Arch Resources, Inc.

Good morning and welcome to the ARCH Resources third quarter 2023 earnings conference 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. Please note this event is being recorded. I would now like to turn the conference over to Dex Sloan, Senior Vice President of Strategy. Please go ahead.

Good morning from St. Louis and thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the investor 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 Gilgham, 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, Dick, 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 third quarter, the ARCH team continued to drive forward with our simple, consistent, and actionable plan for long-term value creation and growth. During the quarter just ended, the ARCH team achieved an adjusted EBITDA of $126.3 million, generated $86.5 million of discretionary cash flow, invested $28.2 million to repurchase nearly 216,000 shares, and finally declared a quarterly cash dividend of $21.6 million, or $1.13 per share. In short, Q3 served to underscore, yet again, the value driving of ARCH's capital return program, which we view as the centerpiece of our value proposition. Since February 2022, we've deployed more than $1.2 billion through the program, including the reduction of the equivalent of 4.3 million shares in the form of common stock and convertible note repurchases, plus the issuance of nearly $662 million in dividends inclusive of the payment to be made to shareholders in December. When combined with phase one of the program during the 2017 through 2019 time period, we've now returned more than $2.1 billion to shareholders. We view the central tenet of the capital return program to be the commitment to effectively return 100 percent of our discretionary cash flow to shareholders, a commitment that is foundational to the program structure. In contrast, we view the program's capital allocation model, which is to say the precise manner in which the capital is returned, to be flexible and dynamic. Indeed, the Board evaluates the capital allocation model on a more or less continual basis, as it endeavors to ensure that capital is returned to shareholders in the most optimal way. Recently, and as a function of that ongoing evaluation process, the Board concluded that an adjustment to the capital allocation model made sense at this time. As a result, the Board decided to ratchet down the relative weighting of dividends while at the same time preserving a meaningful cash balance that can be diverted towards share repurchases during periods of market weakness. It's important to highlight here that the Board continues to view a significant dividend as the integral component of ARCH's long-term capital return strategy. We believe that the return of cash is a clear, direct, an unambiguous way to reward shareholders for their continuing support and confidence. But at present, we believe that directing a larger percentage of our discretionary cash flow to share repurchases makes sense given ARCH's ongoing progress on its key strategic objectives, the company's promising long-term outlook, and the ongoing evolution of the preferences of ARCH's shareholders. Turning now to the market dynamics, we've seen a significant strengthening in global coal markets in recent months, despite continuing weaknesses in the macro environment. Let's start with global cooking coal markets, where high-volume coal, ARCH's principal product, is being assessed at $277 per metric ton off the east coast of the United States, which is a strong price level when compared to historical averages. What's more interesting in our view in that coking coal prices continue to trade at these elevated levels, despite relatively weak steel market dynamics. As an indication of this weakness, global output of hot metal, the end use of the vast majority of Arches coking coal, is down roughly 1% year-to-date, following the decline of nearly 10% in 2022. Counterbalancing that weak demand environment to a large degree are continuing constraints in metallurgical coal supply. Year-to-date, coking coal exports from Australia, the largest supplier of metallurgical coal to seaborne market, are undershooting the already weak 2022 levels by roughly 5 million tons and heading to an over 35 million ton or almost 20% decrease from their high water mark in 2016. Meanwhile, exports for the United States and Canada, the other major sources of high-quality coking coal supply to the seaborne market, remain relatively range-bound despite persistently strong pricing in recent years. As we've noted repeatedly, the global investment in new and existing mine capacity has been extremely muted the last several years due to increasing development costs, mining regulatory pressures, and a host of other ESG-related concerns, and we see no evidence of that changing in the near future. Indeed, we suspect that even a modest improvement and global macroeconomic conditions could drive additional supply tightness well into the future. As for the seaborne thermal coal markets, we see a similar dynamic, with lackluster demand being counterbalanced by years of undersupply. While our thermal assets are effectively sold out at fixed prices for 2023, we expect current thermal market dynamics and pricing levels, should they persist, to support substantial margins on our thermal export volumes in 2024 and beyond. Looking ahead, we remain sharply focused on delivering operational excellence consistently, quarter after quarter and year after year, capitalizing on what we expect to be constructive seaborne coal markets well into the future, maintaining and augmenting our already strong financial position continue to reward shareholders for their support and confidence through our capital return program, and advancing our industry-leading sustainability practices. Through these substantial and ongoing efforts, we're laying a strong and durable foundation for growth and long-term value creation, as well as setting the stage for ongoing improvements in our mid-cycle free cash flow generation. I'll now turn the call over to John Drexler for further discussion of our operational performance in Q3. John?

