Arch Resources Inc (ARCH) 2023 Q4 法說會逐字稿

Good day and welcome to the Arch Resources Inc. fourth quarter 2023 earnings call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Deck Slone, Vice President of Strategy. Please go ahead, sir.

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 we filed 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 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; 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 during the fourth quarter, Arch continued to drive forward with our simple, consistent, and proven plan for long-term value creation and growth. In the quarter just ended, the team achieved adjusted EBITDA of $180 million, generated $127 million in discretionary accounts, bolstered our cash position by $107 million, consistent with our stated objective of building additional optionality for potential future stock repurchases, initiated plans to unwind the cap call instrument associated with the now retired convertible security, declared a quarterly cash dividend of $32 million, or $1.65 per share, increasing the total capital employed in our shareholder return program since its relaunch two years ago for well over $1.2 billion, and achieved independent Level A verification at the Leer mine under the globally recognized for its sustainable mining framework, becoming the first US mine of any type to achieve that.

In short, we demonstrated strong progress against many of our strategic priorities spanning numerous critical areas of performance, including financial positioning, shareholder value creation, and sustainability. Critically, the team maintained its sharp focus on driving productivity improvements across the operating platform as well. Here too, we made significant positive headway as we achieved a 10% quarter-over-quarter reduction in the average cost per ton in our metallurgical segment, secured a nearly 25% improvement in our average coking coal realization, and delivered an increase of more than 50% of our operating margin. Overall, the team delivered improved productivity, capitalized on a strong market environment, and continue to lay the foundation for a stronger execution in future periods.

Before moving on, let me make a few additional comments about our highly successful capital return program. As we've stated many times in the past, the capital return program is the centerpiece of our value proposition. And the central tenet of that program is the return to shareholders of effectively 100% of the Company's discretionary cash flow over time. In any given quarter, of course, the amount of capital is deployed with program can and will vary based on several factors, including upcoming cash requirements, our minimum liquidity target and the like. But those are just timing issues and do not change the fact that over time, effectively all of the discretionary cash are returned to shareholders.

O n the Q3 call, as most of you will have noted, we signaled our intention of increasing our cash balance by $100 million or so, which we believe serves to enhance potential for opportunistic share repurchases in the event of a market pullback. During Q4, we accomplished that objective, adding $7 million to our cash position.

With that completed, we believe we've now effectively positioned the Company to continue the evolution of our capital allocation model towards a heavier share repurchases in the future. Matt will comment on the subject further in his remarks. But a major step in this regard is the planned settlement of the capped call instrument that we expect to complete in the near future. The settlement of the capped call in and of itself should result in their retirement of nearly 2% of our outstanding shares.

Turning our attention to the market dynamics, despite somewhat lackluster steel market fundamentals, coking coal markets appear reasonably well supported at present, Arch's primary product, High-Vol A coking coal is currently being assessed at $262 per metric ton on the US East Coast, which while a step down from the average price that prevailed last quarter is still highly advantageous, particularly in light of Arch's first quartile cost profile.

Moreover, the Australian premium low vol index is currently trading $53 per metric ton higher than the US East Coast price, which is creating an attractive arbitrage opportunity for select US volumes moving into the Asian market. Needless to say, we're sharply focused on trying to capitalize on that opportunity to the fullest extent possible.

Of course, that focus on these opportunities aligns perfectly well with our already well advanced objective of increasing our penetration into Asian markets, we expect future steel demand to be centric. Primary reason that coking coal markets remain well supported in our estimation, constrained supply stemming from ongoing reserve degradation and depletion, mounting regulatory pressures, limited capital availability and persistent underinvestment.

In 2023. According to Trade Dana, Australian coking coal exports declined nearly 6% when compared to 2022, That brings a total decline in Australian exports to around 40 million metric tons or more than 20% decrease since 2016, a peak year for coking coal exports. While the US and Canadian coking coal exports and aggregate bounced back moderately in 2023, offsetting the Australian decline to some degree, protection for those two countries remained well below their respective peak levels. As a result of these factors, we remain constructive on the seaborne coking coal market and expect to continue to be in an excellent position to capitalize on this environment going forward.

Looking ahead, we remain sharply focused on pursuing operational excellence relentless and hitting our volume and cost targets, extending the reach of our high-quality coking coal products into the fastest growing global markets, continuing to reward shareholders through our capital return program as we evolve towards a heavier share repurchase model. Maintaining our strong financial position or capitalizing on the optionality it affords during periods of market pullback, and advancing our industry-leading sustainability products. We believe we're well positioned to drive forward volume objectives in 2024 and beyond. And in doing so, continue to generate significant value for our shareholders.

With that, I'll now turn call over to John for further discussion of our operational performance in Q4. John?

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team executed at a high level during Q4, delivering significant improvements against numerous operating metrics while turning in another outstanding performance in the critically important area of sustainability.

