Arch Resources, Inc.

Good morning, and welcome to the Arch Resources, Inc. second quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Dex Sloan. 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 from 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 the 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 president, and Matt Gilgium, our CFO. After our formal remarks, we'll be happy to take questions. With that, I'll now turn the call over to Paul.

Thanks, Nick, and good morning, everyone. We appreciate your interest in ARCH, and I'm glad you could join us on the call this morning. I'm pleased to report, as I've heard in the second quarter, ARCH continues to drive forward with our clear and consistent plan for long-term value creation growth. Through the quarter of this end, the team achieved adjusted EBITDA of $60 million, set a quarterly production record in our core metallurgical segment, while driving ahead with the development of a second longwall district in the first half, where we expect substantially more favorable conditions. Shipped 2 million tons of cocaine coal, despite significant logistical challenges stemming from the tragic collapse of the Francis Scott Key Bridge. Paid down an incremental $13 million in debt, giving us a net cash positive position of $46 billion, and worked to right-size the operating activities in our thermal segment, setting the stage for cash generation at these operations in the back last year. In addition, in a particular note, we deployed incremental $19.6 billion in our capital return program during the second quarter, even in the face of the just-discussed logistical challenges and a subdued near-term market environment. We returned this capital through the repurchase of an additional 94,000 shares in common stock with an investment of $15 million and a declaration of a quarterly cash dividend of $0.25 per share, payable in September, with a total projected payment of $4.6 million to shareholders. In aggregate, we've now deployed well over $1.3 billion in our capital return program since its relaunch, in February 2022, which we hope you'll agree represents a substantial amount of value generation in a relatively brief period of time. This total includes $732 million, $38.78 per share in dividend payments, and the repurchase of $615 million in common stock, as well as the repurchase and retirement of unconvertible notes. It's worth pointing out that, including the Q2 repurchases, we've now reduced our diluted share count by well over 3.5 million shares, or more than 16%, when compared to the level of May 2022. Looking ahead, we remain sharply focused on driving that share count down even further. As you know, a central tenet of our value proposition is to return 100% of the company's discretionary cash flow to shareholders, with a strong emphasis on share repurchases. We believe that this framework has created substantial value for our shareholders in the past, and we fully expect it to continue to do so in the future. Let's now switch to some brief commentary on the steel and coke and coal markets before turning the call over to John for additional color on our operating performance during Q2. As you're no doubt aware, seaborne coke and coal demand remains tepid due principally to our estimation to a challenging global macroeconomic environment related in part to weak infrastructure and property market spending in China. The predictable but nonetheless consequential effects of the monsoon season in India and the slow climb out from multiple quarters of economic stagnation in Europe. These factors have coalesced to weigh on global steel demand as evidenced by the recent erosion of steel prices. Hot coal prices in major steel producing regions are down approximately 50% versus the peak seen in 2021. As part of this, European steel markets are under pressure, with the average capacity factor of blast furnaces standing around 65%, according to our estimates. This steel market weakness has had the predictable knock-on effect on global cooking coal markets. Even with these pressures, however, customer interest in Archer's high-quality cooking coal products particularly in Asia, continues to thrive. Asian steelmakers appear increasingly focused on identifying strong, consistent, and long-lived sources for their long-term cooking coal requirements, given their own expansion plans, in order to buffer themselves from a lack of new investment in the cooking coal supply space. Given the number of customer inquiries over the last couple of months, we expect to have ample opportunity to continue to build on our global customer base, with a strong Asian emphasis that represents a good strategic fit with our high-quality assets. Meanwhile, the cold and cold supply side of the story remains muted, reflecting degradation and depletion of the resource base and major supply regions. Only modest investment in new and replacement mine capacity. Recent mine outages that have removed 2% to 3% of supply from the global seaboard market and an increasingly fragile supply chain. Moreover, we believe that the current cooking coal prices are below the marginal cost of production on a global basis. We at Chief Acura will take a predictable toll on production models over time, assuming such prices persist. As a result of these various factors, we expect seaborne coal and coal markets to balance quickly once the global economy begins to strain and global steel demand starts to reassert itself. Looking ahead, we remain sharply focused on driving continuous improvement and execution across our entire operating platform in support of strong, value-generating capital returns for our stockholders, even in today's soft market environment. With our cost-competitive Coca-Cola portfolio, high-quality products, and rapidly expanding presence in Asian markets, and recognized sustainability leadership, we believe we are exceptionally well-positioned to capitalize as global steel demand stabilizes and then returns to its anticipated upward growth. With that, I'll turn the call over to John for further discussion on our operational performance in Q2. John?

