Arch Resources Inc (ARCH) 2023 Q2 法說會逐字稿

Good morning, and welcome to the Arch Resources Second Quarter 2023 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would like now to turn the conference over to Deck Slone, Senior Vice President of Strategy. 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 our 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 to report that the Arch team continued to execute [into] high level in its core metallurgical business during Q2, delivering another first quartile cost performance. At the same time, we continue to press ahead with our simple, clear and actionable plan for long-term success and value creation.

During the quarter, the Arch team showcased the significant cash generating capability of the company by delivering $130 million in adjusted EBITDA and generating $151 million in discretionary cash flow despite a softer market environment. The team then drove forward with our ongoing efforts to streamline and strengthen our balance sheet, reducing our already modest indebtedness by an incremental $13 million and maintaining a significant net cash-positive position.

Finally, and perhaps most importantly, the team generated significant value for our shareholders through our robust capital return program, declaring a quarterly dividend of $75.4 million, or $3.97 per share, payable in September and deploying $73.5 million to repurchase over 623,000 shares, or about 3.3% of the fully diluted share count. This last point, the continued generation of significant levels of discretionary cash flow even in a weakened market environment, is one of Arch's defining attributes. In fact, in many ways, Arch was built for this type of environment, given our high-quality, low-cost coking coal portfolio and our ability to maintain healthy margins across the market cycle.

Of course, its ability to consistently generate substantial amounts of discretionary cash flow is also the key to our capital return program, which we regard as the centerpiece of our value proposition. Since relaunching the capital return program in February of 2022, just 18 months ago, Arch has now returned nearly $1.2 billion to shareholders inclusive of the just-announced dividend. Even more noteworthy perhaps is the fact that, when you include the capital returns from Phase 1 of this program in 2017 through 2019 period, we've now returned in aggregate of nearly $2 billion to shareholders. That approximates the total market capitalization of the company at present.

Importantly, and in addition to paying out more than $640 million in dividends at $34.64 per share since the relaunch last year, we've used the capital return program to avoid the dilution of approximately 4.1 million shares. To put it another way, our diluted share count is approximately 18% lower today than it would have been otherwise, absent the share buybacks and the settlement of our convertible securities. And we fully expect the systematic reduction in our diluted share count to continue as we move forward.

As indicated, the Board believes the current capital return program has driven and continues to drive substantial value for the shareholders and expects to continue to return 100% of our discretionary cash flows to shareholders, going forward. At the same time, the Board also believes that it's essential to continuously review the specifics of the capital allocation model as the value is the optimal means for deploying discretionary cash flows in the future, including the relative weighting of dividends versus share buybacks. As you might imagine, the Board factors changes in circumstances, including movements in the company's share price, into its deliberations and decision-making process and will undoubtedly continue to do so in the future.

Let's switch to the coking coal markets, which, as indicated, have softened significantly in recent months. The reason for this softening is relatively straightforward in our view. Global hot metal production continues to be constrained due to a host of macroeconomic concerns and pressures. As evidence of that fact, continental production for the world, excluding China, was down 2.8% through May versus the already-depressed levels seen in 2022 according to the World Steel Association.

Even with this weakness, however, coking coal continues to trade on the seaborne market at prices that still support healthy margins at our low-cost metallurgical operations. Again, this is by design in how the company was built. At present, High-Vol A coal, our principal product, is trading at $210 per metric ton off the US East Coast. While demand is weak, the supply side of the coking coal markets remain constructive, in our view, due principally to years of underinvestment in both new and existing coking coal capacity. Exports from Australia, United States and Canada, the principal suppliers of high-quality coking coal to the global seaborne market are down nearly 3 million tons in aggregate year-to-date against last year's already-constrained levels.

Significantly, this drop in seaborne coking coal volume occurred despite generally strong pricing over the course of the past 6 years. In addition, there is evidence that recent price levels are beginning to exert pressure on marginal cost producers with news that 2 U.S. metallurgical complexes have closed in recent weeks. Based on this, we believe the current net-back pricing is reaching the marginal cost of production and starting to pressure metallurgical coal volumes.