In our core metallurgical segment, the team's strong execution contributed to significantly higher realizations, significantly lower unit costs, and much improved operating margins. In our thermal segment, the team achieved a return to form of West Health as well as a solid contribution from the Powder River Basin assets despite a softening thermal market environment. The upshot was a greater than 50% sequential increase in discretionary cash flow which, as Paul noted, is the engine for our robust capital return program.

Let's take a closer look at the performance of the metallurgical segment. During Q4, the metallurgical team delivered on one of its highest priorities, reducing its average cash cost by more than $10 per ton or more than 10% when compared to Q3. That's a significant achievement and one that serves to further solidify the metallurgical portfolio's position in the first quartile of the US cost curve. Importantly, the improved performance at Leer South contribute markedly to these stronger results.

As anticipated, Leer South experienced slower than normal advance rates and lower than normal yields in the first two months of the quarter as the operation completed mining in panel five where, as you will recall, the coal seam was appreciably thinner due to its position at the outer edge of the reserve block. However, the mine made up for lost time once it transitioned to panel six in early December, resulting in nearly 20% increase in output in Q4 versus Q3.

Looking ahead to 2024, we expect continued productivity increases for the portfolio as a whole as well as continuing improvements at Leer South over the course of the year. As you will have noted, we are guiding to coking coal volumes of 8.8 million tonnes at the midpoint for full year 2024.

In addition, we are guiding to an average cost for the metallurgical segment of $89.50 per ton, which is essentially flat versus 2023 despite inflationary pressures. More noteworthy in my view is the expectation still further improvements in the metallurgical segments performance as Leer South transitions to the second longwall district in late 2024.

As previously discussed, we expect better mining conditions in a materially thicker coal seam as the Leer South longwall advances in the district two based on our significantly expanded drilling program. At a time when many of our competitors are wrestling with the migration to less advantageous and higher cost reserves, we are fortunate to be moving in the opposite direction.

Looking ahead, we currently expect a less than ratable shipping schedule for our metallurgical segment segment here at the outset of 2024. The constraints in sales volume relates to weather-related disruptions as well as unplanned and accelerated maintenance requirements at Curtis Bay, including a force majeure event that will affect vessel loadings in Q1.

As you know, the Curtis Bay terminal is an important link in the seaborne logistics chain for our Leer and Leer South operations. So this outage will have a volume impact. We currently expect Q1 volumes to be modestly less than revenue. However, we expect the impact to be principally one of timing, which is to say we expect to make up for the missed shipments as the year progresses. I might add that we have factored those events into our full year sales volume guidance.

Let's turn now to our thermal platform, which includes our West Elk longwall mine in Colorado with its high-quality coal and competitive access to seaborne markets as well as our legacy Powder River Basin operations. During Q4, West Elk capitalized on the transition to a more advantageous area of the reserve base by delivering its highest quarterly production level of the year at around 1.1 million ton.

As most of you are aware, this is consistent with the normal run rates we have achieved at West Elk in recent years, Bottomline's overall financial contribution will continue to be muted to some degree by the need to make up for legacy price shipments that were missed in the second and third quarters of 2023. We expect a solid contribution in 2024 before a step-up in cash generation in 2025 when we will be transitioning into the beefing midyear.

More encouraging still in my view, as with our metallurgical platform, West Elk expects to transition to even more attractive reserves in mid-2025 when longwall mining shifts to the beefing. As we have shared in the past, the coal seam thickness is significantly greater and the coal quality appreciably better in the beefing, which should translate into both higher volumes and stronger relative price.

This positive trajectory, coupled with the mines access to seaborne markets and its durable domestic industrial customer base, underscores West Elk's significant ongoing potential and further supports our belief that the mine will remain a value-generating component of our operating portfolio for the next decade, if not longer.

In the Powder River Basin, the team made a solid financial contribution despite weakening market dynamics that resulted in a number of negotiated shipment deferrals based on customer requests. As always, we took steps to ensure that we preserve the value of our contract book with these negotiated agreements and parlayed the deferrals into additional sales in outer years. But those deferrals still resulted in lighter volumes in Q4.

Looking ahead to full year 2024, we have commitments in place for approximately 50 million tons of PRB coal at a price generally in line with our average realized price in 2023. As we have demonstrated repeatedly in recent years, we believe we can maintain our cost structure and preserve our ability to generate cash even at step-down production levels should that prove necessary.

Finally, let me emphasize once again that our harvest strategy, which is to say our focus on optimizing cash generation from our thermal assets remains very much intact. Since the fourth quarter of 2016, the thermal segment has generated a total of nearly $1.4 billion in adjusted EBITDA, while expending just $172 million in CapEx.

Before passing the baton to Matt, let me now spend a few minutes discussing our efforts in sustainability, which remains the very foundation of our corporate culture. During 2023, the company achieved an aggregate total lost-time incident rate of 0.55 incidents per 200,000 hours worked, which is nearly four times better than the industry average.

