levels than normal as compared to our revenues, and we expect that relationship to revert to historical norms over the course of the fourth quarter.

From a capital return perspective, we would expect larger cash outflows in Q4, both the dividend, as we've already discussed, and in the amounts deployed in the second 50% of the program as well. As to the latter, the amount we were able to deploy in any given quarter will likely vary greatly depending on the timing of cash flows, especially in relation to normal blackout periods. While that worked against us in the third quarter, we are starting the fourth quarter with sufficient capacity, even given our liquidity and cash targets to nearly double Q3 spending levels on the second 50%.

In terms of our priorities for that part of the capital return program, the third quarter activity provides a good road map. Our primary focus will likely be share buybacks, but we will continue to look for attractive opportunities to repurchase the remaining convertible bonds. At the end of September, our remaining authorization for share repurchases was more than $442 million.

Regarding the bonds, we have now settled or repurchased approximately $130 million of the original principal value, leaving to $25 million outstanding. Assuming a share price of $140 and settlement using cash and shares, those bonds would represent potential dilution of approximately 625,000 shares. As a reminder, the cap call that we purchased at the time the bonds were issued remains outstanding. The cap call is deeply in the money with an intrinsic value of approximately $62 million that would be paid as expiration in November of 2025. At that same $140 share price, the intrinsic value of the CAP call represents an offset of roughly 450,000 shares or more than 2/3 of that dilution. As a reminder, the accounting rules do not allow for the value of the cap call to be reflected in the fully diluted share count or as an asset on the company's balance sheet.

Before turning the call over for questions, I wanted to address one item that will have a positive material impact on our reported income for the fourth quarter. As we have disclosed in our SEC filings, Arch has substantial deferred tax assets, including well over $1 billion of net operating loss carry-forwards as of the beginning of this year. We have maintained a full valuation allowance against those tax assets as a result of uncertainty about the ability to utilize them fully before they expire. Given our taxable income in 2021 and thus far in 2022, along with expectations for continued profitability, we expect to release the valuation allowance in the fourth quarter. This, along with expected adjustments to our FIN 48 reserves will result in a onetime noncash income tax benefit of approximately $225 million to $250 million. As a reminder, we continue to expect to pay no cash taxes in 2022. If coal market conditions remain favorable, we would expect to begin to pay cash taxes next year with an effective rate of up to 5% of pretax earnings. With that, we are ready to take questions. Operator, I will turn the call back over to you.

(Operator Instructions) Our first question comes from the line of Dave Gagliano from BMO.

All right. I have actually a number of follow-up questions. So bear with me on this. I'll try and be quick. Just first of all, on the 200,000 tons of crossover for the fourth quarter, build into the thermal market, what was the price for that 200,000.

Dave, I think as we indicated, the price is approximating what we're seeing kind of the netbacks if -- with the existing MAP markets that we're seeing today.

David, it's Deck. And remember that some of those tons were committed earlier in the quarter at times when prices were lower. So we actually got a premium on some of those volumes. But today, they're fairly reflective of kind of where the marks are today.

Yes. If you're looking at pricing today, that's an accurate comment from Deck.

Well, that actually is my -- I mean we get published indices for Atlantic basin high-vol prices, but what is the market today for High-Vol A for your coal?

It's above 280 right now, Dave, so in that $2.83 sort of a range that's FOB, U.S. East Coast. Okay. So to get that number to get that net back, you would simply take that and then work it back to the mine the way that we typically do, due to the netback calculation.

Helpful. And then switching over. thermal, it's been 17 million to 19 million tons per quarter, roughly. Is that a reasonable range on a quarterly basis for 2023?

Yes. If you look at the midpoint of our guidance, that would kind of imply kind of in that 18-plus million ton range to achieve that. We've been challenged with a lot of rail issues in the PRB. We talked about it in the prepared remarks. We reduced the midpoint of that thermal guidance by 2 million tonnes. If you remember, last quarter, we dropped that by 5 million tons. Those are committed tons that are going to get carried over into next year at attractive pricing. So we haven't lost that volume. But you are correct, we're going to need that kind of that $18-plus million run rate, and we're working hard to achieve that.