In summary, we believe Arch is exceptionally well-positioned to generate significant value in the current market environment and equally well-positioned to capitalize when the global economy begins to recover and gather steam. In recent quarters, we've expanded and strengthened our world-class coking coal portfolio, increased the global reach of our high-quality coal products, reduced our indebtedness while building and maintaining a net cash positive position, greatly simplified our capital structure and extended our industry-leading ESG practices. We're pressing ahead on all these fronts with the objectives of enhancing our position even further.

Through these substantial and ongoing efforts, we believe we've laid a strong and durable foundation for the long-term value creation with the capability to generate significant levels of discretionary cash and to return robust amounts of capital to our shareholders in a broad range of market environments.

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

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team maintained excellent operational momentum in Q2, as highlighted by yet another first quartile coking coal cost performance, along with a stronger-than-anticipated result from our legacy thermal segment.

Let's begin with a brief discussion of ongoing progress in our core metallurgical segment. And to begin with, in a particular note, Q2 represented Leer South's strongest production quarter to date as we continued to systematically drive up productivity rates at that world-class asset. We remain confident we will achieve still stronger execution in the quarters ahead.

Coking coal sales for the metallurgical segment as a whole totaled 2.3 million tons in Q2, consistent with the guidance we provided in April. In addition, the coking coal segment achieved an average cost of $89.94 per ton. This cost performance keeps us on track for meeting our annual coking coal cost guidance. Inclusive of Q1, the Metallurgical segment has now achieved an average per ton cost of $86.54 through the first half of the year.

Let's turn now to our legacy thermal segment, where the team continued to deliver significant cash flow in excess of capital requirements and did so even while addressing the previously discussed localized geologic challenges at West Elk. During Q2, the thermal operations contributed total segment level EBITDA of $29.2 million, which was substantially higher than initially anticipated. In short, the Powder River Basin operations rose to the occasion, demonstrating excellent cost control and delivering solid margins, which acted to counterbalance, to some degree, the near-term challenges at West Elk. On the West Elk front, we remain on pace to transition through the issues noted last quarter and expect to be back to business as usual at West Elk starting in Q4.

As indicated, we continue to harvest significant levels of cash from our thermal operations in keeping with our long-term strategy. Since the fourth quarter of 2016, the legacy Thermal segment has now generated a total of over $1.3 billion in adjusted EBITDA while expending just $154 million in capital.

Now let's spend a few minutes discussing Arch's marketing strategy and execution before I pass the baton to Matt for some additional color on our financial position and results. As Paul noted, coking coal demand has been relatively soft of late despite a degree of resilience in coking coal prices. At present, we have committed more than 80% of our projected coking coal production for the second half of 2023, so our volume exposure is limited. In fact, as indicated, we anticipate a 5% to 10% step-up in coking coal sales volumes in Q3.

As for our Thermal segment, we expect to ship approximately 60 million tons from our Powder River Basin operations in 2023 while rolling about 5 million tons of our committed and priced Powder River Basin volumes into 2024. While we would prefer to shift the volumes as planned this year, we are willing to work with our customers in exchange for volume and/or price considerations on future shipments.

Finally, let me give you a quick recap of our strong ESG performance year-to-date. In the critically important safety arena, Arch's subsidiary operations achieved an aggregate lost time incident rate of 0.47 per 200,000 employee hours worked through the first half of 2023. That's nearly 5x better than the industry average. At the same time, we maintained our perfect performance in environmental compliance, reaching the midpoint of the year with 0 environmental violations and 0 water quality exceedances.

In addition, we published our 2023 Sustainability Report in June, which can be found on our website. This report, which I recommend to everyone on this call, details our comprehensive efforts across a wide range of ESG metrics and also reports on the 47% reduction in CO2 equivalent emissions we have achieved in our operations since the base year of 2011.

