Arch Resources Inc (ARCH) 2021 Q1 法說會逐字稿

Good day, everyone. Welcome to the Arch Resources, Inc. First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. And I would now like to turn the call over to Deck Slone, Senior Vice President of Strategy. Please go ahead.

Good morning from St. Louis, and thanks for joining us today. While we are conducting this morning's call from Arch's boardroom, I want to assure you that the team is widely spaced and following CDC guidelines closely.

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 to 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 your questions.

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

Thanks, Deck, and good morning, everyone. We're glad you could join us this morning on what we know is a very busy earnings day in the natural resource and industrial spaces. I'm pleased to report that the first quarter was business as usual here at Arch in all the right ways. Once again, the team demonstrated its commitment to world-class execution, operating with precision and efficiency despite a tough start to the quarter related to the lingering impacts of the pandemic. As expected, the performance at our core coking coal operations improved steadily as the quarter progressed and the vaccine became more widely available, culminating with an exceptionally strong March. Even with less than ratable volumes, we achieved an average coking coal cost for the quarter of less than $60 per ton, anchored by the Leer mine, which continues to identify new ways to ratchet up its performance, trim costs and bring out additional efficiencies. That strong performance at Leer underscores yet again why we're so excited about the impending start-up of the longwall at Leer South. While we don't expect Leer South to match Leer's cost performance immediately, we do expect it to break out from the gate strongly, driving our segment cost down, and we absolutely believe it has the potential to reach approximately the same intensely competitive cost structure as Leer over time.

I'm also pleased to report that the final development work at Leer South continues to go very well. We're just a few months away from the commissioning longwall, and we're more than confident than ever about the transformational impact the new mine will have on our cash-generating capabilities. To reiterate, we expect it to boost our total coking coal volumes by more than 40%, reduce our average coking coal costs by several dollars per ton, improve our average coking coal quality and cement our position as the world's leading supplier of High-Vol A coking coal. Moreover, the Leer South start-up will represent another significant step in our ongoing transition into a pure-play coking coal producer.

As previously announced, we continue to explore strategic alternatives for our legacy thermal assets with the clear stipulation that will only move forward with the sale if the prospective buyer can meet our rigorous requirements for a clean and responsible transaction. At the same time, even as we explore the potential sale of those assets, we continue to drive forward with a two-pronged strategy of optimizing their cash flows and working down our final reclamation and bonding obligations in an accelerated fashion. During the first quarter, we made good progress on both fronts, achieving a solid margin in our thermal segment while moving ahead aggressively with the accelerated closure of our Coal Creek mine. As previously discussed, Coal Creek represents approximately $50 million or 25% of our total asset retirement obligation in the Powder River Basin, and we plan to work the vast majority of the Coal Creek liability down by mid-2022. During the first quarter, we made an excellent start in that effort, performing the necessary work to reduce Coal Creek's ARO by approximately $8 million. Over the next 5 quarters, we expect to reduce the mine's total obligation by another $30 million to $35 million.

Shifting to another critical facet of our strategic transition, we also made important progress during the quarter in refining, strengthening and advancing our long-standing commitment to environmental, social and governance performance. As we've stated many times in the past, we believe that aligning our strategy with the world's evolving ESG priorities is essential to long-term success in our business, and we continue to move forward on multiple fronts to do just that. Of course, for Arch, this begins with our deep and unwavering commitment to excellence and safety, and we continue to set a high bar in that arena. During the first quarter, our lost time incident rate was roughly 30% better than our industry-leading 2020 average and 4x better than the national average. In addition, Arch continued to build out its ESG disclosure efforts, achieving the top score in our ISS peer group in the environmental category. Moreover, we reported during the first quarter our continuing reductions in Scope 1 and Scope 2 greenhouse gas emissions, which are down 55% since 2013, and keeping with our strategic shift towards higher value but lower volume metallurgical products. And we've intensified our reduction targets for our carbon dioxide equivalent emissions to conform to science-based targets for our 2-degree Celsius future.

Most significant of all, perhaps, we continue to realign our value proposition to reflect our focus on steel markets in keeping with the global economy's intensifying focus on decarbonization. We believe that a significant amount of new steel will be required in a decarbonizing world given steel's importance in urbanization, infrastructure development and construction of essential decarbonization tools, such as mass transit systems, wind turbines and electric vehicles.