Perhaps even more impressively, the Leer and Leer South mines completed 519 and 329 consecutive days, respectively, without a single lost-time incident. Those streams are nearly unprecedented for underground mines of their size and complexity and further underscore our progress towards our ultimate goal of zero incidents at every one of our mines every single year.

On the environmental front, the company received zero environmental violations under SMCRA versus an average of 11 by 10 of our large coal peers, and recorded zero water quality exceedances for the third year in a row. Again, an impressive achievement by the team.

Finally, and as Paul noted, our Leer operation became the first US mine of any kind to achieve Level A verification under the globally recognized towards sustainable mining framework. That accomplishment is further evidence of our deeply ingrained culture of continuous improvement and of our intense focus on raising the bar in all areas of our operating execution.

With that, I will now turn the call over to Matt for some additional color on our financial results. Matt?

Thanks, John. And good morning, everyone. As usual, I'll begin with a discussion of cash flows and our liquidity position. For the fourth quarter, operating cash flow totaled $182 million, a sequential increase of nearly 40% from Q3 levels. As expected, we had a small working capital benefit in the quarter, contributing $7 million.

Capital spending for the quarter totaled $55 million, and discretionary cash flow was $127 million. As planned, we grew our cash balance over the course of the quarter with an increase of $107 million. We ended the quarter with cash and short-term investments of $321 million and total liquidity of $444 million, including availability under our credit facilities.

Debt at year end was $142 million, resulting in a net cash position of $178 million. We have achieved our objective of enhancing our financial flexibility and do not anticipate needing to materially add to the cash balance in 2024.

Moving on, I wanted to note a recent development in our outstanding debt that we completed shortly after year end. As you will recall, we paid down the vast majority of Arch's term loan in early 2022, giving a small stub outstanding because of the interaction between the loan and other parts of our debt structure.

Earlier this month, we refinanced that stub with a new $20 million term loan. Our small transaction refinancing allows us to maintain the financial flexibility that we have grown accustomed to over the past several years without any material change in our ongoing debt service obligations.

Next, I want to highlight a couple of notable financial accomplishments from 2023, starting with the capital return program. For the year, we deployed $355 million under the program, representing nearly 80% of the year's discretionary cash flow. That total includes dividends declared of $171 million or $9.20 per share and repurchases of common stock and diluted securities of $184 million.

As for the remainder of the discretionary cash flow, we expect to deploy that opportunistically in future quarters. The second accomplishment is the ongoing reduction of our diluted share count and the simplification of our capital structure. Going back to the beginning of 2023, our diluted share count total approximately $20 million shares with more than 11% of that comprised of diluted securities, primarily the remaining convertible bonds and warrants.

By the end of the year, the diluted share count was below 19 million shares, with diluted securities representing just 3% of the total. So we reduced the total share count by 5% while greatly simplifying the capital structure. As a final step in that simplification process and another significant step in reducing the share count, we intend to unwind the capped call.

By unwinding in the near term, we will receive shares representing the current fair value of the instrument, and estimate that could be as much as 2% of the fully diluted shares outstanding. While we are accepting a discount on the dollar value of the capped call. We believe that retiring the shares now in advance of expected future capital returns will prove more value-creating than delaying the retirement until the maturity date in late 2025.

Before turning the call over for questions, I would like to cover a few cash flow guidance and modeling items for 2024. First, we expect capital expenditures to be in the range of $160 million to $170 million, representing maintenance level spending. We currently expect that to be spread fairly ratably over the course of the year.

Second, we expect a larger share of additional maintenance and improvements at DTA. over and above the normal operating costs to be approximately $10 million. This is not included in our CapEx guidance but is accounted for as an equity investment. I would also note that we expect this to be offset by additional income that we will generate from selling our excess capacity in the terminal to third parties.

Third, with respect to cash taxes at current metallurgical prices, we would expect our cash taxes per year to be near the bottom end of our guidance range as we continue to utilize our net operating loss carryforwards.

Lastly, as we look at working capital trends, we typically see a cash outflow in the first quarter and would expect that to be the case in this quarter as well, with an outflow of as much as $40 million. As we look at the full year, we currently expect to see a modest working capital benefit, which represents a tailwind of more than $80 million as compared to the working capital build we experienced in 2023.

To wrap up, Arch entered 2024 in a great position to continue to deliver robust capital returns, only maintenance capital spending, minimal debt service obligations, and the ability to utilize NOL carryforwards to minimize cash taxes, and a more favorable working capital trends.

As we look at how we execute the capital return program, the combination of streamlined capital structure, the reweighting of the program towards share repurchases and the additional cash we currently have on hand positions us nicely to substantially reduce the share count this year. For that, we are ready to take questions. Operator, I'll turn the call back over to you.

Thank you. (Operator instructions) Lucas Pipes with B. Riley. Please go ahead.

I first wanted to ask about the met coal guide for 2024. When I think about the midpoint, 8.8 million tons and I compare that to 2023 sales of 8.6 million tonnes kind of pulp, a delta there of 200,000 tonnes at the midpoint. I'm a little surprised given the transition at Leer South. And so I just wondered if you could maybe walk us through maybe some puts and takes across that portfolio. Would appreciate your perspective on that.