Finally, I would like to highlight the fact that the Black Thunder mine was honored by the State of Wyoming with the 2023 Excellence in Mining Reclamation Award during Q2. On behalf of the entire management team, I want to extend my congratulations to the workforce for that significant achievement. Again, we are focused on setting the standard for the industry in the sustainability arena, and this award is emblematic of our success in doing just that.

With that, I will now turn the call over to Matt Giljum. Matt?

Thanks, John. Good morning, everyone. We are pleased to report another quarter of strong earnings and robust cash flows in the second quarter. Starting with earnings, EBITDA for the quarter totaled $130 million, a result that was lower both sequentially and as compared to last year's second quarter, as market prices for both metallurgical and thermal coal weakened significantly over the course of the quarter. In fact, average High-Vol A prices in the second quarter were approximately $75 per ton lower than the first quarter average and more than $200 per ton lower than last year's second quarter.

When comparing only to recent quarters, however, it is easy to miss the strength of the earnings, both on a consolidated basis and in our core metallurgical segment. Compared to the quarterly average from 2017 through 2019, a period of fairly strong metallurgical markets, Q2 2023 consolidated EBITDA was approximately 30% higher than the historical average. And in our Metallurgical segment specifically, this quarter's EBITDA was nearly 80% higher than the historical average, showing the impact of Leer South as it advances towards target production levels.

Turning to cash flows. Operating cash flow in the second quarter was $197 million. And while that was lower than last year's second quarter, it was an increase of over 56% sequentially. As you recall, cash flows in this year's first quarter were reduced by a substantial increase in working capital. As expected, some of that working capital was converted to cash this quarter, resulting in a benefit of more than $62 million. Capital spending for the quarter totaled just over $46 million, with spending for the first half of the year now ratable with our annual guidance.

Discretionary cash flow for the quarter totaled $151 million, and our Board has declared a dividend of 50% of that amount or $3.97 per share. Dividend will be paid on September 15 to stockholders of record on August 31.

Regarding the second 50% of discretionary cash flow, as we discussed on last quarter's call, second quarter efforts were focused on share repurchases as we deployed over $73 million to buy back more than 623,000 shares. We ended the quarter with cash and short-term investments of $235 million and total liquidity of $361 million, including availability under our credit facilities.

On the liability side of the balance sheet, we continued to reduce debt and other liabilities. We paid down an additional $13 million of debt during Q2, bringing the total outstanding to less than $138 million at June 30. We also completed nearly $8 million of final reclamation in the quarter, with $5 million of that at Black Thunder. And we grew the Thermal Mine Reclamation Fund by $1.5 million via interest earnings.

Moving on to our capital structure and share count. For the first half of this year, we have reduced our fully diluted count by nearly 1 million shares, including share repurchases and repurchases of convertible bonds and factoring in shares issued pursuant to warrant exercises. That reduction represents approximately 5% of the year-end 2022 total.

Looking forward to the remainder of the year, we expect continued reductions in the diluted share count as we execute on the capital return program. We currently have nearly 419,000 warrants remaining outstanding and expect those to be exercised over the next several months. While those exercises will increase the basic share count, there should be no impact on the diluted count.

Finally, while we have repurchased all of the convertible bonds, the cap call that we purchased at the time of the bond issuance remains outstanding. The cap call is not factored into our fully diluted share count or otherwise reflected in our financial statements, but its intrinsic value remains approximately $62 million.

Turning now to the remainder of 2023. We have largely maintained our operational and financial guidance in line with last quarter. However, in the Thermal segment, we have reduced our expected sales volumes by 2 million tons to reflect additional carryover into future periods. From a timing perspective, Thermal segment performance will continue to be impacted in the third quarter as we transition West Elk to the new longwall panel. We continue to expect a full contribution from West Elk in Q4.