Thanks, Paul, and good morning, everyone. As Paul just discussed, the ARCH team navigated through the extreme disruptions to the logistics chain in an effective manner in Q2, shipping more than 2 million tons of coking coal, even as we were forced to direct virtually all our seaborne volumes to an already busy DTA during April and May. I want to commend the ARCH team for that excellent work, and I also want to extend our appreciation to our rail and other logistics providers for their great support during that challenging time. I would also point out that we had two additional vessels, representing more than 160,000 times, that just slipped into Q3 due to the extremely busy June shipping schedule at both East Coast terminals. While we were disappointed that those vessels fell out of Q2, those early July loadings provide a jumpstart to the year's back half when we anticipate moving substantially more bombs. Given the strong performance of the overall logistics chain in the face of Q2's difficulties, as well as our positive operating momentum, we are confident we can achieve the step-up necessary to deliver on our 20-year sales guidance of between 8.6 and 9 million tons. Bolstering that confidence further is our continuing operational progress. As Paul indicated, the metallurgical team delivered a record performance during Q2, producing more than 2.5 million tons in total for the first time. Just as importantly, Lear South progressed into the final panel in District 1 in early July and is achieving strong advance rates there even as the mine prepares for the transition to District 2 in late September or early October. As you will recall, our data shows that the coal seam is 15% to 20% thicker in District 2, and that the overall mining profile is more advantageous, which should drive a step up in production levels in future periods. Now let's spend a few minutes on the metallurgical segment's operating margins, which were compressed in Q2 due to the challenging logistical environment. In total, logistical disruptions had an estimated impact of greater than $12 million in Q2, related to vessel demurrage, re-timed vessel movements, increased rail fees, and mid-streaming activities, which in aggregate, acted to lower our average sale netback appreciation. As an aside, it may also be worth noting that we had a higher than ratable percentage of high vol B shipments during Q2, which also acted to dampen the average netback. The metallurgical segment's cash costs were also pressured due to the difficult logistical environment during Q2, as we directed every possible loading spot to coking coolers. As a result, we deferred the shipment of nearly 150,000 tons of thermal byproduct during the quarter. Given that the thermal byproduct inventory value is immaterial, the reduced shipping schedule for this product served to increase the metallurgical segment's unit cost by an estimated $6 per ton. We expect these unit costs to reverse in the year secondhand. We are also expecting an appreciably stronger performance from the thermal segment in the years back end. That positive outlook is driven principally by the expectation of an improving contribution from our Cuddle River Basin operations in Q3 and Q4. As you will recall, we entered 2024 at an annual production rate of close to 55 million tons. Based on the expectation that we would ship 50 million tons of already submitted volumes and an incremental 5 million tons or so related to intra-year sales. Unfortunately, muted power demand coupled with depressed natural gas prices quelled virtually all new buying activity while spurring an influx of requests for the program. As a result, we spent the first six months of the year realigning operating activities and stripping rates with a much reduced shipping forecast. On a more positive note, the excess stripping that we completed during Q1 and Q2 resulted in a significant build in pit inventory in the year's first half of our PRB month. As most of you are aware, pit inventory is full and is still sitting in the pit post the removal of the overburden, a step that constitutes the lion's share of the production cost. Consequently, these tons, when they do ship, will have a positive impact on our per ton cash margins since most of the operating cost has already been incurred. We are currently sitting on more than 8 million tons of pit inventory in Wyoming, which is twice as much as we would typically get. During the year's back half, we expect shipments to exceed production, which will allow us to monetize some of this pit inventory value. Meanwhile, West Delphi Ginn operated efficiently and generated solid adjusted EBITDA, even as it continued to ship under several legacy contracts that dampened netbacks. More importantly, the longer-term outlook at West Elk remains compelling. During Q2, the marketing team continued to build out West Elk's book of industrial business in the outer years at fixed prices in excess of $70 per ton, $25 to $35 per ton above the legacy contracts that are expiring. At the same time, the mine continued to drive ahead with the development of the BC, where the coal is significantly thicker, the quality is markedly better, and the first-time cash costs should be substantially lower. Those factors, in aggregate, should translate into a step change in profitability for West Elk across a wide range of market conditions once the long haul transitions to the B-seam in mid-2025. Before passing the baton to Matt, let's spend a few minutes discussing the team's exemplary achievements in the sustainability arena. As you know, we firmly believe that a culture of safety and environmental stewardship is essential for long-term success in our business. During the first half of 2024, Arches subsidiary operations achieved an aggregate total lost time incident rate of 0.47 incidents for 200,000 employee hours worth, or more than four times better than the industry average. On the environmental front, the company recorded zero environmental violations under SMACRA as a result, as well as zero water quality exceedances across all our subsidiary operations. Further highlighting the team's excellent work, the state of Colorado recognized West Delphi Q2 with an Outstanding Safety Award, an Excellence in Innovative Safety Technology Award, and an Excellence in Mining Reclamation Award. And the state of Wyoming honored Coal Creek with a Surface Mine Safety Award. On behalf of the board and the senior management team, I want to once again commend the entire workforce for their deep commitment to excellence in these essential areas of performance. With that, I will now turn the call over to Matt for some additional comment on our financial results.