Hey, Lucas, John Drexler. As we look at the volume guidance for '24, we're comfortable with what we have out there. We, as we've discussed, expect the continued opportunity to ramp at Leer South over the course of '24. District 2 for us, which we've been talking about and sharing with you guys as well, is something that we'll be getting to towards the end of '24. So that transition is continuing.

The expectation for Leer South is around 3 million tons this year. And so that for us is comfortable. As you look at the rest of the portfolio, there's a lots of things that happen operationally between longwall moves, at each of our longwall operations over the course of the year, et cetera, timing. But we're comfortable with that 8.8 million tons,

I'll share with you, the team is very focused on being higher than that number as we work over the course of the year. But as we kick the year off here, I wanted to make sure we're all in a range that we were comfortable with. But we're very focused on improving that numbers as we work over the course of the year.

That helpful. I appreciate the color, I'll turn over to the thermal side for a moment. And first, I wondered if you could maybe provide a mix, expectation between West Elk and the PRB, and then also where you kind of see PRB pricing contract for 2024? Thank you.

As we look at the tunnel portfolio, we're excited about what we've seen and the progress we've made at West Elk. As we reported, we've gotten back essentially to expected run rates for that operation. As we got through the fourth quarter, we were at 1 million tons. That's kind of where we expect to be as we work through 2024, So 1 million tons a quarter or 4 million tons for the year.

The balance then comes over to the PRB. At West Elk, I'll note the real excitement is we're back to normal levels, but we're also going to be in a position where we're transitioning to the beefing. So development is occurring there. By the time we get to mid-2025, we're going to be in an even thicker coal seam, better quality. So we're excited about that.

In the PRB, the rest then spilled back to the PRB. We've indicated that we're at kind of that 50 million ton level. If you look at our guidance, the midpoint of that guidance, our commitments are actually slightly higher where we sit today. You see where natural gas prices is that

As we reported, we took advantage of the opportunity of some of our customers in '23 that needed to look at their commitments in their inventories. And we were able to parlay that into additional volumes with some rollovers in '24. It was about 5 million tons. As we sit here today, we don't think it'd be unreasonable to think of something else in that magnitude, 5 million ton-ish that could be impacted as we work through '24.

This is Deck. I would add this that for the West Elk, we expect volumes to be higher. That's for sure. Volumes normally around 3 million tons in 2023, so we expect meaningful step up to between 4 million tons and 4.5 million tons in 2024, but prices are likely to be lower. So, you know, obviously the seaborne pricing has come down. We have some legacy contracts that we still need the service. So this sort of sideways contribution despite the better results at West Elk from a production perspective, the better operation.

In the Powder River Basin that pricing is around $15, is kind of where we're committed to right now. We still think that creates the opportunity for us to generate $1 to $1.50 margin. So look, overall for the thermal contribution, perhaps a small step down given the volumes are likely to be lower, but still a substantial contribution from the thermal segment.

I know that doesn't necessarily come across from the guidance table because things like export tons are missing, et cetera. But we still think this, our thermal segment is going to contribute a significant amount of cash in 2024.

One thing I think I'd like to just kind of touch on again, and I think Deck and John both -- I know it's a little odd we're guiding below what's by about 1 million, 1.5 million tons, I think it's just plain and simple recognition of natural gas has fallen so much in the last couple of weeks that we're expecting pretty hard push back. We'll get that value back. I think it's the reality. And I think we wanted to show it in our guidance.

Yes. Thank you. That's exactly what I wanted to get at. If you look at the guidance table, you're committed at, call it, $17 and cash cost guidance $16 to $17. So maybe to help us understand this better in today's Newcastle price environment and what you have left to sell at West Elk maybe domestically as well, where would you expect that $17.09 to trend in today's market environment? Thank you.

Lucas, it may well count on that. Right now, you can look at it as the netbacks could be sort of in the $40, sort of $40-plus range, but there are so many moving parts of West Elk and again, we grant you that that guidance table might cause a little confusion. But the reality is there are so many moving parts at West Elk in the wake of some of the quality issues we had in 2023 that we do think there is a meaningful margin still to be gained.

And even with what I just described, that sort of mid-$40 range and netback, we still believe that when you sort of factor in some of the volumes that are priced, again you're going to see a widening out and a solid margin from the thermal segment, is all.

Lucas, you may have noticed with that additional export volume even at these costs and prices that are down from where they have been, that will move that number up. That's in the guidance table over the course of the year. I think that's kind of been the historical practice you would have seen from us as well if you go back to the previous quarters, beginning of the year, et cetera.

Thank you. And sorry if I missed it, how many West Elk tons are uncommitted, unpriced today? And would they all go into the export market with that $40 something netback?

It's close to a million tons that would not be priced as yet.