Dave, I think your question was also -- or the way I understood it was on 23. And I think if you look at '22, I think it's a good place to start for our '23 volumes.

Okay. And then on the domestic met sales for 2023, I think you said $190 per tonne was the average price?

That's correct.

I believe that's right.

Okay. How does that -- I just don't have it in front of me, how does that compare to the 2022 contract price, average price?

Yes It's slightly lower. I think it's definitely if you -- as we follow the trade rags and where everything is out there, we're very pleased with what we were able to achieve kind of with where the forward curve in the market was and feel real good about putting in those million tons fixed volume, fixed commitment, steady train service. So we're very pleased to achieve that, lock those cash flows in, but still provide a lot of exposure for the remaining book. And as we described the market that, over time, we feel is going to be attractive for us.

And Dave, while it's a very small discount, just kind of where the marks are today and as we just discussed, and I just looked at actually $286 today for High-Vol A, where it's a very small discount to that actually reflected the marks at the time the deals were done, in fact, a little bit of a premium. So we feel good about what we put to bed and getting that fixed price business done.

And are there plans to do any more? Or is that it for the domestic for...

I think here again, Dave, that if this is it, we're fine with that. Our focus is the seaborne market. And I think we're set up. Look, if it's a parallel this year, we'll see dribs and drabs come in. We're sitting at about 10% of our coal state in North America, and that's where we could end up next year.

Two more real quick. What's the average price of the 90% of thermal that was locked in for 2023 or that is locked in for 2023, just an average overall.

So we haven't discussed that as yet. I think we've indicated that, look, this year's realizations in the PRB were particularly strong. This is going to be -- 2023 will be another very strong year relative to historic values. We may not quite be to the level we see for 2022, but it will be another strong year, creating another very solid margin in the PRB. And then we do have some fixed price business that we have done out of West Elk that is obviously a very attractive prices given current international seaborne markets, and we'll continue to explore opportunities to sort of fix additional volumes there into a still really strong futures curve. But as I said, right now, it looks like it could be a small step down relative to 2022. Having said that, there are other things that counterbalance. And one point I would certainly emphasize is that we made $110 million contribution this year to the Thermal mine reclamation fund. Next year, that contribution will be de minimis. So in reality, of the Thermal segment, we would expect to generate even more cash for availability to the capital return program.

And then my last question. I heard the commentary, but I didn't catch it all regarding the cash flow movements in the fourth quarter. I thought I heard at the end there during that commentary that there was -- the net result with the working capital changes was the cash outflow, which, to me, implies no variable dividend. Did I hear that correctly?

David, the working capital piece, I think, would be a reduction in the cash flow in Q4 as opposed to an increase that we saw in Q3. But overall, if you look at quarter-over-quarter, we should -- if you work through our guidance, we're guiding to what should be a stronger operating performance in Q4 as compared to Q3. So with that as a starting point, instead of getting a working capital tailwind, we're going to get a working capital headwind. And as we sit here, generally, our receivables are typically about 100% of a monthly sales amount at the end of any quarter in September, that was down below 2/3 of the sales. And we want to make sure that we acknowledge the great work that our contract admin and billing groups did in being able to get that and pull some of that cash forward. But we don't plan on that every quarter and assume we're going to see an increase. If we go back to those normal levels, our working capital increase could be as much as $100 million that would offset those operating earnings as we look at Q4 cash flow. Still should be positive, but not nearly as robust as they were in Q3.

And David, Matt pointed out, though, in the fourth quarter for the other, the second 50% in terms of the capital we expect to deploy in that area, that could be as much as twice what it was in Q3, so somewhat of a counterbalance to what could be that negative move on the working capital front.

Our next caller is Lucas Pipes from B. Riley.