Thanks, Paul, and good morning, everyone. As Paul just discussed, the ARCH team delivered solid results in $86.5 million in discretionary cash flow, despite constrained advance rates at Lear South during the third quarter. Our core metallurgical segment delivered higher per ton realizations and stronger cash margins on a sequential basis, while maintaining a cost structure that, while elevated relative to expectations, placed us comfortably in the first quartile of U.S. cocaine coal producers. In addition, our thermal segment delivered solid supplemental cash flows well in excess of its capital requirements, despite a roughly break-even performance at West Elk. In short, our talented workforce and high-quality operating portfolio continued to deliver significant value for shareholders, even as we addressed some near-term challenges and laid the foundation for stronger results in the future. I also want to highlight the continuing upward trajectory of the metallurgical portfolio on a year-over-year basis. First, it's worth underscoring that the ARCH team is on track to ship around 1.3 million more tons of cocaine coal in 2023 than we did in 2022, based on the midpoint of our full-year guidance. That's a significant step up, clearly, with substantial upside going forward. Second, I want to highlight the fact that we are guiding to metallurgical segment cash costs of less than $90 per ton at the midpoint of our full year guidance, which would be approximately 5% lower than our average cash costs in 2022. Again, that's a market reduction, particularly in the face of inflationary pressures that continue to push costs higher across the industry. But the most noteworthy aspect of this upward momentum is that we fully expect to drive continued progress on both these key metrics as we finish the year and move into 2024, followed by an even further step change in execution in 2025. The primary driver behind this positive outlook is the expected improvement in operational execution at Lear South. Let me be clear, Lear South is a very good mine today at its current run rate of approximately 3 million tons per year. During its first two years of operation, it has contributed $470 million of segment level EBITDA against an initial capital investment of $400 million. Moreover, it has contributed significantly to the step down that we have achieved in our operating costs from 2022 to 2023 and is on track for what we expect to be incrementally stronger results in 2024. But what is most exciting is its strong potential to become a great mine on the order of Lear in 2025, as we transition into the second Longwall District. Of particular note, we have greatly expanded the drilling program at Lear South to ensure that we have a clearer picture of the geology, which should greatly enhance our ability to optimize the mine plan. And that expanded drilling program is reaffirming what we have long believed, that the seam thickness in District 2 is approximately 20% greater than in District 1. Thicker coal, quite obviously, means that we will be cutting more coal and less rock, which should drive significant improvements in coal yield. At the same time, cutting less rock means less wear and tear on equipment, which should contribute further to the productivity enhancement. Of course, this is mining, and there is always the potential for surprises, both positive and negative, but we remain confident and highly enthusiastic about the outlook for Lear South and its potential to shift into an even higher gear in the coming quarters. Let's now spend a few minutes discussing the thermal segment. As indicated, the Powder River Basin assets performed at a high level once again in Q3 as they managed costs effectively while delivering a solid margin. This strong execution resulted in a substantial contribution to overall cash generation, which in turn counterbalanced and effectively break even performance by West Elk. The good news is that West Elk has now progressed into a new area of the reserve and is back in thicker and higher quality coal. While we are still endeavoring to make up for some of the shipments missed in Q2 and Q3, we expect a much stronger contribution from West Elk in Q4 and throughout the course of 2024. Then, in mid-2025, the West Elk Longwall will transition into the B-Seam, where the coal is markedly thicker and the quality is substantially higher. In short, the outlook for West Elk, which is one of the few remaining high-quality, low-cost Western by two-minute coal mines, is very promising. Now let's discuss our marketing efforts in Q3, starting with our recently signed North American coking coal commitments. Our marketing team was successful in achieving positive outcomes with several North American customers, and we have committed to ship approximately 1.5 million tons of coking coal to these customers in 2024 at an average fixed price of $158 per ton. As we have stated many times in the past, we are happy to place volumes into the North American market when we can secure an appropriate price for the value and use of our high-quality product slate. By the same token, we are well equipped to move 100% of our coking coal volumes into the dramatically larger seaborne market at index pricing when North American pricing dynamics are less favorable. We are pleased with our success in placing North American volumes for delivery in 2024 and equally pleased with the large percentage of our 2024 output that will be directed into the seaborne market. On the thermal side of the house, we are moving quickly towards sold-out status for our Potter River Basin operations in 2024. We have also placed virtually all the West Elk tons for 2024, with