Before I pass the call to John for some additional comments about our operational performance, let me spend a few minutes on what we're currently seeing in the coking coal markets. First, let me say, based on our own experience in recent weeks, U.S. East coal (sic) [Coast] metallurgical markets remain solidly supported with strong continuing interest in our yet to be committed volumes from customers in every major region. The driving force behind this constructive tone, as you would expect, is the strong resurgence in global steel production. As we sit here today, steel output appears to be on course to recover the pre-pandemic levels as soon as this year. Steel prices in all major markets remain at historic highs. Steel mill capacity factors have rebounded to healthy levels, and key importing countries, including India, are returning to the seaborne market to satisfy pent-up coking coal needs. Clearly, this is a solid backdrop for coking coal markets, even with the current drag on overall seaborne demand being exerted by Chinese import policies. Moreover, U.S. East Coast metallurgical price assessments continue to enjoy a $30 to $50 per ton advantage to premium quality Australian coals, which we believe is entirely merited based on our direct experience in these markets in recent weeks. In addition, there continues to be a silver lining to the Chinese import restrictions. Namely, we've been able to expand interest in U.S. coals generally in our Leer brand specifically, which we believe is an ideal fit for this marketplace given its great value and use when integrated into a blend. While we have yet to sign additional commitments into China given our limited availability in the second quarter, Chinese interest for deliveries in the second half of the year remain strong. Whether such deals ultimately get inked or not, we believe we've made valuable inroads into this market, which, as we all know, is the source of more than 50% of the world's steel supply.

In closing, let me reiterate that we remain sharply focused on executing on our clear and actionable strategy for growth and value creation. We expect steel demand to remain well supported for the foreseeable future as the global recovery shifts into high gear, as infrastructure-driven stimulus efforts march forward and as the build-out of the new low-carbon economy resumes. With our low-cost metallurgical assets, a high-quality product slate, industry-leading ESG performance, a carefully cultivated customer base, along with a best-in-class growth project, we believe Arch is well positioned to profit in this environment and drive long-term value for our shareholders.

With that, I'll now turn the call over to John Drexler for further details on our operational performance during the first quarter as well as what we're expecting for the balance of the year. John?

Thanks, Paul, and good morning, everyone. I want to begin by recognizing once again the tremendous efforts our team has put forth in managing COVID. As indicated, we experienced a dramatic decrease in the number of COVID infections at our operations over the course of the quarter due in large part to the quickly expanding availability of the vaccine. To increase employee access to the vaccine and to drive rapid uptake, we engaged with our employees about the benefits of the vaccine, established incentives related to the vaccination process and work to streamline the logistics process, which included conducting several vaccine clinics at our mines. We are pleased with the success of these efforts to date, which we believe has contributed significantly to the rapid decrease in cases at our operations. We continue to work to drive the percentage of our employees who are vaccinated still higher.

As we have stated many times in the past, and as Paul has underscored yet again today, Arch's single highest strategic focus remains the expansion of our world-class coking coal platform. I'm pleased to report that during the quarter just ended, we made exceptional progress on multiple fronts in support of this mission-critical objective. Of course, the ongoing work at Leer South is the most overt and transformational example of our ongoing efforts to further elevate our metallurgical business. And as Paul noted, it was an exceptionally eventful 3 months at Leer South as the commissioning of the longwall grows ever closer. As we sit here today, we have taken possession of the longwall system, including all 212 longwall shields. We have nearly completed development work on the first longwall panel. We have commenced work on the underground setup room at the end of the panel where the longwall system will initially be deployed. We have taken delivery of all the rail infrastructure, including the locomotives, man trips and other hauling equipment, and we have completed all the major work on the preparation plan. In short, we are in excellent shape as we begin the final drive to the finish line. I am enormously proud of the exceptional work the operations team has done in a period of just a little over 2 years to get us to this point. Most impressive of all, in my opinion, is the fact that the team has successfully kept the project moving forward on time and on budget in the face of the many obstacles, distractions and personal challenges that accompany the global pandemic. Of course, there's still a great deal to do, but we are in excellent shape and well on track for a mid-third quarter start-up. Over the next several weeks, we will be completing the setup room and begin the underground deployment of the longwall system, lay over 5 miles of underground rail line and upgrade the mine's belts and motors on the slope to accommodate the huge step-up in volume that is about to take place. As previously discussed, the slope work will result in a 30-day outage at the mine, which is scheduled to occur late in the second quarter. To bring all this work to a successful conclusion and to facilitate a smooth and effective start-up, we are taking full advantage of the adjacent Leer team's great experience and expertise, which, of course, is one of the many advantages of building Leer South that is nearly identical to Leer in so many respects and so close in proximity as well. As indicated, Leer South is the most obvious example of our ongoing efforts to build out, strengthen and augment our existing coking coal portfolio, but it is far from the only one. In fact, we made critical progress at every one of our metallurgical mines during the quarter on initiatives that should enhance our metallurgical segment performance going forward.