Got it, all right. This is very helpful, gentlemen. I really appreciate all the color, and I'll turn it over. Best of luck.

Thank you, Lucas.

Katja Jancik, BMO Capital Markets.

Thank you for taking my questions. Staying on West Elk, how much did West Elk contribute in '23?

So Katja, once again as we've indicated this past year '23, West Elk, while it was constrained and had issues, it produced 3 million tons. We expect that to grow to 4 million tons. So we do see an enhancement there. Given where the international markets were and with some of the challenges we had, we still had a nice margin at West Elk.

As we've just talked about some pressures in the markets themselves as we step into '24 at West Elk, but you see a very meaningful increase in volume. So the contribution, as we see it, is still probably flattish between '23 and '24 and still resulted in a nice cash flow for that complex contributing to the thermal segment.

And Katja, maybe just a little bit more granularity, Deck again, probably $10 to $15 margin is how do we think about that for the 3 million tons. You think about that $10 to $15 margin, what we're saying is so you can see that volume that John just described, the 3 million tons step up to 4 million plus, the way that margin gets compressed a little bit in the current environment. So maybe that's helpful.

That's super helpful. Thank you. And then on the met side, you're guiding 8.6 million tons to 9 million tons. Can you still over time expect you can get to 10 million tons?

Katja, I think as we've continued to have discussions around the met portfolio, we are comfortable especially as Leer South transitions into District 2, that we're going to see volumes at that 9-plus million ton level. We'll continue to do everything, to focus on getting that to the highest amount of production that we can out of that portfolio.

We do expect it to be well north of 9 million tons, and that will be a great met portfolio. And if we can push it up to 10 million tons, we'll be working to do that as well. But it's too early for that far out to really solidify some of that guidance.

Katja, this is Paul. The one thing I'd add is, I'll give John a lot of credit. As he noted in his remarks, we came through October, November as expected, due to some bad conditions. We hit December and the new panel from Iran as well as (inaudible) and we know we could run the volume. So I gave a lot of confidence in what I saw and saw the team produced. still remain fairly optimistic.

Nathan Martin, The Benchmark Company.

Maybe just a follow-up on the most recent question. As we think about the net operations in general, again I think you guys in the past eventually get to that 10 million tons run rate. But just to be clear, does that include the thermal byproduct tons? Because I know some people have likely assumed that that was just coking coal. So if it does include the byproduct tons that in theory are coking coal tons more likely in the low 9 million tons kind of range, just it would be great to get your thoughts on the right way to think about that.

So, Nathan, when we're talking about met and these numbers we're using and the goal of ultimately maximizing the met sales, that's just the met. It excludes the thermal byproducts. As we mine across our portfolio as part of the production and processing, you are left with that MIS product, so that's incremental to the volume, the met volume that you have there. So it if you add in the MIS product, then yes we will be over 10 million tons when you add back the impact of the MIDS as we look longer term. Absolutely.

Okay. John, just want to make sure that was clear for everyone. I appreciate that. And the maybe sticking with met for a second, any thoughts, guys, on this historically wide spread between US East Coast met coals like High Vol A and (inaudible) coal, especially given your high portion of mix to HCA production? And then how do you see that possibly affecting your realized price per ton in '24? And what do you think it takes for the spread to kind of return closer to normal?

Yes, Nathan, it's Deck. Let me take a shot at that and others can join in. Obviously, we don't have a perfect answer. This is very wide differential historically. We think it's too wide. We think it will close over time because it creates significant arbitrage opportunity. But as you noted, the average over the past seven years, the debt average differentials in the past seven years has been a $10 or so premium for premium low vol.

Look, you could make the argument that the spread could reasonably be assumed to be around $20. That's the transportation differential between moving tons from Australia into Japan versus the US East Coast into Japan. But the fact is it's more than $50 today.

One of the things I would point to, different products play different roles in coking coal blends. And so right now, as we discussed and as Paul noted, coking coal exports out of Australia are down 40 million tons, 40 million metric tons since 2016. And we continue to see operational challenges there. So there's real pressure on availability of premium low-vol and premium low-vol does have a very specific role that it plays in blends.

And so look, I think your scarcity there, I would add the fact that with costs and royalties moving up in Australia, that also is supporting that higher premium low-vol price, look not to say that justification because again, we think this creates a significant arbitrage opportunity for us to sell our tons into the Asian market rather than into the Atlantic market. And for the Asian buyers to reach into the US East Coast to pick up tons.

So we still expect that excess spread to contract. I do believe the fact that there are fewer US producers who really have a lot of experience and exposure in Asia as more US producers get that exposure. I do think that creates more of an opportunity to see that equilibration of those two prices.

But look, we're glad to see the higher PLD price. We absolutely believe that that HPA and the other US East Coast prices should be pulled up over time by the scarcity there.

Yes, I think one of the interesting things, Nate, is that with Leer, we have the unusual ability for the US and that we can compete closer to a PLD because of the CSR plastic properties of the coal. Because of that, we do get an opportunity to participate in that arbitrage. But it's a little odd and I think Deck did a good summary of all the things that are going on that are created there.