Looking at cash flows, I wanted to point out several items that will impact discretionary cash flow over the remainder of the year. First, we expect a working capital benefit in the back half of the year as we continue to unwind some of the build that occurred in the first quarter. While working capital levels will be largely influenced by the direction of metallurgical prices, we would expect to benefit across Q3 and Q4, assuming current prices hold, to be generally in line in aggregate with the benefit that we experienced in the second quarter.

Next, as part of our ongoing efforts to reduce liabilities and streamline the balance sheet, we will be terminating our cash balance pension plan later this year. Plan is very well funded, but we anticipate a final contribution of up to $10 million that will be made in the third quarter.

Finally, we currently expect capital spending in Q3 to be the highest quarterly spend for the year with a significant step-down in the fourth quarter.

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 Lucas Pipes of B. Riley Securities.

My first question is on the cost side. So my quick back-of-the-envelope for the Met segment is $86.53 year-to-date. Midpoint of the guidance, $84.00, would suggest a very nice step-down in the second half of the year. And I wondered if you could maybe speak to that and the level of confidence, and are you targeting the midpoint? Or is there maybe a little bit of optimism baked into that? I would appreciate your thoughts on that.

Lucas, this is John Drexler. Yes, I guess on the Met side, on the Met costs, for year-to-date we're at that $86-plus a ton range. As we sit here and we look at the remainder of the year, we've kept guidance the same. We expect to see improvement in our volumes as we work through the back half of the year, and we're comfortable that we're going to be in a position to achieve our guidance. I can't get specific to say we're targeting the exact midpoint of the range, anything like that. This is mining. There can be variability, obviously, as we've seen in this quarter.

Some of the influence of this quarter was impacted by higher shipments from our continuous miner operations. Obviously, they have a higher cost structure. That all comes down to just timing of shipments, timing of vessels within a quarter, et cetera. So that did have some influence. But as we sit here for the remainder of the year, we feel good about the cost guidance that we have out there and what we're pushing towards operationally for the remainder of the year.

I want to stay on the Met segment for the second question. Again, kind of anchoring the question around the midpoint of guidance at 9.3 million, tons and you have 8.1 million tons committed. And I wanted to get a sense for what the appetite is in the market for spot tons. I assume that delta between 9.3% and 8.1% would go into the spot market. Maybe that's the wrong assumption. But what's the appetite out there? And what sort of pricing would you expect to achieve on those uncommitted tons?

Yes, Lucas, good question. As we sit here today, we're very confident and comfortable with our Met book and the remaining exposure that we have out there. The sales team has done a great job in managing the portfolio as we've seen a weakening and softening in prices.

Given our suite of products, the qualities that we offer into the marketplace, the customers that we've built and gotten comfortable with our production; as we sit here today, we'll continue to manage and are comfortable with the guidance that we have out there for shipments. Obviously, it will continue to be influenced by the market. But as we sit here today, we're comfortable that the team will continue to operate and execute and achieve those levels of sales.

And then I'll squeeze one last one in. It's a question I get fairly often from investors. When I look at the asset side of your balance sheet fund for asset retirement obligations, $139 million; and then, when I look at the liability side, ARO obligations at $235 million. So I wondered if you could comment on that discrepancy. Is that in the PRB? And if so, are there additional contributions planned for the asset side? How should we think about that?

Lucas, this is Matt. The funding that you see on the asset side of the balance sheet, that's primarily directed for Black Thunder and the long-term obligations there. Obviously, that's the lion's share of what's on the balance sheet in terms of the liability. But specifically, we're funding toward that long-term obligation. And that has to do with a variety of factors. One, obviously, because it's the largest and because a lot of that work will be spent after that mine is no longer generating significant cash flows, we're trying to make sure that we're well protected for that. And given uncertainties around the long-term life of coal plants in the U.S., we want to make sure that we have enough funding to be able to make the right decisions with that.

Regarding the reclamation for the other mines, obviously that will be something that we do on an ongoing basis, and we've continued to do, and expect that those aren't things that we're going to have to pre-fund to a large degree although, as you get closer to the end of the mine life, that certainly could change. But that's really the funding is basically for Black Thunder. John?