approximately one-third of those tons exposed to export pricing. As always, the single greatest achievement of the Arch Team is its ability to continually deliver excellence across a wide range of sustainability metrics. During the first nine months of 2023, Arches subsidiary operations have achieved an aggregate total lost time incident rate of 0.42 per 200,000 employee hours worked, which is approximately five times better than the industry average. At the same time, Arches subsidiaries once again recorded zero environmental violations and zero water quality exceedances during Q3. I am also proud to report that the U.S. Department of Interior recently honored Arches Potter River Basin Operating Subsidiary as the sole recipient of the 2023 Excellence in Coal Mining Good Neighbor Award, the nation's top honor for community engagement. This marked the third time in five years an ARC subsidiary has been so honored. In addition, the National Institute for Occupational Safety and Health recently honored the Lear Mine with the Mine Safety and Health Technology Innovation Award for the coal sector. On behalf of the entire senior management team, I want to express my admiration for, and appreciation to the ARCH workforce for their tremendous efforts in this absolutely critical area of performance. 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. I'll begin with the discussion of cash flows and liquidity. For the third quarter, operating cash flow totaled $131 million, which included a working capital benefit of $16 million. The working capital benefit was lower than anticipated, as shipment timing and the increase in metallurgical prices towards the end of the quarter led to additional growth in accounts receivable. Capital spending for the quarter totaled just over $44 million, and discretionary cash flow was $87 million. We ended the quarter with cash and short-term investments of $214 million, and total liquidity of $337 million, including availability under our credit facilities. Debt at September 30th was $131 million, resulting in net cash of $82 million. While this is clearly a strong financial position, it is worth noting that cash and liquidity were at their lowest level in two years and at the lower end of our targeted range. Looking ahead to the fourth quarter, we expect sequential improvement in operating cash flows. As always, working capital trends will be largely determined by MET pricing, but at this point we would anticipate a benefit in Q4. with a magnitude similar to what we experienced in the third quarter. Capital spending in Q3 was not as high as we had anticipated, with some planned expenditures delayed into the fourth quarter. We now expect fourth quarter CapEx to be roughly in line with third quarter spending. Moving on to our capital structure, we continued to reduce the overall diluted share count over the course of the third quarter, repurchasing nearly 216,000 shares. On a year-to-date basis, share repurchases now total just under 1 million shares at an average purchase price of $124 per share. Combined with the first quarter convertible bond settlement, the total impact of the repurchases represents 7% of the beginning of the year diluted shares outstanding. Just as importantly, we reached a significant milestone in early October, completing the process of simplifying our capital structure. At the beginning of the year, the diluted share count included both the remaining convertible bonds and warrants, which in total comprised more than 1.5 million shares at that time. We repurchased the final convertibles earlier this year, and virtually all of the remaining warrants were exercised by their expiration date in early October. As expected, the warrant activity increased our basic share count, but had no material impact on the diluted count. Moving forward, there will be minimal difference between our basic and diluted share count, and we believe this simplicity has value. As we increase the weighting of share repurchases under our capital return program, long-term shareholders will have a growing claim to our underlying production and earnings, as well as growth in per share dividends over time. Finally, I will remind everyone that the cap call that we purchased at the time of the convertible bond issuance remains outstanding. The intrinsic value of the cap call remains approximately $62 million. an amount that is not reflected in our financial statements or otherwise factored into our fully diluted share count. We have the ability to exercise the cap call on or before its maturity date in the fourth quarter of 2025 and can elect to receive either cash or shares. If we elect to exercise prior to the maturity date, the amount we would receive is the fair value at that time. Before turning the call over for questions, I wanted to make some final comments related to the capital return program. First, as Paul mentioned, the Board has declared a dividend of $1.13 per share based on the third quarter cash flows. The dividend will be paid on December 15th to stockholders of record on November 30th. Paul also mentioned our commitment to returning cash to our shareholders, and thus far this year, we have demonstrated that commitment. Including the dividend announced today, combined dividends, share repurchases, and convertible bond repurchases, Net of proceeds for more on exercises total nearly $343 million year-to-date, which is actually slightly more than our discretionary cash flow over that same time period. With that, we are ready to take questions. Operator, I will turn the call back over to you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Chris Lefemina from Jefferies. Please go ahead.