Right now, we have that ability to compete head to head, and we'll take advantage of it while it exists and that we are selling and we are taking advantage of it in some instances. So there are tons we're selling tied to PLD. In other instances, it may be that there are buyers in Asia who are quite willing to pay that price because they don't need that full quality.

So we can sell a lower quality product with a little more ash, and take advantage of a blend between PLD and some of the other indices and still get a premium to the US East Coast price. So we absolutely are tapping into that and taking advantage.

But it would be nice to see the entire East Coast market lift. I think again, that would take some of our competitors following suit and being able to sort of penetrate into Asia the way we have.

And then maybe one final question, Paul or maybe, Matt, just as it relates to the discretionary cash flow, again, you guys mentioned your decision to increase your cash position quarter over quarter, obviously affected share repurchases. I think you only spent about $3 million in the fourth quarter there.

Now the talk is moving to heavier more opportunistic share repurchases. So I guess first, can you provide maybe just some more details behind your decision to build that cash during 4Q? I think the average share price was below where it has been to start the year here.

And then second, should we expect on the return of discretionary cash flow, obviously other than the dividend, to continue to kind of be lumpy? And then finally, would you expect to increase your buyback authorization as you shift to buying back more stock?

Nate, I think I'll start with this, but I think this is probably a group effort. But as I look back and with the cap program in the last few years, in fact there's very little change here, arguably Arch took the lead in this area. We really set the standard for coal here. I know the fundamental premise of our shareholder return program is really pretty simple and we live by, and this is the shareholders' money and we're going to return it.

We have shareholders that prefer dividends, and we have shareholders that prefer buybacks, and we've tried to be responsive. The decision to build the $100 million on the balance sheet is really a response from some of our shareholders who thought we should really hold onto some dry powder when we see pullbacks in the market.

Like everybody in the commodities business, we experienced significant volatility, and I'd would expect that to be the case in the future as well. While we remain very constructive on the current seaborne coking coal market, our story in general also, and I think you see that by our willingness to exit the capped. When we see pullbacks, it generally coincides with lower cash balances on the balance sheet. And that's exactly what we're trying to take advantage of.

I look at our buybacks, the history of it, and I think we've been pretty good stewards of shareholder money. The 12 million shares we've bought back over the last six or seven years, we've averaged about $90. I think in this pricing environment, that's a pretty good story. And we're clearly better at picking the timing on buying and selling our investors.

We want to be prudent on how we deal with the buyback program and building cash towards the upper end of our target points. Done with the goal of trying to be a little more responsive.

And maybe just to add a little bit to that, just to give you a specific example, if you go back to the middle of last summer, we saw the stock price dip when the met prices dipped, wherein the cost $110 a share, maybe a little lower. And as we entered Q3 of that year, we were at minimum liquidity levels. Certainly we used the cash flow we were generating at the time to buy back. But if you look at our Q3 buybacks, relatively weak. And if we had had a little dry powder at that time, we could really have done something more substantial.

And that's really the type of thing we're trying to build in the ability to do today, it is really be able to take advantage of those times. There's going to be volatility in this industry and we should be able to manage to take some of that volatility out of the trading, for one, but also to take advantage of times when we think the value has gotten a little lower than it really should be. I think that's the right way to look at the cash build.

When you think about, the part of your question regarding the lumpiness of capital returns, look for better or worse, the cash flows are fairly lumpy the way the business runs. And so there's going to be some element of that. But hopefully what we've done by building some cash here is try to smooth some of that out.

And then as we look at the authorization, look, we'll continue to watch that. I wouldn't be surprised if here in the next quarter or so we need to potentially refresh that authorization. But that will be a discussion we'll have with the Board when the time is right.

Alex Hacking, Citi.

Yes, good morning. Can you hear me? So I guess just coming back to Nate's question on HCA pricing because your gap's pretty wide, right. I think, as you know, FOB Australia HCC was priced around $290 a short ton in the fourth quarter, you guys are realizing $195, $100 gap, right? And a lot of that has to do with the pricing of HCA.

I guess how much of the issue there is with all the new supply because Leer South's ramped up and it seems like mine number four in Alabama has also transitioned to HCA. Like, is that the fundamental problem that we've just had a big chunk of new supply in the markets struggling to absorb it? Or is there something above and beyond that? Thank you.

Yes. So Alex, yes, I think the right way to think about the spread with PLD is right now it's about a $53 differential. So that is simply a function of market conditions and the aspects we talked about.

Now when you look at our average coking coal realization. The average HBA price in Q4 was $281. And when you think about sort of the Arch blended portfolio, we might be talking about something more like -- sorry, $275 would have been sort of the average price that prevailed. So you take that $275 and you say, okay, that's around $275 a metric, it's $200,000 short, you assume a $50 rail rate, that's $200. And then when we think about the fact we had North American volumes committed at $182, then we're at a fixed price for about 20% of our volumes. It kind of lands you right on top of that $196 number.