At our linchpin operation, the Leer mine, the team remains sharply focused on continuous improvement in everything it does, and that commitment is self-evident. In the systematic way, Leer has improved its performance, implemented new technologies, trimmed costs and run out efficiencies. During the first quarter, Leer's unit cost declined to $40 per ton even with the lingering impacts of the pandemic and despite the less than ratable shipment levels. Based on our internal estimates, that's $35 per ton lower than the average unit cost for the U.S. coking coal industry. While we don't expect to achieve that $40 per ton level every quarter, we have locked that figure in our sights. And as Paul noted, that kind of performance is precisely the reason we are so enthusiastic about the prospects of the start-up of Leer's companion mine, Leer South.

Shifting now to our Beckley mine, which, as you may recall, produces around 1 million tons of Low-Vol coal annually. We took steps during the quarter that should set the stage for an increase in incremental volumes in the mine's annual output levels. Interest in our high-quality Beckley product continues to exceed our productive capabilities by a wide margin, and we believe the steps we are taking there should pay significant dividends. At Mountain Laurel, we continue to make good progress in getting our cost structure to a solid, sustainable place post the transition from longwall to room and pillar mining. As you may recall, one of the key components of that effort was the transition of mining activity from the Alma seam, which is leased to the #2 gas seam, which we own in fee. We now have 3 of our 5 continuous miner units operating in the 2 gas seam and expect to move a fourth continuous miner into operation in that seam later this year. In addition, we are beginning to reap the benefits in the marketplace of a meaningful step-up in product quality associated with the move to the 2 gas seam where the sulfur is lower and the overall metallurgical characteristics are more advantageous.

Turning quickly to our first quarter operating execution. One of the most noteworthy aspects of our performance was our positive upward trajectory as the quarter progressed. After a slow start due principally to COVID-related impacts in January and early February, our performance improved steadily and systematically throughout the period. That's encouraging, and we fully expect that positive momentum to continue in Q2. As a result, we are anticipating an increase in metallurgical shipments of approximately 15% in the second quarter, and quite obviously, additional improvement in Q3 when the Leer South longwall starts up, even when taking into account the ramp time. As for our legacy thermal operations, we expect Q2 results to be generally in line with our positive first quarter performance, even with still soft thermal demand and still high stockpile levels at U.S. power plants. Counterbalancing those factors, to some degree, we expect West Elk to produce and ship at a higher level in Q2 in keeping with a much improved export market environment. Equally important, though, is the progress we made on shrinking the thermal operational footprint. During the quarter, we were able to complete work totaling more than $10 million towards reducing our PRB asset retirement obligation, with most of that work occurring at Coal Creek, where we expect to complete the vast majority of the final reclamation work by mid-2022.

In summary, we are pleased with the strong operational execution of our metallurgical platform as well as our excellent progress in expanding the platform's capabilities, and we are pleased with the ongoing execution on our thermal strategy as well where we are demonstrating are still significant capabilities for generating free cash while simultaneously shrinking the footprint of those operations.

With that, I will turn the call over to Matt for thoughts on our financial performance. Matt?

Thanks, John, and good morning, everyone. I'll begin with a few comments on the first quarter performance, beginning with our metallurgical segment where cash margins were $24.13 per ton for the quarter, benefiting from an improved pricing environment and strong cost control with unit cost below $60, despite the impact of COVID and less than ratable volumes. On the thermal side, while John noted the impressive reclamation accomplishments, it's just as important to note the first quarter margins of roughly $1 per ton despite transportation challenges throughout the quarter. Taken together, first quarter per ton segment margins were the strongest we've seen since the middle of 2019, and we expect to improve upon that performance over the remainder of the year with the Leer South start-up.