Hey, guys. Thank you for taking my question. Just a question on the capital return policy, the framework. So now we have 25% targeted for dividends of discretionary cash flow and up to 75% for buybacks. And, Paul, did you say that that 75% the portion of that will be used for buybacks. It sort of depends on where your share price is. So if you think you can accumulate cash on the balance sheet and maybe get an opportunity to buy shares cheaper later, that is what you would do. Or should we expect that entire 75% of discretionary cash flow to be used as buybacks in real time?

Yeah, Chris, thanks. Look, I think as we look at the capital return program, it's been very successful. And as I noted, it's hit a lot of our expectations. And as we look at this change that we just announced, which is changing the relative weighting, what we'd like to do is first and foremost try and be a little more responsive or be responsive to shareholders, plus be a little more opportunistic. So I could see a situation where in strong markets we build a little bit of cash on the balance sheet than when we're in a cyclic business when the market goes down, we'll hit the share repurchases heavily. And, look, I think it's kind of a smart way to do it, but I think the fundamental thing for shareholders is the program really hasn't changed. And when you look back over time, you know, we'll hit those targets of returning cash to shareholders. We're just going to be a little more selective how we do it.

Right. So I guess the, you know, the follow-up question on that is if you're in a position, let's assume that your share price is 20%, 30% higher than where it is today and you're accumulating cash on the balance sheet, Do you worry about that sending a message to the market that your stock is potentially overvalued? I mean, I understand the point about buying it on the weakness, but not buying it on strength, I think. Do we worry about sending a perverse message about kind of what the real value is in the equity? Does that question make sense?

Oh, it makes sense, and it's one we've talked about quite a bit. Look, I think you'll see that we'll probably be in the market at all times, I think what we'll do, though, is we may be heavier at some times and less at others. As I look back to last quarter, we were in the blackout and couldn't take advantage of it, but when the share price was at the bottom end of the spectrum here around 115 or 120 at the start of Q3, it had been nice to be able to jump in at that time. I think what we're looking at is just trying to take advantage of that. Look, I wouldn't be surprised if we build a little cash one quarter and we use it for next, but the intent is, as I said, to ultimately return the cash that we've allocated for share buybacks to share buybacks.

Chris, I would say that capital preservation piece has been part of the formula since the very beginning with always that same view that building a little bit of a war chest you know, it can be useful, but it's probably not a big enough number where you're going to note it, but we certainly understand the question and the concern.

Understood. Thank you. Appreciate that. Good luck, guys. Thank you.

The next question comes from Kasia Jancic of BMO Capital Market. Please go ahead.

Hi. Thank you for taking my questions. Maybe on the Lear South, I think you mentioned that you expect production to improve next year. Can you talk a little bit more about what the actual production could be at Lear South?

Yeah, so as we reported with Lear South and some of the challenges we've experienced here most recently in the panel that we began mining in mid-July, panel five, we've been disappointed with some of the production that we've had. It's been driven by some of the geologic challenges, the thinning of the coal seam that we saw that was not expected. As we transition out of that panel, which we expect to occur later in this quarter, we'll be heading into other panels here in the remainder of District 1 that we think get us back into the type of geology we saw in Panels 3 and 4, where we saw better production levels to the tune that would put us on a pace of around 3 million tons on an annual basis. As we look at, we transition into 2024, we're comfortable kind of with how we're going to move forward. Where we're really excited, though, is the opportunity as we finish mining in District 2 and head into District, or I'm sorry, finish mining in District 1, head into District 2, we see a meaningful improvement in the coal seam height. We're substantiating that with the drilling. We see a 20% improvement, and as a result, we would expect volumes to approach those that we would see with Lear at four, four plus million tons on an annual basis.

And, Connie, just as a reminder, in Q1 and Q2, we produced more than 800,000 tons per quarter at Lear South, which is very much on that track for sort of that three million ton run rate. So, you know, we expect that to continue to be back in that sort of range throughout 2024. You know, for Q4, look, as John just said, we're still in panel five and we'll be in it for about half of this quarter. And then we transitioned to panel six. So, you know, somewhere between, you know, the 520,000 tons we produced in Q3 and that more like 800,000 ton run rate in Q4 is probably what to expect. Again, since we're in panel three, you know, panel, sorry, panel five for part of that, for part of that, of the quarter. And then, you know, as John said, I think just to reiterate that Look, at 3 million tons per year, Lear South is a really good mine. It's a low-cost mine. It's a highly productive mine. It's just not where it's going to be and where we expect it to be in 2025.

And what should the cost be at, let's say, 3 million tons per year?

You know, as we look at our overall MET segment, you know, what we've guided to here for 2023, you know, at the midpoint puts us at 89.50%. You know, as we move into 2024 and expect improvement at Lear South, I think, you know, we hope to be able to maintain that cost structure, if not improve on it with some improvement in volumes as we go forward. You know, Lear South clearly, even at a 3 million ton a year pace, is in the first quartile of the cost structure. And so it's a good mine, and it's going to continue to work to get to that great status as we go forward in the portfolio.

Okay, and then maybe shifting gears to PRB, I think you mentioned you're almost sold out for next year. Can you talk a bit about what volume that looks and what pricing is?

Yeah, so as you look at our Potta River Basin operations, you know, we're in that 60-plus million ton kind of volume between Black Thunder and Coal Creek as we wrap up 2023. As we step into 2024, we've been real pleased with the book that we've built, the pricing associated with that book. you know, as being responsive to what we're seeing with the market, there may be a modest reduction, but it would be a small reduction from the levels that we see here currently in 2023 from a shipment level perspective. We haven't given guidance. We're still working through the budget on that front, but wouldn't be that different, significantly different from what we're seeing here in 2023.

And, Cody, as we've discussed, look, our expectation is that the market overall probably steps down at a pace of something like 10% per year. We're very comfortable. If that's, you know, if that's what the market requires from us, we're very comfortable at stepping down to that same sort of level. We'll still generate, you know, significant cash from, you know, the PRV assets. We'll still maintain a good solid margin, you know, the PRV assets. Now, you know, if in fact supply changes in some way, and then we're prepared to maintain more at that 60 million ton level. But again, very much prepared for, you know, a gradual reduction over time if, in fact, you know, the market continues to, you know, to decline at that kind of pace.