So look, I would say we're really delivering on that US East Coast HBA price or the US East Coast prices. Generally, we're capturing that realization fully. So we feel good about that. And I'd still believe that's the best proxy for us going forward, is US East Coast pricing, even though as indicated there will be instances when we tried to move tons into Asia at the PLD price and instances where we can do that, or at a blended price in Asia.

So look, we feel good about that. But I would say back to the issue of sort of what the differential was between PLD and HBA again some of those some of those fundamentals that we discussed, certainly don't view this as a new supply issue.

Yes, US production did bounce back about 5 million tons or exports bounce back about 5 million tons in 2023 when Australia was down 10 million tons. So in reality, the seaborne market lost supply during 2023. So we certainly don't see that as the issue. We would suggest that the 5 million tons of US was really just, for the most part, bringing additional volumes out of the existing portfolio.

There aren't a lot of shiny new assets being added. So we see limitations to how much the US can can move up. But again, we think the market is really quite well supported. We think we'll continue to have opportunities to move additional volumes into Asia. We're shipping 40% of our tons into Asia today. We expect that to be 50% and in relatively short order and probably 16 thereafter. So look, we're moving in the right direction into the center of the steel-making future. And so we feel good about all of that.

Okay. Thanks for the color. You actually answered my second question, which was going to be around the tonnage that's going into Asia. So let me just ask, I guess real quick. I apologize if I missed this, in terms of the shipments in the first quarter, they're going to be weaker or impacted by some logistical issues. Did you quantify that or can you quantify that? Thanks.

We indicated maybe less than ratable for the 8.8 million tons. The one we used was modestly I think from a ratable perspective. You could look to a 5% to 10% reduction from ratable on the 8.8 million tons. That's a vessel or two, Alex. That's just the kind of timing that you're talking about here, and we'll be making that up as we go forward. We don't have any concerns about that.

Okay, perfect. Thanks a lot

That suggests missing -- look, two vessels, 150,000 tons. It doesn't take much for volumes to slip from one quarter to the next. Look, Curtis Bay is moving quickly to resolve the issues. But when you're talking about a force majeure event and an outage that span multiple days, that really does result in a change in the efficiency and productivity of the facility. They did a great job of getting things lined out. But it was multiple days of outage, and so again it could have a small effect and we want to be prepared for the fact that we could see a couple of vessels slip out of Q1 into Q2 probably Thanks.

Michael Dudas, Vertical Research Partners.

On the met coal front, maybe Matt can go over, you're admirable with per ton cost flat, but what are you budgeting for 2024 on some of the input costs, labor, consumables, contracting, royalties et cetera? What are moving at a better rate or higher rate than normal. What are contributing to help those costs as we move through '24? And is that something similarly given with expected better volumes we could think about for 2025 preliminarily.

That's a good question. And I mean, you hit on everything. I mean as the economy recovered as supply chain issues prevail, we saw significant inflationary pressures from the industry. We saw supply chain issues pushing things out, delaying major pieces of equipment, what have you. The team did a fantastic job of managing all of that, and continues to do a great job of managing all of those things.

We continue to see higher inflation and certain things, repair parts and supplies that we're acquiring. We're seeing other things where inflation has slowed down significantly from. So that all gets factored in from the labor perspective. Labor stuff in our industry, really, as we've talked about this at length before, we're very fortunate that we've got great long life, low cost assets that operate incredibly safely, have a great culture.

Our most important asset are our employees. And when they feel that way, our turnover is lower than others. But still, labor is another impact that is affecting the cost. As we sit here today to be able to move flat from '23 to '24, obviously with some modest improvements in volumes but still hard work by the team to manage cost across the board, as we step forward into '25, one of the wonderful things about our portfolio is our ability to continue to manage to that first top quartile cost structure. Once again, high volumes, great assets, great people running them in. And we think we're in a good position as we move forward.

Appreciate that. My second question, maybe for Paul, John, or maybe the group. Certainly there's been a pretty sizable shift in the thermal market in the US with gas prices meandering quite low, maybe a sense of what your customers are thinking? Any thoughts on plant retirements, pace or speed up?

And as you're thinking about the next several years and we have, we did have a nice recovery when prices were strong because of the Ukraine issue couple of years ago on the pace of maybe moderating or declining what the PRB assets will contribute in the marketplace, given what maybe could be a little longer a trough in the market from a cyclical side relative to the other secular issues that face your customers?

As far I'll start off and let the others jump in. As I said in the past, we look at this situation from a pretty pragmatic point of view. The last coal-fired power plant in the United States was 10 years ago. Last year, we saw about 13 gigawatts of coal-fired generation shutdown in the US, and there's expected to be in another 7 gigawatts in 2024.

The funny thing is, though at the same time, 2023 was a record year for global coal consumption or -- excuse me, 2022 was. 2023 is looking like it also is going to be another record year. The thermal market as well as seaborne thermal as well as seaborne in the coking coal market, it still remains very strong. If you have assets or the US that can get coal offshore, it still has a very good outlook.