Turning to cash flows and liquidity. First quarter operating cash flows totaled $6 million, which was negatively impacted by a $34 million net working capital increase. The first quarter is typically one where we see inventory build in advance of the Great Lakes business, but this year's increase was larger than normal given the improvement in production over the course of the quarter as well as an expected ramp-up of export thermal shipments in the second quarter. Capital spending for the quarter was $77 million, including nearly $60 million of Leer South project costs and $6 million of capitalized interest associated with the project. Maintenance capital for the quarter was just $11 million, with substantially all of that related to the metallurgical segment. Our primary financing activity for the quarter was the successful closing of the second tranche of tax-exempt bonds, totaling $45 million at an interest rate of just 4.125%. Based on qualifying expenditures to date, we received nearly $29 million of the gross proceeds for use in the first quarter, with more than $16 million that remains restricted on our balance sheet at March 31. We finished the quarter with unrestricted cash of $237 million and total liquidity of $250 million. While cash levels were in line with our expectations, availability under our credit facilities was lower than typical. Availability is determined a month in arrears, with our March 31 availability based on February receivable and inventory levels. As we've mentioned, we saw improvement over the course of the quarter with March production and sales levels the highest in the quarter. That improvement has been reflected in the availability under the facility subsequent to quarter end as we've seen an increase of more than $15 million. Finally, while we do not include restricted cash in our reported liquidity, the remaining tax-exempt bond proceeds will become available to us as we complete the Leer South development, with the majority of the remaining funds expected to be released in the second quarter.

Lastly, I'd like to comment on a few aspects of our guidance for the second quarter and the remainder of 2021. The only change in our guidance is with respect to interest expense, which has increased slightly due to the additional tax-exempt bonds. While the remaining annual guidance is unchanged, I wanted to address some of the quarterly cadence. Both our metallurgical segment costs and capital spending will be influenced by the Leer South timing, with the highest cost per ton and a significant portion of our remaining capital spend expected in the second quarter before we see a meaningful step down in both in the back half of the year. Thermal segment cost per ton is also expected to be higher in Q2 than the rest of the year, following the typical seasonal volume pattern. This sets up for substantially improved earnings and a return to generating free cash flow in the back half of the year. And initially, those cash flows will be used to bolster liquidity, reduce debt and continue to address reclamation obligations. Once we have made sufficient progress on those fronts, we expect to resume capital returns to shareholders.

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

(Operator Instructions) We'll take our first question from Lucas Pipes from B. Riley Securities.

This is actually [Matt Key] here asking a question for Lucas. What percentage of seaborne commitments, if any, at this time are currently scheduled for China in 2021? And is there a general target that kind of Arch's aiming for in terms of China sales during the year?

So Matt, this is John Drexler. Good question. As we look at our overall guidance that we've provided for our met book, we've indicated that 75% of our book is going to go into the export market. As we look at the amount that we view going into the Asian market, of which obviously China would be a part of, we've indicated that we expect about 20% of our book to go into that market. Now that's not traditionally been China where it's been going to. But as we indicated earlier or late in 2020, we did see an opportunity to book business into the China market, which we did over the course of 4 quarters, which we think has been advantageous to the opportunity that's been out there. As we sit here today and look forward, as we've indicated, we see additional opportunities into China. We think that's a silver lining to the overall issues that are going on right now between China and Australia, and we'll take advantage of that. Longer term, I think our view is that, that ultimately does get worked out. In the meantime, though, we'll take advantage of seeing if there are opportunities to get our product into China, and we think it will be well received and potentially give us further opportunities longer-term into that market.

Matt, this is Deck. And just to build on that a little bit. So while we do absolutely view this as opportunistic because of what's happening with Chinese policy regarding Australian imports, our experience so far and our engagement suggests that we really might be talking to some folks who are going to be in our book longer term. And so that's certainly encouraging. So while there certainly is an aspect of this, which is opportunistic, we do believe we are creating some long-term relationships. It's been a good experience so far. So we're feeling positively about that. And as we've indicated, we don't have a whole lot of coal to sell this year. And we've noted, we only have about 1 million tons at the midpoint, and we're being very careful about how we place those tons. We want to, as we've stated before, expand both the breadth and the depth of our customer base as we bring on Leer South, and we really sort of begin to build that book for the longer term.

We do believe, in the second half, there are some opportunities for additional sales into China potentially. And whether those come to fruition or not remains to be seen, but again, the conversations are good. The interest remains very high. And in fact, I would add, look, it's simply -- the tone of the market continues to feel quite constructive to us overall. So despite the Chinese policy issues, which are resulting in the significant disconnect between Queensland pricing and U.S. East Coast pricing, the market tone to us feels constructive. We don't envision any issues really with placing the remaining volumes that we have available for the rest of the year. Quite frankly, if we have more coal, we'd be eager to put it into the market because the demand has been significant. So we're feeling quite good about all that.