Okay. Thank you. I'll hop in. Thank you.

Thank you, Katia.

The next question comes from Nathan Martin from Benchmark. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. This may be starting on the Coke and Coal side. Based on my math, it looks like 4Q shipments, you know, flattish, kind of gets you to the midpoint of your four-year guidance. And what could possibly drive you to the top or low end of that range? Is it Lear South performance? Is it logistics? It would just be great to get your thoughts there. And then, you know, a lot of talk about improvements at Lear South, kind of that step change in 25. But how should we think about the potential for Coke and Coal shipment growth in 24 before we do move into that second long-haul district? Thanks.

Yeah, good questions. I think as we look to the remainder of the year, it's a combination of production, logistics. As you guys know, all of that factors into where ultimately that volume is going to go and why we typically have that range that's out there. But we're comfortable with the guidance range that we have out there and our ability to achieve it. As you step into next year, with our expectation that you're going to see you know, Lear South kind of in that three plus million ton a year run rate. You've got, you know, Lear that should be comfortably above four. You've got, you know, the two other continuous miner operations, Beckley and Mount Laurel executing well at a million tons a year on an annual basis. You know, we have not provided guidance yet. We're deep in the budget process. But I think, you know, we should be comfortably above, you know, nine million tons at the midpoint as we look into 24. And then, you know, with ongoing growth as we move further into 25 as we get into District 2 with Lear South.

Appreciate that, John. And then maybe also a bit of a modeling question on the thermal side for the fourth quarter. I think you guys previously said roughly 60 million tons or so of PRV sales. If I assume West Elk is 3.5 to 4, that gets me close to 64 million for the full year, but that would imply a pretty big step down in thermal shipments in the fourth quarter. Am I thinking about that correctly? Am I missing something? Is there any update there?

So I guess, you know, the midpoint of the guidance on the thermal side that we're showing is 65 million tons. You know, you're at, call it 60, to 63 million tons in the Potter River Basin. You're probably at a West Elk at that number that you described, around 3 million, 3 million plus tons. And then you also have to factor in, at least on the thermal side, the mids that we show in the guidance table, which I think we've got 700,000 tons. So, you know, approaching a million tons on that basis is kind of where we're expecting shipments to be.

You know, Nate, one of the things that's always a little bit confusing, and I think if you look back, you've seen the same thing the last couple quarters. We've got it below our sales on the thermal side. And that's just the reality of what we were seeing earlier in the year where we thought, you know, customers are going to ask for rollover or pushback tons. And, you know, as I say, we're quite happy to accommodate them as long as we achieve the same value or a little bit more. And That's what we're anticipating with some of that guidance.

Got it. Appreciate that, guys. And then maybe just curious, John, you were talking about West Elk. Stick with that for a second. Sounded like production in 2025 could take another step up when you hit thicker, higher quality coal. What does that production level look like versus maybe a more normal run rate today?

Yeah, so, you know, as we've worked through the challenges that we had in the sunset district panels at West Elk, you know, we've transitioned out of those. We've moved to another area of the reserve. The long wall has gotten up and going, and things are going well there. You know, we've got to manage a few things. We've got some tons that we still need to ship from volumes that we missed in the first two quarters, and we'll continue to manage that. But As we step into next year at West Elk, our expectation is we should be around that 4 million ton a year level. And then as we step into the B theme in 2025, there's further opportunity with that better quality coal, more consistency in the thickness. to ramp it back up to levels that we've seen before at West Elk, where you're approaching 4.5, 5 million tons on an annual basis. West Elk, we think, is a great opportunity to access the export market. The coal is well-received. It's a great quality coal into the international markets. You know, right now as we look at 24, about a third of the volume that we have is exposed to those markets, and we're excited where West Elk is getting itself to as it moves forward.

The B team is, you know, as John said, appreciably better quality. You know, you're looking at a step up in BTUs of 400 to 500 BTUs per pound. So, you know, significant step up and progress. appreciably better than the Newcastle sort of quality. So, you know, that's another aspect of the story. Not only is the coal thicker, and as John said, gives us that opportunity to move back to sort of 5 million tons, potentially even above that at West Elk, but also just that higher quality is going to make it that much more attractive in the seaborne market. And it's already, you know, a really good Newcastle lookalike, in fact, a little better than Newcastle.

You know, Nate, I think, you know, what's lost in all this is, We really view West Elk as a long-term asset for the company. Its access to the seaborne market, particularly what's going into Asia based on Newcastle pricing, is really pretty exciting. The B-seam, we've got a lot of experience buying the B-seam. When we get down to it, as Dex said, the quality goes up considerably. It's a very good product. It gives a lot of advantage, particularly the Japanese markets.

Great color there, guys. And if I may, just one more. I don't want to leave Matt out. What's kind of driving the CapEx increase, about $10 million at the midpoint? Matt, you mentioned some CapEx got carried in the fourth quarter, but is there anything particular there to note?