So I wanted to touch a little bit on the 2023 met coal outlook. And I think you mentioned you have 1 million tons contracted into the domestic market, and that's going to be about 10% of your total sales. So that implies 10 million tons of met coal next year, up pretty nicely from this year. And first, if you could confirm that. But then secondly, there were these isolated geologic incidents this year. And obviously, you can't change geology. I think you did a good job working through it, but you can anticipate it. And you mentioned you the development work gives you increased visibility of what's coming. And I wondered if you could elaborate on that. And if, in fact, you've maybe done a little bit more development work to have more confidence in the 10 million tons for next year.

Thanks, Lucas. And we'll talk about Leer South. We talked about it last quarter. We encountered sandstone in the current panel we're in. As a reminder, we had completed mining in the ramp-up of Leer South in Panel 1 at a successful longwall move in the May time frame, came out of that move and actually saw a very healthy ramp in the beginning of Panel 2 when we encountered very difficult cutting conditions related to Sandstone. As we indicated, as we continue to move further east in the first district, that first district has 5 longwall panels -- as we continue to move east to each panel, all of the geology says that the conditions should improve, we should see less of the impact of those types of issues that we experienced during the quarter. And as we are developing those new panels, we have continuous miners out there developing the head gates we are experiencing better conditions. It's what's giving us confidence as we move forward that we're going to see improved productivities.

Probably more importantly, as we're now developing down into District 2, once again, where the overall geology should show improvement. We're experiencing that as well as we have continuous miners down there. So that's why as we're continuing to progress here our confidence in the level of productivity continues to get stronger. And so we expect that improvement to continue to play itself out. As we look forward to next year, you're exactly right. And as we've indicated before, if everything is running as expected across our platform, we should see the opportunity to produce up to 10 million tons on an annual basis. So we haven't provided specific guidance on all that yet. We'll do that at the fourth quarter earnings release. However, once again, we've talked about this before with each of our operations as we look at all their productivities, we are comfortable that, that 10 million ton arena is around where we should see the capability to produce.

That's very helpful. Very good to hear. My second question, I may have missed this, but the cadence of any buyback from here, how should we think about that considering the movements of working capital, your minimum cash targets, the dividend that's payable in a little over a month, how should investors approach the level of buybacks between now and year-end?

Lucas, this is Matt. And really, probably the best way to look at it, we clearly came out of Q3 with a little more cash on our balance sheet than we wanted to. Quite a strong collection performance in the last couple of weeks of the quarter, which, as you know, is a blackout period around earnings. So that really limited how much of that cash we could deploy in Q3, but puts us in a very good position, as I mentioned in my remarks, as we head into Q4. So as I indicated in those remarks, we think we could as much as double what we spent in Q3 on the second 50% of the program. And as we said, that's likely going to be buybacks. Just to put that in perspective, we did buy back over 400,000 shares, nearly 450,000 shares in Q3. And so if we're able to hit that doubling level of that, depending on the share price, we could buy back as much as 1 million shares or maybe even slightly more as we go through Q4.

Lucas, I think one of the surprises for all of us, we put a lot of thought into the capital return program in the allocation method. What -- all the modeling we did, I think what surprised us was how lumpy cash flow can be at the end of the day. Matt was kind of generous. But I think the last day of the month, we received almost $100 million of receivable. It's a great story, but it really kind of makes the numbers a little distorted. And we've had quarters where people didn't pay on time. This is one of those weird quarters where people paid ahead of time. So unfortunately, I think the capital return can be a little lumpy. But I think the bottom line is the intent is the same, and that is 6% of the discretionary cash flow is going to go to the variable dividend. And the second 50% will ultimately end up as share buybacks are the buy down of the convertible debt. Very interesting. Well, maybe at current inflation rates, people just can't wait to get rid of their cash.

Our next question comes from the line of Nathan Martin from The Benchmark Company.

Maybe I'll start off just touching on 3Q coking coal realizations possibly a little lower than some had thought just based on some of my prior conversations. Obviously, we saw a lot of volatility in the price during the quarter. But maybe can you give a little more color on that result? And then I guess really what I'm trying to get at as well, just looking forward to the fourth quarter is, let's just say, we assume, for example, benchmark stays flattish quarter-over-quarter in the fourth quarter, which, I mean, I think it's actually averaging pretty close to that right now. But given the fact that prices have been notably more stable than they were in the third quarter, is it unreasonable to expect realizations to be up in the fourth quarter?