Matt, I think it's important to note that even currently, we're sold out through Q2. We're turning away business for prompt interest on the met side. And once again, further indication of what we see as strong markets moving forward. And as Deck said, with 1 million tons left to move, we feel very good about our opportunities as we move forward.

I think -- this is an important issue. So I think just kind of the last little bit of color. Obviously, as you look at forward curve, especially the steep increase in PLV prices in the back half of the year, the market is building in that they think this is going to get resolved. Whether that's right or not, it's clearly out there. But you look at the pricing today, CFR into China is about -- or in China is about $220. It's the largest arbitrage, I think, any of us have seen. It's about $100 right now. It seems that this will get solved at some point in time. But as Deck said, we're going to take advantage of this. We're going to use this not so much to put off a spot vessel or 2, we're going to use it to build a customer base in a very important market.

Got it. This is a really helpful detail. I really appreciate it, gentlemen. And just a quick macro question for me just to wrap things up here. Given that U.S. steel output at pricing has held up really well here probably longer and better than I think a lot of people thought kind of going into this period, what's your kind of current expectations for U.S. met coal production in 2021, as it kind of improving? Do you expect other kind of producers in the region to be able to ramp to kind of keep up with the strong kind of downstream market here?

Yes. Matt, it's Deck. And I'll just -- I'll start. Listen, we saw -- as you know, we've seen a lot of rationalization out of the U.S. here over the past 2 years or so. 2018, quite frankly, we were at -- around 80 million tons of metallurgical coal production. That fell to 72 million tons in '19, 57 million tons in '20. We absolutely believe there's some amount of that production that can come back, but we think there's a fair amount of it that is either out permanently or at least persistently, and that it's going to take a much higher price. So we could certainly envision U.S. metallurgical supply bouncing back to the mid-60s. This year, again, some of that reduction was simply mines running at lower capacity factors, running fewer shifts, et cetera.

But when you go back to Q4 of 2018, there were actually 163 coking coal mines in Q4 of '18 operating. Q4 of '20, there were only 108. And while we haven't had a chance to look at all the data yet for Q1, data is not all in as yet. It looks like we're going to see something very comparable in Q1 of 2021. So we're not seeing a return of some of those mines that shut down those higher cost operations. So we think there is that ongoing structural change as we see degradation and depletion, particularly in Central Appalachia of some higher cost mines. And so we do think it's going to -- the U.S. is going to be a smaller player going forward. We don't expect to return to that 80 million tons that we saw in 2018, really at any point in the foreseeable future, even if we see a meaningfully more significant move higher in pricing. So we should see a little bit of a bounce in terms of demand in the U.S. Look, that's not going to be huge. We really are more focused on a 330 million ton seaborne coking coal market rather than a 20 million ton or so North American coking coal market. But certainly, it can help tighten the market to some degree. It's not an insignificant piece of the overall marketplace for us. And so we do think there's an opportunity there. And certainly, we're hearing some of the North American buyers who are beginning to look around to see, okay, if we have to augment our position, they bought most of their tons in the fall of 2020, as they always do, but if we have to augment our position where are we going to find those tons, and we've been having those conversations. So feeling positively about that.

And Matt, I think just to add to that, and I think it builds on it, and we've talked about it a lot, fundamentally, the long-term view of supply into the market, in a market that we see over time, continuing to require additional amounts of metallurgical coal, quite frankly, around the world. On the supply side, there's a challenge of the lack of capital that's available to the marketplace. And so as the price continues to rise, and there's not as meaningful of the supply response as there's been in the past, it can put the opportunity to see a longer market opportunity with higher prices moving forward. And while we feel so fortunate and excited about the position that we're in here to get Leer South completed, we think at a very good time to put ourselves in a position, to be in a position to generate significant amounts of cash, quite frankly, no matter where the market cycle goes, we don't think there are that many opportunities, quite frankly, around the world that we've had here that we've capitalized on and that we'll move forward with.