Yeah, you know, a lot of that, Nate, really is just timing. And, you know, I'll let John chime in if he's got anything to add. A lot of it is just timing of when we receive things. Obviously, with some of the supply chain lags that we've seen, trying to predict when those things are going to arrive certainly is not as easy as it once was. The other thing I would mention is we are bringing on some additional equipment as we look into next year, trying to find opportunities to expand production where it makes sense as we go into the 2024 timeframe.

I think Matt said it well. You can get a little lumpy here when you've got some lead time items that are 18, 24 months out, trying to predict exactly when they're going to come in, you know, is difficult. So we're glad to get some of the stuff that we got. We'll get it in place. You know, I think we've discussed in the past, you know, as we move forward, and we're not providing specific guidance yet, but we would expect future years of CAPEX to be, you know, in similar ranges to what we've seen in the last couple of years as well. So, you know, we feel good about kind of how we're managing all that and moving forward.

Very helpful, guys. Appreciate the time. Best of luck in the fourth quarter. Appreciate it, Nate. Thanks, Nate.

The next question comes from Michael Dudas of Vertical Research Partners. Please go ahead.

Morning, gentlemen. Hey, Michael.

Hey, Mike.

So, Paul, I think it's very appropriate to be cautious on outlook for U.S. thermal consumption regarding your PRB assets, but maybe you can remind us or Over the next, how do you look at the mine plans over the next five to 10 years, given what maybe you would have thought when you instituted your reclamation and your defeasement plan relative to what consumption's been, what your utility customers are saying? I mean, there's been, even though everybody talks about net retirements and coal, there's been some plants that need to stay on for grid and other type reasons. Is there a chance that maybe you can accelerate some of those future cash flows into some of the nearer term years, given where your plan is right now, maybe what your customers are thinking, recognizing that you want to be cautious on expectations on thermal demand?

Michael, I'll start out here. I'm sure a few others will weigh in. But, you know, real proud of the team in the Powder River Basin and the way they've managed – in that declining market environment. And as you know, you don't have to go back that far, a decade, decade plus, where we were mining out of the Potta River Basin well in excess of 100 million tons on an annual basis. So the team has done an incredible job modifying the mine plans, effectively managing production and still maintaining a very healthy margin And managing the cost structure, which, as you know, is difficult in our business as volumes are declining. You know, it's hard to predict where things are going to go, but we continue to see that trend downward. The team's very focused on being in that position to maintain those costs and maintain those margins to generate cash. You know, all through that cycle, we have done an outstanding job of managing the reclamation footprint. We've been shrinking the profile of the operations. You can look at Coal Creek where, you know, we still have some modest volume where it makes economic sense to do so, yet we've roughly closed, you know, 80 to 90 percent of that operation and, quite frankly, essentially fully reclaimed it. So, you know, real proud of the team there. When opportunities present themselves in the market, the team has responded very well to optimize the production with the fleet of equipment that we've kind of essentially shrunk down to. And we would expect that there may be those types of opportunities as we go forward, and we'll fully be prepared to execute on those as we go forward.

You know, Mike, as I look at the PRV, I still have a relative positive view. I think we're set up well. I think the key to success in the PRB is being very flexible. We've done a very good job of cutting our costs as we've dropped production and kept the margins in a fairly good line. Going forward, the key to future success is going to be the same. Watching costs and being very careful about the capital we put in. But, you know, I feel pretty good. We've got pretty good clarity the next five years. And, you know, at the end of the day, the Thermal Mine Reclamation Fund has created just a real easy option for us out there. And, you know, I think we're set up to play it well. The team out there has done a great job. And, you know, I still have a little bit of optimism for the operation.

Yeah, Mike, it's Dak. And, look, you know, the fact is we think that – In the end result, the domestic market is going to continue to decline, but we are absolutely prepared. If we get a period of time where we get a bit of a plateau and it stabilizes, we're ready for that. But the fact is that the coal fleet does continue to age. Natural gas prices right now remain low. We're still seeing those systematic, steady sort of coal plant closures each year, but there's still a significant market. So we are taking advantage of that. As Paul said, we certainly believe we can for the next five years plus. But in the end, we still think we've prepared appropriately for, you know, right now what you'd have to say is, you know, continuing declines, you know, over the next decade.

Those are great, great observations. I appreciate that. And just my quick follow-up, Paul, or for the group, you know, met coal prices, your high-volume is risen quite nicely here the last several weeks in the midst of maybe, you know, some, you know, steel production down or what have you. Do you get the sense from your customer base of how you're looking at your export shipments next year that there's some reality to that, that there's reason for that, or is it a short-term blip? Is there a sense of maybe some better momentum because of the limited supply that we've seen, or is there the expectation that some more pig iron might come into the marketplace next year requiring some of the coals?