Yes. Lucas, in addition, I mean, obviously, as we've demonstrated quarter after quarter, year after year, we're very focused on maintaining in a small footprint and managing those liabilities aggressively. And I think it's emblematic, as we indicated, with Black Thunder winning the reclamation award that it did from the state of Wyoming. It's just a tremendous focus of our team, along environmental stewardship, along our ESG principles, and we'll continue to manage all of that aggressively as we move forward.

The last thing I'd mention is that, with the interest rate environment that we have today, obviously, much more favorable than when we put the funds in place, we would expect that the interest earnings on that fund are going to do most of the work in terms of growing that to the ultimate level that we need. And we probably, as we forecast it today, needs something less than $20 million of contributions from cash flow to be made sometime over the next handful of years in order to make sure that we've got a fund that matches the liability when it ultimately needs to be paid out.

This is Paul. I think the last bit of color I'd give you is that, as you look back the last couple of years, the concern really was the liability of Black Thunder. And that's what the reclamation fund was really set out to address. You think about the other mines that make up the rest of that difference, those are all 20-plus years out. And there just isn't a concern or a clamoring to do anything right now about those liabilities.

So I think we feel good about where we're at. I think the Black Thunder fund is really to [seize] the concerns. So I think what we've done is put it in a very good place.

So really, Matt, if I understood this right, tens of millions of dollars over the next couple of years. So like maybe an incremental $5 million or so of cash outflow per year? Is that a reasonable ballpark? Or would you comment on that?

Yes. I would say that, that is reasonable, Lucas. The only thing I would say is, if we happen to have periods where pricing is very strong and we have windfalls like we had last year, we showed last year, we're not afraid to take care of that when times are good. And so, if there were periods where cash flows were maybe a lot stronger than what we see today, we could try to move more aggressively to just put that behind us. But given where we stand today, we think something more modest and incremental over the next few years makes sense.

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

Matt, can I just start with you, I think, a clarification point on your working capital return comments? I think you said 3Q, 4Q should be equal and kind of in balance with the aggregate for the second quarter return. So second quarter return was about $62 million. Are you saying around $30 million each then to be returned in 3Q and 4Q is the way you see it today?

And Nate, I would say we're certainly expecting around that $60 million to $65 million over the course of the back half of the year. I would caution that, that may end up sliding more into Q4, just the way the vessel timing shapes up here in Q3. It does look like we may end up with shipments weighted toward the back half of the quarter, which could push some of that benefit more into Q4.

The way I'm looking at it today is probably more, call it, 1/3 in the third quarter with the remainder in Q4. But obviously, changes in both pricing and vessel timing could have a big impact on that.

But just to confirm, it's kind of an aggregate of that $60 million to $65 million is what you would see in the back half.

That's correct.

And then maybe shifting over to the Met side of the business. John, maybe for you. Any thoughts on where you are in driving the costs at Leer South down to kind of the expected levels post ramp?

Yes, Nate, we've continued to see ongoing improvement at Leer South in productivity and managing the costs, culminating here and achieving the highest quarterly volumes that Leer South has had since the longwall has started up. So the team is very focused on continuing those efforts. Clearly, we're expecting improvement in shipment levels in the back half of the year that would align with ongoing improvements across the entirety of the Met portfolio, including Leer South. So Leer South's starting to find their groove and really move things along, and proud of them for the efforts that they've had in taking that forward.

And John, while I have you, would you kind of expect, at least the way you see shipping schedules currently, would you kind of expect to shift back more towards a normal mix of longwall coal versus CM coal into the back of the half of the year?

Yes. As we play out the entirety of the year, Nate, I would absolutely agree with that statement that we would expect just the typical back half of the year split between the various qualities of coal that we have.

And then maybe you guys also mentioned the High-Vol A spot price is about $210 a metric ton today. Could you just maybe walk us through the math to get to an indicative net-back there? What kind of rail and port fees should we assume kind of at that price? That would be very helpful.