Matt, I think Deck and John puts us in a great perspective. The only thing I'd add is, when you think about when the volume started dropping in the U.S. metallurgical production, prices were quite a bit stronger. They're in the 170 to 180 range. Sitting here today, we enjoy these 150 and 160. But, yes, if you think that production was being shut down at $15 or $20 higher, I'm not sure what's going to be needed to bring some of this production back.

(Operator Instructions) And we will move on to Nathan Martin from the Benchmark Company.

Maybe kind of start off on the met side. Pricing came in a little stronger than expected. You obviously know that U.S. East Coast prices continue to be at a premium to Australian coals. It looks like you priced some additional export tons since the last quarter at an incrementally higher level. I was going to ask about your forward thoughts on price and supply and demand, and most of that has been addressed through last few answers. Maybe I would ask, now that China's ban on Australian coal imports has continued since roughly October, are you guys finding that you're competing more against that Australian tons out there in the seaborne market or buyers still hesitant somewhat to shift away from your normal suppliers?

I think, obviously, it's something that we're going to watch closely, and it evolves overtime, depending on how long the dispute between China and Australia goes. But as of right now, we've not seen a whole lot of movement of traditional buyers into the traditional markets. I think, longer term, there is concern that if they go out and buy and adjust the blends that they have gotten very comfortable with in the traditional markets that they're buying from, that, that could change very, very quickly. So we haven't seen a lot of dislocation with that yet. But obviously, it's something we continue to watch closely, and it's counter balanced with some of the additional opportunities that we see as we've discussed into the Chinese markets.

And Nate, just to build on that a little bit. We did talk a little bit about supply, demand. But more broadly, look, this is a significant development in the marketplace, the import restrictions in China. And quite frankly, if China imports less -- significantly less than the 48 million tons of seaborne coking coal they imported last year, that will weigh on the market. Of course, counterbalancing that really is an attractive demand story otherwise, and you can certainly see that very readily where steel prices are around the globe. They are stratospheric and continue to be -- the outlook, I think, continues to be quite strong for the near term. If you look -- at the most macro level, you look at manufacturing PMIs globally, they're about 55%. So clear expansion is sort of trends there. The restarts of blast furnaces continue apace. Capacity factors are back as steel mills are back to levels that they were pre-pandemic or approaching those levels. All the discussion about economic stimulus, they're certainly potentially helpful and could push steel demand higher and continue to provide important support. And we're seeing big consumers like India get back into the market in a significant way.

So look, we're encouraged by the fact that in 2021, we could see -- just based on the first few months, we could see steel production get back to -- even back to 2019 levels and happening that quickly one year after the pandemic would be an impressive rebound. And as we talked about the supply on the U.S. side of things is clearly -- continues to be under pressure. And Paul said it well, it's going to take more -- higher prices than this to coke's additional tons back into the market, we think. And then -- but when you look around the globe, you still see the same sort of level of underinvestment. The major coking coal producers are guiding lower, not higher, which is interesting to see. So those are significant counterbalances to the Chinese policy you've highlighted.

So as we've indicated, while that certainly is a concern, the tone in the market to us continues to feel constructive. We continue to see very good interest in our available tons. The forward curve is showing strength out through 2023. So we're really feeling fairly positively about the market even as we continue to watch the situation carefully in China.

Great color, guys. Just real quickly, with those 1 million tons left of met you have on price, you mentioned roughly sold out for the first half. It sounds like you expect to maybe price those somewhere in the back half. Any thoughts there?

Yes. No, we'll move those in the back half of the year. And all indications from everything we're seeing in the market is that we expect a strong market environment to be able to move those tons into. We're turning away business near term. And we just think that will roll right into the back half of the year and give us a great opportunity to move that volume at attractive prices.

I mean, I think at the end of the day, it's probably going to go out -- it's going to go out on index at the time it shipped as most of our export shipments are.

Got it. And then shifting a little bit, you guys pointed out what we noticed as well that met shipments during the quarter lagged in reported production numbers. Any additional thoughts there? Was it rail service, vessel timing, other logistical issues? And when do you expect those additional coal tends to move? Sorry.

Yes. So Nate, that's good question. So we had a strong production quarter, and you saw 1.5 million tons of sales. Some of it is seasonal for us. Some of our coal moves via the Great Lakes. And so the lake season doesn't open until after the first quarter. So that's a portion of it. We do have a longwall move at Leer coming up here. And so there's some preparation in advance of that in having coal available for the shipments. As we've indicated, we expect a step-up of 15% in our shipped volumes in the second quarter and then even further in the back half of the year as we bring Leer South online mid-third quarter. So everything is lining up with our plan and our book as we had expected.