Yeah, I'll let John follow up with the more direct contact with customers, but You know, I think it's all of the above that you mentioned. There is no question that the current market is under, you know, the supply is very tight. The underinvestment in the coal sector is really rare in its head. As I noted in my comments, you know, hot steel production is down 1% this year. It was down 10% last year. But at the same time, coal prices have held up. You know, seven, eight, nine, ten years ago, this would have been a big dip in coal prices. I think there is also a little bit of hope on the macro side, but we're not counting on it. These are extremely good prices at current levels. $2.77 makes for a very good net back for us, particularly with our cost structure. I think if the customers in the North American side, what you saw us do is what we've said for the last couple of years. We're continuing to willow down our North American exposure Last year it was at about 20%. It's looking like this year it's going to be about 15%. And, look, there's a lot of value to shipping coal in North America as far as logistics, but at the discounts that were being requested and those that we understand were settled, we're quite happy with where we ended up.

So, Michael, I agree 100% with Paul on one of the biggest drivers here is just the challenges you see across supply areas. Both near term, you know, as you just look at so many of the announcements that we've seen here even recently and the challenges that the industry faces, quite frankly, around the world. And then longer term, you know, and how that's going to continue to play out for something for steel that clearly we've got our views that there's going to be comfortable demand for decades to come. So we feel real good about that. As we deal with our customers, I think the one thing I'll add is very proud of our marketing team and the efforts and success that they've had with our customers in the international market, especially new markets for us such as Asia, in getting the product there, getting the qualities of the product realized, the benefits, and that puts us in a position going forward that that value and use of our product in those markets, you know, puts us into those blends and then allows us to continue that as we continue to move forward as well. So we feel good with where things are going.

Mike, it's Dak. And look, I would add that in mid-July, we actually saw HVA prices drift down to $200 or so. At that level, you started to see rationalization, which certainly suggests that given the marginal cost of production, that there is support you know, at some level around, you know, that $200 mark. Now, that's not perfect, and, you know, you can dip below that level for some period of time, but it certainly feels like there's support at that level. And then, in fact, you know, since that time, obviously, we've jumped a good bit, and we're at $277. Interestingly, PLV, you know, premium lowball out of Australia and off the Queensland coast is more than $70 higher than that. So, Again, not to suggest that 277 isn't a great number. It is. We don't need a higher number than that. But right now, what has typically been a $7 spread between PLV and HVA over the past seven years is a $70 spread. So you can see that there's still that sort of pressure on pricing, as Paul said, supply sort of highly constrained. And you know, we think there is, you know, the opportunity at a minimum to close that differential. Now, how that gets closed remains to be seen. And also just a reminder that look over the, you know, since 2010, the average price, you know, in the seaborne market has been $238. So again, I think the world has changed a good bit because of the supply constraints, the pressures we continue to see in the various jurisdictions around ESG and regulatory constraints, the underinvestment. So we're pretty constructive on the outlook sort of longer term.

Well done, guys. Thank you. Thank you.

As a reminder, if you have a question, please press star 1. The next question comes from Lucas Pipes of B Reilly. Please go ahead.

Thank you very much, operator. Good morning, everyone. My first question is on DTA. One of your, well, your peer at the terminal mentioned that there's a need for long-range capital improvement And I wondered if you could maybe speak to, one, what sort of capital improvement projects may be necessary and what cost may be necessary. And then, two, just kind of more broadly, how strategic is DTA to you? I would appreciate your perspective on that. Thank you.

Lucas, I'll start out here. Just as a reminder, DTA, we have a 35% ownership interest in that asset. It is a strategic asset for us, but it has more than sufficient capacity for us to meet our needs. Right now, we're using about 3 million tons of that capacity. That leaves us probably with an excess of 2 million tons. you know, DTA is an asset like all assets that needs to have a capital evaluation. We are working with DTA to evaluate, um, those capital needs, uh, where necessary, where economic, you know, we'll make sure we're committing, uh, to that capital. Um, you know, where we've got a unique opportunity is with our excess capacity, you know, kind of given where we see, you know, the market for that throughput, um, you know, we can recover a lot of the additional capital that, uh, may be required as we go forward with the throughput capacity that goes through there. So, you know, DTA has been a great asset. It continues to be a great asset for us. We expect that it will move as we move forward. And, you know, I think we feel good in a lot of different ways we can manage the needs of that capital as we go forward.

You know, the other thing I'd add to what John said is that, look, it's a great relationship with our partners, Doc, We clearly have a little less pressure on us than them as far as throughput. And, you know, as we've given guidance, these capital projects that they're talking about are not a surprise. You know, we've baked them in our numbers, and we've talked about CapEx over the years. And we also think we may have the ability to offset a large degree of it with our excess capacity and going out to a third party. So, look, I think – It's all well and good, but it's really not a surprise to us and really not an issue to us.