Yes, Nate. So yes, that $210 level, the way you would think about that is that's a metric ton delivered in the vessel, and that's the U.S. East Coast assessment. So $210, that takes you down, call it, $20 for the easy math to $190. Our rail rate has been sort of capped out, and it was capped out again in Q2 at around $60. And the reason that is, is that the rail rate and the way the contracts work is dictated by pricing that prevailed in Q1. And as you recall, in Q1, the average High-Vol A price was $307. So at that level, we sort of cap out at the rail rate. That was with us again in Q2 because we're effectively 1 quarter in arrears. [Well,] that should be beneficial to us in Q3 and going forward, given that prices have come down.

Now, the counterbalance is that prices have come down. So we get lower prices, but we'll have a lower rail rate. So that's useful. But if you take that, if you go to the $210 to the $190 million, and then you say at $60, that puts you at the roughly $130 level, is kind of where that puts you. And quite frankly, if you run the math, that's kind of where we ended up for the quarter. It's the step-down from Q1 to Q2 was relatively predictable. And then again, we should get some benefit in Q3.

That's very helpful. And then my kind of back-of-the-envelope-math for incremental net tons that you guys priced was in roughly the high $130, so I think that makes sense, and I appreciate that.

Well, Nate, and remember, really, there's not much you can read into what we price simply because almost everything you saw that rolled into from the committed but unpriced column, the seaborne market was really just what we shipped. So for the most part, the seaborne market, our seaborne volumes are going to be driven by what the price is in Q3 and Q4 as opposed to any sort of fixing of price because it happens in sort of a real-time basis and very prompt. So what you saw with the change was really just tons that were committed but unpriced became fixed price in the most real sense of the world, they shopped.

And then maybe just one more to kind of slip in on the thermal side. You guys had called out last quarter potentially 5% of PRB volumes getting deferred into 2024. You put a finer point on that this go, around 5 million tons of PRB tons. It looks like they'll be deferred into 2024. Do you feel like you've fully incorporated kind of the expected deferrals at this point, at least the way you guys see the market?

Yes, Nate, as we look at the market today, just given the soft thermal market, the price of gas, kind of where we see things, stockpiles, et cetera, we're really comfortable kind of with the strategy that we have in place, where if we see customers that have an issue that we have conversations with, if they're willing to work with us, we'll consider rolling tons over. But clearly, we want to make sure we're preserving the value, or optimizing the value of that opportunity, either through additional volumes or additional price. And that 5 million ton range we've given, where we see things now is kind of what we expect between now and the end of the year.

I will say, as we sit here today, the team's done a great job of building out future years' volumes in the book and at pricing that's very attractive. So we feel real good at how this year is playing out, how we're managing it, and then how that's going to roll and play into future years as well.

And Nate, just to expand on that, I mean, really, that's how we built out the book that we've built out, is through opportunities like this. So we don't view this as a negative. We're happy to work with our customers as long as we get additional and incremental value, and that's how we've built out the out years. And so, while $60 million is where we think we'll shake out, and we'd like to ship 60 million tons, as long as the opportunity creates more value for shareholders longer-term, we're willing to have those conversations.

And so we don't view it as a negative. And quite frankly, again, as you look to next year, we're starting to have a really quite, quite solid position for another significant contribution from the thermal segment that's already baked in. So we feel good about it.

Deck, any way you want to put a number on how many tons you have committed on the thermal side for next year yet?

All I would say is that, look, if we're going to ship 60 million tons this year, whether we can get to 60 million tons for next year is to be determined. But again, we are in a position where that's not unachievable. So I think that tells you that, even in a market that's declining, we continue to have a very substantial book even for 2024 and look, a good start on 2025 as well, so in fact a really solid position for 2025 as well. So feeling really good about the visibility there. And then, obviously, as you get into the out years, we'll see where the market goes, and we're ready to be nimble and react to whatever the demand picture, in fact, proves to be.

Our next question comes from Katja Jancic of BMO Capital Markets.