And Nate, certainly, that 15%, we -- look, we hope that proves conservative when you look at the timing, when you look at shipping schedules, et cetera. There are vessels there right at the end of the second quarter. So we'll see that plays out. But you're right, we've built meaningful inventory. The trajectory is quite positive in terms of production. So we feel good about all that, but some of that could just be timing. So again, hopefully, the 15% is conservative, but right now, we think that's a reasonable number to share and to target.

Got it. And then obviously, the 15% you guys just went through. Any idea or you could give us any thoughts on cadence as Leer South does ramp up, maybe mid-3Q in the 4Q and even '22 from a shipment perspective?

Well, incrementally, we've indicated that we expect with bringing Leer South online that we're going to see a step-up of about 3 million tons on an annual basis. We're really excited as we bring Leer South online, but we've acknowledged there'll be a quarter or so probably of ramp time bringing a brand-new longwall up and running. And so we've not given specific guidance on the cadence into the third and fourth quarter. But with a mid-third quarter start-up of the longwall and then having a full -- a quarter of production in the fourth quarter with that longwall running, I think you can back into some high level estimates of what that would mean from a volume perspective.

And then finally, just thoughts -- maybe you might get more specific on your update on your plans for Black Thunder. Obviously, things with Coal Creek sound like they're progressing as planned. Also, it seems like West Elk tends to get overlooked at times on discussing your plans for your legacy thermal assets in the future. So can you give us an update on that mine as well?

Yes. Nate, this is Paul. I'll start off and maybe talk about the macro picture and let John maybe talk specifically about what's going on. But look, I think we feel pretty good about the strategy that we put forth last fall. We're basically following a two-pronged approach. And the first is, we're going to continue to shrink our footprint. That first starts with Coal Creek, where we're working very rapidly to bring down not only the ARO, but we're also bringing down the bonding amount. And second, we'll continue to run these things for cash and look for a possible buyer of the assets. I believe and I think it's true that as we carry on this parallel path, particularly as we drop the liability and bonding, the universe of buyers will expand. And at some point, they'll cross. And we'll just keep this path going. What I like about it is, we control this process. And you look at the first quarter, John and his team made great progress and executed on the plan.

So I'll add -- I'm real proud of the teams out there, and I think Paul really hit it on the head when we have the opportunity to control the process. And I think it's really what makes us unique in the basin in the assets that we have there, Tier 1 asset with Black Thunder. And so real opportunity to continue to generate significant cash even in a challenged market environment. We've talked about it before. The history of that operation as it reduced its production volumes over the last decade to be responsive to the market environment, continued domain an outstanding cost structure, and we expect that moving forward as they continue to focus on reducing the footprint as well, generating cash, taking a portion of that cash and reducing the footprint.

The team at Coal Creek has done a great job as well. We're off to a great start. We feel real good about our progress through the remainder of this year and into early -- first half of next year and our ability to complete the vast majority of the reclamation that's going to be required there. And so we'll continue to move down that path in earnest and be responsible as we move forward.

Nate, it's Deck. And I mean a real advantage that we -- over the next 5 quarters, we can focus intensively at Coal Creek, which really isn't a meaningful contributor -- hasn't been a meaningful contributor to EBITDA while we optimize cash flows of Black Thunder and continue to operate at current levels, which again is important because we want the thermal assets to pay their own way here with the ultimate closure costs, and we feel very confident about their ability to do that, and generating significant amounts of cash at Black Thunder certainly helps drive that. So again, it's a nice position to be in to have -- to be able to focus on final reclamation at Coal Creek, but still optimize cash generation at Black Thunder.

And we have a follow-up question from Lucas Pipes from B. Riley Securities.

And it's a bigger picture question. But kind of over the past few years, whenever there was a question on M&A, if I recall correctly, the answer was along the lines of, look, we have Leer South. And whenever we benchmark anything against Leer South, Leer South is just so much better value. And so I wonder -- again, this is bigger picture, but with the Leer South here upon completion, could M&A make more sense in the met coal space? What are your thoughts on that? And then maybe more broadly, it's been feeling pretty quiet on M&A and coal more broadly, and I wondered if you have any updated thoughts on what could maybe evolve over the coming 6 months to a year.