As we look at it, the annual requirement for us, we expect to be relatively modest and, as John indicated, with that spare capacity to generate additional cash flows associated with third-party throughput, really view it as very manageable. It's a good asset. We want to continue to invest in it. We think it's going to be an important part of the of our overall logistics chain going forward, but again, highly manageable.

And is your excess capacity there currently leased to a third party, or is it just, quote, idle at the moment?

We just recently offered out some spare capacity. Some of that capacity, we had been really husbanding that for the last few years, but have started that process and likely will continue to do so. We can expand on it meaningfully, but have just taken the first sort of step on that front and really focused on thermal throughput. To this point, there's been demand for it on the thermal side, which is which is a good fit for us, would rather move those volumes as thermal.

That's helpful. Thank you. Then going back to your coke and coal volume outlook, and the way I think about mine output typically is kind of on a normal distribution, on a bell-shaped curve or so, and I wouldn't expect you to provide a bell-shaped curve here on a call. But I wondered if you could maybe speak to the range of outcomes for your four coking coal mines. Again, no need to be too scientific, but one standard deviation for a mine, what does that look like? If you could just provide some ranges for your coking coal portfolio, I think that would be really helpful. Thank you.

Yeah, Lucas, I mean, I think, you know, we may not get into one standard deviation discussion here, but, I mean, just as a general, you know, kind of view, we've got two powerhouse longwall operations, Lear and Lear South. You know, between the two of them, you know, I think in broad scale, you would expect from high vol A production the opportunity of 8 million tons, right? You may have, you know, in certain periods where one mine is a little less. You may have other periods where another mine – is a little more, and then as we've indicated with our two continuous miner operations, Beckley and Mount Laurel, they're each kind of built to be around that million-ton-a-year pace. We will always look to optimize the volumes and, quite frankly, have had all kinds of success in wringing out additional volumes across the portfolio through efficiency projects, what have you, But kind of in the most simplistic view, that's how I would kind of view it. That kind of gets you right around the 10 million tons there.

And, you know, Lucas, as we think about guiding for next year, again, we're not there yet. We're going through the budget process. You know, Lear has been in that 4 million ton per year range in cooking coal. it is in very thick coal next year. So there is potentially upside there. And again, we'll take that into consideration as we think about guidance and as we provide guidance going forward that we feel very confident in. And if Lear South is at that 3 million ton range, which is what we're kind of sort of indicating we expect in 2024, both Beckley and Mount Laurel have been more in the 1-1 range. So there's certainly upside to that idea of 9 million tons for next year. But you know, we want to be careful and make sure that we're guiding to very conservative numbers and, you know, under promise and over deliver as we go forward. But that's, you know, maybe gives you a little color.

I appreciate that. Thank you. Um, then, uh, on, on the domestic, um, on the domestic side, uh, North American medical contracts for, for 2024, um, The quality of that coal, how would you describe that? Was that overweight, or not oral, or was that mostly high-volume? Thank you very much for your question.

Yeah, Lucas, yeah, look, we were real pleased with the opportunity we had with the North American markets, and I would say that the products that we sold, the 1.5 million tons, does represent the full suite of our product, the high-volume products. low vol, high vol B, obviously the vast majority or the majority of that, I should say, is high vol A weighted and likely for modeling purposes you can use our typical splits that we have amongst the various volumes. But, yeah, we're real pleased with where we got and the outcomes that we achieved. Equally excited about the volume that we have exposed to the export markets as we step into 24, as Paul indicated.

Okay. Thank you. Then last question for now from me. On the M&A side, how would you describe your level of interest? Are you looking? There are some assets out there that are for sale. There are some public companies that trade at very attractive valuations. How do you think about M&A in this environment? Thank you.

You know, Lucas, I'll answer it probably the way we've answered it every time, which was we've looked at everything and we will continue to look at anything that's out there, particularly anything that comes up. You know, anything that can bring lower costs and greater value, we're all ears. But at the same time, we look at ourselves, particularly where we're currently at. Our best investment right now is in our own stock. And that's what our focus is. I will assure you, and I would expect the shareholders would expect us to also, is that we'll look at everything and we'll question ourselves and try to figure out if it's the right move. We'll always hold it, though, against what our own option is, against purchasing our own stock.

Makes sense. All right. Well, I appreciate it. I'll continue to best of luck.

Thank you, Lucas.

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

I want to thank you again for your interest in ARCH. As I noted earlier, we remain sharply focused on delivering operational excellence. We're in the process of making significant progress with our metallurgical portfolio and expect a nearly 20% increase in cocaine coal volume in 2023. versus 2022. I think just as importantly, we expect that momentum to continue with an anticipated step up in 2024 and yet another change in 2025. In short, we remain optimistic about ARCH's long-term outlook as well as the company's potential to reward shareholders in a substantial way through our capital return program. With that, operator, we'll conclude the call and we look forward to reporting to the group in February. Stay safe and healthy, everyone.

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