So Nate, just kind of reviewing the performance for the third quarter. If you just take the benchmark for High-Vol A, I think it averaged for the quarter around 2.74, convert that to short and then back out about $60 of transportation costs associated to get it from the mine to the port. And you're kind of back into that mid-180s, $185, $187 a ton. Obviously, across our portfolio, we're shipping to a lot of different places around the world, so you're affected by a lot of different benchmarks. But at the end of the day, that's kind of the big driver that High-Vol A price and kind of netting back using that kind of methodology. So I think from our perspective, we feel that we -- the achievement of the price was kind of where we expected it to be for the quarter as we move forward. Once again, kind of name where that price is going to be for the quarter, and it's going to be a big driver as far as what the final outcome will be. But as we sit here today, we would expect if things were to stay relatively flat from where they are now, we would expect essentially a modest uptick, but it would be very modest. Once again, depending on what you're showing is that you're coking coal price today at across our portfolio as we move into the fourth quarter.

So Nate, just to connect that final dot. So remember the number we reported for our realization, average realization on the coking coal side was $1,950. So we view that as actually a premium and having outperformed where the market was through the quarter. And then remember, too, you also have some low volumes that were a bit lower. High-vol volumes were a bit lower. So actually, on a realization basis, fairly strong in Q3 relative to the benchmark numbers.

Got it. And then I guess, not unsurprising to see full year coking coal shipment guidance come down maybe a little bit lower than expected. So maybe can you guys talk about what gets you to the high end versus the low end of that revised guidance? Is it still mainly logistics based? -- sounds like production is improving? Just any color there would be great.

Yes. Nate, I think the issue that we continue to work through is how well is that ramp at Leer South post all the sandstone going to continue as we move forward. That's a big driver here as we work to the end of the year. And you have to look at the flexibility of all of our operations and where they're at. The other item that kind of impacts what we're looking for in the fourth quarter, given the timing of how we're continuing to mine at our 2 longwalls, both Leer and Leer South, we actually will have both operations. We expect both of them to be in longwall moves prior to the end of the year.

Typically, you don't see too longwall moves falling in the same quarter, but we're going to experience that here. And so that's just giving us a little more conservatism around the number that we're looking at here. longwall moves are nothing of any significance for us. They're kind of part of the routine operation of a mine. We get them done very efficiently, very effectively, typically in the east in a 10- to 12-day time frame, but having 2 of them fall in the same quarter. It's kind of giving us a little more caution as far as what we're looking at from a guidance perspective. And take some of those numbers in terms of guidance, look, we're assuming that logistics continues to be a bit challenging, particularly as you look at vessel shipments. And so look, we'd expect the end of the year with healthy inventories, not excessive, but healthy inventories. So look, we could certainly outperform that midpoint number, but we think that it's prudent to sort of guide to the levels we're guiding to, and we'll see where it goes. And if we don't ship in Q4, we could be shipping additional volumes in Q1. So we'll see how that all plays out.

And Deck, that's a good question. Can you remind me, I think you guys had 1.1 million tons of inventory at the end of the first half, kind of where does that stand today?

Yes. We -- I think we're right at around 900,000, 1 million tons right in that arena right there. So essentially flattish over the course of the quarter.

Got it. And then maybe kind of shifting gears to the cost side. And John, you just alluded to, I guess, 2 longwall moves and Leer South in the fourth quarter, may be contributing to a little bit of the increase in full year met coal segment cost guidance. How would you expect that to kind of trend heading into '23? I think maybe they are around what we expect that to win through. But any additional color there would be great.