West Elk is a prime example of that where it's a coal that fits very well in the Asian market because of its low ash and low sulfur and high CV. So I think there is a diminishing role in the US for coal. Our internal view is that the PRB will continue to drop about 5% or 10% a year. And I think what you're seeing or we could see in 2024 headed into the early part of the year, is looking at a $1.70 natural gas. It's a pretty tough road to go forward.

I would agree with all that obviously. But look, last year, utility consumption was around 390 million tons in the US. Go back to 2008, it was 1.1 billion tons. So clearly, there's been a pretty steep glide path here. We are absolutely prepared. If we start to see a plateau, we're prepared to continue to produce at a higher level, had the ability to do that. We'll take advantage of it. But I think we've been right to prepare for that decline and do all the things that you that we've done. Shrink the footprint, build the thermal mine reclamation fund. The PRB shipped about 230 million tons in total in 2023.

As Paul said, right now, we expect that to continue to step down 10% per year or so probably makes sense. We could definitely see some delayed retirements of power plants so that $1.50 or $1.70 natural gas price right now is a green light thing, saying you're okay to close.

I will say this, concerns about reliability are growing. There areas more discussion. We'll see if we end up with some more significant delays. We've seen a few here lately. So we're prepared to go in the direction. If it continues to decline the way that it has, we're prepared to bring the plane in for a soft landing in Powder River Basin. If suddenly we see a plateau, we're also ready to capitalize it.

Michael, I'll round out those comments with just the wonderful folks out at our operation have done an incredible job through the entirety of that cycle. And through the decline over many years, we continue to manage the asset and nibbling into do it in a way to manage the costs. You go back to a high watermark for the Powder River Basin or Black Thunder was 117 million tons. This year it was 60 million tons. Right now, you see us guiding to 50 million tons through the entirety of that decade of change.

The team there has embraced and continued to manage the costs and to be able to put us in a position to continue to generate cash. And we've got high confidence no matter where that goes as we go forward, that we're in a position to do the same thing as well.

Chris LaFemina, Jefferies.

I just had a question about the capital return strategy. So, Paul, you mentioned accumulating this cash as dry powder. You've talked about in the past as well. You've targeted $100 million of cash build which you achieved in the quarter. So as we go forward from here, let's assume that you don't get the pullback in your stock price. Should we then assume that all free cash flow will be returned to shareholders, and it's really just a question of whether it's dividends or buybacks? Or do we continue to accumulate more cash waiting for that potential pullback to happen? That's my first question.

Okay. So I think the real simple answer is that we got ourselves to where we said the kind of the upper end of our cash ranges and we're ready to move on. And I think we've positioned ourselves very well. There's two strong arguments for moving forward with heavier share repurchase right now.

First and foremost is the discussion here earlier. The fundamentals for metallurgical segment are still pretty good. Pricing looks pretty strong over the medium to short term that's probably not baked into the dynamic or it's not reflected our share price. And second, as John pointed out, we expect ongoing operational improvement in '24 and '25. So I think we set ourselves up well for what's coming, and I feel good about the position we put ourselves in.

One thing I'll add, Chris, as Paul said on the cash balance, we're at the level we wanted to be at. I think I was pretty clear in my prepared remarks. We don't see the need to build that here in 2024. Maybe one data point. As we look at the capped call, it's going to be something similar to a share repurchase. The breakeven, if you look at where we're at today from a share price perspective and where we would need to be in 2025 to make this a better bet to do it today, currently sits at a little less than $200 a share.

If we look at it that way, we look at our plans, we look at what we think we'll be able to achieve in terms of capital returns over the next couple of years, we think it's better to do this today. And so taking that and translating it into share repurchases, we think we're in a position that, in today's share price environment, we've got a lot of cash we're going to generate to buy back shares.

And then if we do see a pullback in the world where we don't have a pullback, it would be one of the first times I think we've seen something like that in a long time in our business, but if we don't see a pullback we're going to be spending 100% of the cash flow as we sit here today, returning that to shareholders.

And is there a number on a pullback that you'd be looking for? I'm not sure if you can answer that question, but your stock's down 15% from its recent high. Is that enough of a pullback? Or does it have to be so much more significant than that?

I don't think we want to get into where we're going to be a certain price points. I think where we sit today, what the stock has done in reaction to this, I think we'd be fairly active in the repurchase program.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Paul Lang for any closing remarks. Please go ahead, sir.

Thank you again for your interest in Arch. As I noted earlier, we remain focused on pursuing operational excellence, delivering on our volume and cost targets while driving continuous improvement across the portfolio. At the same time, we continue to reward shareholders through our capital return program. We're intensifying our focus on share repurchases and opportunistically shrinking our diluted share count over time. With that operator, we'll conclude the call, and we look forward to reporting to the group in May. Stay safe and healthy, everyone.

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