First on the West Elk, I think last quarter the expectation was for West Elk to improve in 3Q and then reach a more normalized level in fourth quarter. Is that still true?

Yes, Katja, I think as we sit here today, what we're doing at West Elk and the challenges we've encountered, what we represented last quarter and as we're communicating this quarter, I think we continue to feel real good, and we are on plan with that as we developed our plans to manage through the issue.

I can report, we indicated that we're going to be moving a longwall from a panel that was creating the challenges that we had to an area of the reserve that was going to be higher quality, where we wouldn't have the types of challenges that we've had. The team's done a great job, and I can report that we're actually beginning the process of that longwall move in the next couple of days. That sets in play kind of that process to get ramped up in that next panel, once again, where we expect better conditions. So as we've indicated, Q2, Q3 would be meaningfully impacted by the issues and the challenges, but back to more normal conditions and expectations of normal operations in Q4.

And Katja, it's Deck. I would just say, look, we did talk about maybe a step change in the right direction in Q3. But we're just going to grind through these 2 panels. And Q3 probably doesn't look that different from Q2 when you think about the thermal segment as a whole, and we'll see where that all shakes out. But the key piece here is that, over 15 years of West Elk operating at a very high level, we've had these 2 quarters we kind of have to gut it out through because of the surprise with the quality in this mudstone. And so, look, I wouldn't expect any significant change, another modest contribution in Q3 from the Thermal segment. And then, Q4, we should be back on our horse.

Okay. And then Paul, I think in your prepared remarks, you briefly mentioned the relative weighting of dividends versus share buybacks. Are you potentially thinking of shifting that weighting from 50-50?

Katja, the real [capital return] program I think, has really gone well and kind of a fulfillment of the commitment that both the Board and management made to the shareholders followed (inaudible) Leer South during COVID, which we had to do a lot of creative things to get by. And I think it's worth repeating that, since relaunching the program 18 months ago, just 18 months we've returned nearly $1.2 billion to shareholder, including yesterday (inaudible) dividend.

In addition to that, we've cut the share count balance to 18%. And you keep that in the context, at the same time, when we return all that cash to our shareholders. We reduced our debt by 80% to a net cash-positive position. We prefunded the mine reclamation liability, and we greatly enhance liquidity. And as you point out, as our shareholders should expect, the capital return program is discussed at every meeting by the Board. And we clearly challenge ourselves as circumstances have changed, as well as what is the best and most value-driving use of our discretionary capital.

If you remember that Phase 1 of our capital return program in the 2017 through 2019 time period, we had a really heavy emphasis on buybacks, and we repurchased about 40% of the shares outstanding over a 2-year period. So I think, as you can tell from that, we're clearly comfortable with a different allocation formula. Standing here today, we've now returned about $2 billion to shareholders through both phases of the program, which I think is an amazing accomplishment given it approximates really our market cap today. I think it also underscores why Arch is such good value.

So I guess getting around to the absolute final is that, with all that background and color, I think the message here is that the Board is committed to the capital return program, but we still expect buybacks and dividends to play a significant role in any allocation, going forward. However, by that same token, we could envision a scenario in which the Board would logically adjust the relative weighting of those 2 components as circumstances change, as our shareholder preferences evolve.

As I've said many times in the past, relative to the allocation model, there is no perfect solution for all our shareholders that works 100% of the time. Hence, I think we'll talk about it quarterly. We need to be deliberate, and we'll review it continuously. And if it makes sense, I think the Board will react appropriately.

The next question comes from Alex Hacking from Citi.

So you mentioned that Leer South had a record quarter. What is the cadence for the rest of the ramp-up look like there?

Alex, I think as we sit here today, I can't get specific into that expected cadence. It's obviously influenced by longwall moves, just ongoing ramp, et cetera. So, once again, I think we just expect ongoing improvement as we move forward, and we'll continue to drive that way for the met segment as we go forward.