Yes, Nate, I think clearly, we're operating as an industry in an environment where there are a lot of inflationary pressures. It's affected us all, it's affecting us also. But the biggest driver for us and the biggest thing that we'll move forward from were some of the challenges that we had from a production standpoint and volume related. So as we move forward, with the improvement in volumes we're seeing in Q4 and despite the inflationary pressures, once again, we see a 10% drop in fourth quarter unit costs. As we step into 2023, we expect that improvement to continue. We haven't provided guidance yet, but a modest improvement from the levels that we've seen in '22 just from the expectation of improved volume performance in '23 is what we're expecting, and we'll provide a full update in the fourth quarter earnings call on our projections.

So Nate, again, just to do the math and connect the dots. So if our costs have been around $100 a 10% step down, puts us at around $90. And as John said, if we see another market step down from there, we certainly believe that, that will put us very, very easily and nicely into the first quartile in terms of cost and really well to the left on that cost curve. So we feel good about the trend. Obviously, we want to take it as long as we can go, but some prudency and some caution here given just an intense inflationary environment.

Our next question comes from the line of Alex Hacking from Citi.

I'll just ask maybe a quick one of the comments to the end of the hour. On the met coal shipments, it sounds like at the moment, the mine is maybe the bottleneck -- earlier in the year, it was the logistics. I mean, I guess as we head into 2023, I think you've discussed that you're hopeful that the mine or the Lea South can support run rate close to 10 million tonnes a year, but do you think that the U.S. rail and port logistics can support 10 million tonnes a year next year? And also, do you think that the market can support 10 million tonnes next year, given all the closures that we've seen in European blast furnaces, I guess maybe you could discuss the current market conditions and whether or not you're having challenge any challenges placed in the coal.

Alex, this is Paul. I'll start with this and maybe let later jump in here. But as you look going into fourth quarter and into 2023, I got to tell you, the Eastern railroads, I think, are doing a pretty good job of getting back on track with things, and we really have no complaints about what they've done in the last couple of months. And I think we're getting really good messaging on 2023. And obviously, the one big thing that will help us is Curtis Bay coming back fully online sometime this quarter. So we're expecting to head into 2023 in pretty good shape all around I'll divert for one second from your question. The West is particularly with the PRB, we've had one of the railroads just have terrible performance. And unfortunately, we're heavily weighted to that railroad. And it's been difficult, and it's cost us a lot of money this year. But back to the broader question on the market, we're cautious about what's going on in Europe. And I think, frankly, that's why you're seeing us put a lot more emphasis on Asia and particularly India. And that's where we see our market ultimately growing towards, and that's what our plan is. Sure, anything on...

Yes. No, no. I think, Paul, that's excellent. I think just to add to that, despite some of the challenges that we're seeing with economic conditions with kind of the concern around closures, we continue to see on the supply side, a lot of challenges. Even despite the significant and healthy price, you've seen a lot of challenges in Australia, and that was even before they had some of the issues with weather. You have the threat of industrial action with BHP. In Australia, there's been a lot of noise around. There's just a lot of concerns or specific mine issues across the world. So there continues to be a lot of support in the markets that we see out there that we continue to take advantage of.

Our next question comes from Michael Dudas from Vertical Research.

As you -- Paul or John, as you budget -- you're in the budgeting process for 2023, is it prudent to look at your input cost, labor, et cetera, to keep it flat from where it is today, up a significant plus to say, 5%? Or do you see any indications that or maybe some moderation? And from these high levels, you see some maybe help that could have come about in 2023? Yes.

Mike, it's a great question and kind of one of those crystal ball type questions. But I think you're hitting on an interesting point, right? As the industry has worked through this year, we've all encountered significant and very healthy inflationary impacts. You've seen significant increases in steel input costs. Fuel costs have skyrocketed from last year. Those are areas where maybe there's a flattening or moderation that it can occur, but as -- and once again, we'll update with full expectation at the next call. As we look forward, it's kind of hard pressed to see a significant decline in those types of inflationary pressures. But at the same time, hopefully, we're not seeing the same things that affected all of us over the course of this year as we move forward. So maybe there's maybe more of a return to modest inflation. But we can all debate where the economy is ultimately going to go here. And -- but I think once again, from a modeling perspective, a modest uptick from ongoing inflation might be prudent here from where we are today. Right.