This is Paul. I'll start off, and if Deck and John have anything to add, that would be great. But I think everybody could agree that consolidation ultimately that -- I should say, ultimately, that decreases cost overall is a good idea. And beyond that principle, though, it's difficult to actually get these deals done. At the end of the day, one of the things, I think, as we get Leer South up and running and continue to address our situation in the Powder River Basin and demonstrate that we can, in fact, get this liability down, get this bonding reduced, the world opens up considerably as we continue to head down this path. And it's hard to envision exactly how this plays out because every company, not only in the U.S., but even overseas has -- each of them have their kind of situation like we have with the Powder River Basin. So if the stars aligned, I think it makes sense. But right now, our focus is controlling what we can control, and the best thing we can do overall is the path we've had it down in Powder River Basin. We're going to take care of Coal Creek, and we're going to move on to Black Thunder.

Lucas, this is John Drexler. I think one of the fundamental things you've seen from Arch is its focus also on that Tier 1 low-cost asset base. And I think that's served us well, and it's what we've indicated over time that we're committed to. And I think it lends back to Paul's discussion that we will tread very carefully on any opportunity. We have to evaluate any opportunity through the lens of what's the quality of the reserves and the cost to produce. And so I think that's a significant component of any evaluation. It's typically left a high bar, but that doesn't mean that there aren't opportunities out there as we move forward and that we'll have the opportunity to evaluate.

Lucas, it's Deck. Thanks for jumping on. We know you have a lot of competition. We -- a number of other calls going on. So we appreciate you being on the call. Look, I would simply add that we have said again and again, the point of Leer South, I mean we took a pause in terms of returning cash for a range of reasons, market-driven, et cetera. But also, we took a pause to build a bigger cash-generating machine, and we've done that. And we're really quite comfortable simply operating the assets we're going to have with Leer South, generating a lot of cash and ultimately looking at a strong capital return program as we've had in the past. So that continues to be our primary focus. Again, as you know, and as we've said many times, we will kick every tire and look at what's out there, and maybe there's a diamond in the rough. But as we indicated with Leer South for many years, before we made the decision to move forward Leer South, we are always going to be screening everything against the organic opportunities we had already in-house. We said that for about 3 years, and then sure enough, we've decided that the smart growth project there was Leer South. We moved forward with it. It's really the same holds now. I mean we still have a very significant reserve base. The Leer reserves can accommodate additional investment. We are in absolutely no hurry to move forward with any of that. But that's what we will be screening any opportunities against, and that's a pretty high bar. So we're going to be very careful as we assess any opportunity out in the marketplace and meanwhile are quite comfortable continuing to run the assets we have and returning cash.

I mean at the end of the day, Lucas, our fallback is for the next 20 years effectively, which these 4 mines are set up to do, we're just going to generate cash and return to shareholders.

And we'll take a question from [Paul Gait] from [Azvalor International].

And look, you actually answered my question probably in the last sentence of you applied to the previous. And it was just on the conversation around sort of M&A, and I suppose my question was, how do you compare that? Because, of course, buying back your own stock is exactly the same as an acquisition. And so far as it increases the per share exposure to the reserve base that you already have, and you get to do it at zero premium and zero execution risk. And just making -- and the question was sort of how do you compare that with sort of anything else because I sort of struggle to see something in a, let's say, the same jurisdictional sort of exposure that you guys have in the U.S. And here, I'm thinking about, God forbid, the recent troubles that we've all seen in Mozambique, for example. So on the political risk, combined with the quality, cost position of the reserves and the life that you've got, it's a pretty high bar versus sort of just increasing our exposure to what we already have in Leer.

Yes. Paul, I think you're right. I mean at the end of the day, we don't increase our cost or trade or trade down our quality product. Yes, we're comfortable with where we are, and if that's what we end up doing for the next decade, that's fine.

And there are no further questions in the queue. I would like to turn the conference back over to Paul Lang for any concluding remarks.

I'd like to thank everyone for your interest in Arch and taking the time today to participate in our quarterly call. As we noted earlier, it is a busy day. I guess my final thought is, when we announced the plan to develop Leer South in February of 2019, we had great hopes and expectations for the project. Sitting here just a few months for the longwall start-up, our enthusiasm for the project has not diminished. If anything, it's gotten stronger. John and his team continue to do a great job managing the huge effort and are on the cusp of delivering a major mining project on time and on budget. While this in and of itself is a great accomplishment, I'm more excited about how it will continue to transform Arch for the years to come.

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

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.