And then I don't know if you disclosed this, but how much coal have you sold into Asia in the first half of the year?

So Alex, what we typically do is we generally talk about the splits of our sales volumes for the guidance that we provide. It's about 20% stays into the North American market and the domestic volumes there. About 80% goes into the seaborne market. And as a general rule of thumb, what we've seen is an ongoing significantly increased amount going into Asia. And right now, that's probably at around 50-50 of that export volume that's going into Asia as opposed to Europe or South America.

Alex, it's Deck. We focused a huge amount of attention on building out that Asian presence and helping the Asian market understand the unique qualities that we have with our high-volume product. And I know you and I have talked about it, and we've all talked about it a lot. The fact is that our HVA product from Leer and Leer South is such a great fit for the Asian market because they're looking to blend a lot of disparate product. And the nature of Leer and Leer South is that it really promotes excellent particle bonding so that you end up with a much better and more homogeneous coke out the back end of the coke oven when you're using our products because of their plastics qualities and all the things we've discussed.

So look, that's a huge focus for us. And I would add, look, we also understand that's where the market is going to be, right? That's where the growth is going to be. When you look at what Wood Mackenzie is projecting in terms of growth in blast furnace capacity in Asia, when you look at where coking coal consumption is likely to go as a result of that increase in blast furnace capacity, we're seeing about an 80 million ton increase between now and 2030 in Asian demand for coking coal.

So that's where the market is going to be. And that's a huge focus for us. And the team has done an amazing job, I think, of educating that Asian marketplace about the qualities of our coals and why they can be such a great fit in their blends.

Alex, it wasn't all that long ago that we had minimal amounts of volumes going into the Asian markets. And for the team to achieve what they've done, secure the customers that they've been able to secure, to grow the consumption of our coal there, 50/50 split of our exports is a real testament, once again, to the entirety of the portfolio and the work they're doing, as Deck indicated, for an area that's going to be very important for us as we go forward.

So Alex, if we had to say, I mean, it's going to be systematic. But as John said, of our total volumes, we would expect 40% or so going to the Asian market. Is that 45% next year, 50% the year after? Who knows, but it's going to be that sort of systematic increase in all likelihood. And quite frankly, that's where those incremental volumes go. As Leer South continues to operate at higher and higher productivity levels, those volumes are going to go in all likelihood into the Asian market. So again, we feel good about sort of where that is all trending.

And then I guess, just finally on the domestic side, not to throw the cat amongst the pigeons, but a large U.S. blast furnace steelmaker on their conference call suggested that they were looking for a significant cut in the thermal coal price for next year. I guess how do you think about, as you head into next year, kind of a trade-off between domestic market and seaborne market, and how much flexibility do you have to put incremental tons into the seaborne market if that seems like the best economic option for you?

Alex, this is Paul. I'll start this off if the others want to weigh in. But I go back to where we left off on the other answer, which you back up not that long ago, 5, 6, 7, 8 years ago, we have 50% North American and roughly 50% Europe and South America. And as time has evolved, we clearly pushed our volumes heavier into Asia with a lot less reliance on the U.S. and Europe.

And I've said this many times in the past. If we ultimately have to, we're ready to go 100% export. And the North American business has some advantages. It's FOB buying generally. It has a lot less working capital implications, but there is a cost to keep it in North America -- or excuse me, if there's a discount to keeping in North America versus what we view of the seaborne market, we're quite willing to go in the seaborne market and just sell on an index basis rather than lock in a lot of volume in North American business.

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Paul Lang, for any closing remarks.

I want to thank you again for your interest in Arch. While the global coking coal market has entered a soft patch, I want to reiterate once again that Arch was built for just such conditions. Indeed, we see the current market weakness as an opportunity to differentiate ourselves even further by highlighting our low-cost position and demonstrating that we can thrive and continue to generate substantial amounts of free cash flow across a broad spectrum of the coal market cycle.

With that, operator, we'll conclude the call, and we look forward to reporting to the group in late October. Stay safe and healthy, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.