I think you make a great point. The industry and you guys have absorbed all this amazing input and cost and in labor, et cetera. So I think that could be helpful going forward. Just one quick follow-up. Looking at the PRB and looking at your expectations for next year shipments midpoint and looking forward, if you -- and you've set up some longer-term contracts that you indicated in your calls, looking longer term, is the acceleration of the output from Black Thunder I guess, how long -- first is when you put out the plan was it 2 or 3 years ago, what the falloff might be in production. How does that look today given the market demand, price and what you've done with their funds so far?

Look, I'll start and maybe, Mike, I'm sure I want to jump in on this. But I don't think really anything has changed in the PRB. And we could all argue the public policy side of this. But I look at it from a pretty pragmatic point of view. Last coal-fired power plant was built 10 years ago in the United States and the average age is creeping up 47, 48 years. This trend is continuing. I think we'll see slowdowns in retirements over the next 2 or 3 years. But this thing is heading towards a pretty fast decline rate. And I think as we look at what we're doing, we're taking into account that ultimately glide path on thermal coal consumption in the U.S. and we're tailoring our Black Thunder operation towards it. And I think we could have and the industry could have on the thermal side, a very profitable period of time where this call is going to be needed, and we'll do very well. But what we're not going to do is invest anything to increase production. If anything, we're just going to continue to follow the market. And I think the industry will do well if that's kind of the pack that's taken.

Mike, we were at about 1 billion -- 1.1 billion tons of thermal coal consumption in the U.S. Last year, that was about 520 million tons this year around 290 million tons. So look, we -- the reality is a progress for the company. We're pitching out and we're seeing retirements. We could see some extensions. In fact, we've seen about 15 gigawatts of extensions announced here in recent months, which is certainly helpful. We have about 500 million tons of reserves still in the PRB that are permitted and that we fully intend to mine that would allow us to produce at these sorts of levels for the next several years and generate a lot of cash there. But in the end, we do believe that the fleet is going to age out because we aren't building any new coal plants, as Paul said, we are getting age on these plants. So our view hasn't changed, but we certainly believe there's an opportunity to generate a lot of cash over the next 5 to 7 years from these assets. And we've built a really strong book of business that we plan to leverage. The fact is that, that book is not just strong for 2023, but we've got a lot of length on it as well. We've got strong commitments for 24, 25, 26. So I feel good about what we can do there. But we don't -- we have -- our view of where thermal coal consumption is going in the U.S. hasn't changed. I guess one final point but this year, coal conservation has been a significant part of the step down in consumption. -- utilities just aren't able to get the tons. So I would say that we are seeing a little stabilization likely could have seen generation and coal demand for power generation at roughly equivalent to 2021 levels this year, but utilities can't get the coal. So the fact is that demand has stabilized here a bit, and that could persist.

And Michael, I want to wrap up real quickly just with kind of a final comment on that. The teams at our operations in Wyoming and Colorado, they're doing an incredible job with this very challenged kind of environment that you see out there, there's plenty of opportunity. We've worked really hard. They've worked real hard to make sure that we are all in a position where these windows of opportunity are created, we're going to make a lot of hay while it's on shining. And that's what they're doing. They're doing an incredible job. And as Deck indicated, we believe there's a lot of length there. We need to stay in the right point of the cost curve in the operations, the regions that we're operating in and take advantage of these market opportunities and the teams there have done a wonderful job.

I would now like to turn it back to Paul Lang, President and Chief Executive Officer, for closing remarks. Paul?

I want to thank you again for your interest in Arch. As I've mentioned earlier, 2002 has been a period of great ongoing progress for the company. We've completed the hard work and taken the necessary steps to build a compelling cash generating model. Our focus now is to continue to refine our operating platform and to wring out additional efficiencies in all aspects of the business. Along with this, we believe it's entirely appropriate, and we fully intend to continue to reward our shareholders for their investment and trust over the last several years. With that, operator, we'll conclude the call, and we look forward to reporting to the group in February. Stay safe and healthy, everyone.

Very good. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Thank you.