Matt? Thanks, John, and good morning, everyone. Let's begin with a discussion of second quarter cash flows and liquidity. Operating cash flow totaled $59 million in Q2, which was negatively impacted by a working capital increase of $15 million. In April, we had discussed the likelihood of a significant working capital increase in the quarter in light of the tragic bridge collapse in Baltimore. and the impact it would have on shipment time. But the ability to quickly pivot to alternative shipping methods resulted in a much smaller than anticipated bill. Capital spending for the quarter totaled $47 million, and discretionary cash flow was $12 million. The balance sheet, we ended June with cash and short-term investments of $279 million. We reduced debt levels by $13 million during the quarter, ending June with total debt of $133 million, and liquidity of $366 million. Turning now to the capital return program, as Paul detailed, we remained active in the program in the second quarter, despite the challenging logistical and soft market environment. While cash flows for the quarter did not support a variable dividend, our board has declared a fixed dividend of $0.25 per share, available on September 13th to stockholders of record on August 30th. I'll discuss our guidance in more detail shortly, but with the expectation of increased volumes and segments in the back half of the year, we would anticipate cash flows to support more significant returns in Q3 and Q4, and we would expect sharing purchases to be the primary vehicle for those returns. Next, I'm going to spend a few minutes expanding on the severance tax rebate that we received from the state of West Virginia in the quarter. Rebate stems from visionary legislation put into place by the state to encourage coal-related investment and employment. As you may recall, the incentives that the state created in that legislation were an important consideration in our ultimate decision to move forward with the $400 million build-out of Lear South. We're now pleased to report that the legislation has proved highly beneficial to both parties. On the art side of the equation, we have a new world-class cooking coal mine that we expect to remain centerpiece of our operations for decades. For the state, that investment has translated into 600 well-paying direct jobs, a significantly higher number of indirect jobs, and substantial incremental severance tax receipts, as well as a host of other state and local tax revenues. The rebate earned in the second quarter was the result of a long process required under the law, not only documenting the investments that were made, but also demonstrating the benefits to the state from increases in coal production, Looking ahead, we expect to qualify for additional rebates in the future, although the extent and timing of those potential future recoveries will be driven by a host of factors, including market dynamics. Finally, I'll conclude my remarks with some comments on our guidance for the rest of the year. In the meta-original segment, we have maintained our four-year guidance for cooking both sales volumes and cash funds. While volumes for the first half of the year were less than rattle, particularly in April, Shipments in May and June were at an annual pace of more than 9 million tons. For cash costs, our guidance excludes the Q2 benefit and any potential future incremental benefits of a severance tax rebate, while anticipating a meaningful reduction in the thermal byproduct inventory by year-end. Additionally, we have adjusted several other items in line with the weaker operating results thus far this year. Capital spending is now expected to be in the range of $155 million to $165 million, a reduction of $10 million at the midpoint. Total SG&A guidance is now approximately $92 million at the midpoint, including both cash and non-cash expense, representing a reduction of $5 million. will carry federal NOL carry forward, totaling approximately $250 million in 2025. With that, we are ready to take questions. Operator, I'll turn the call back over to you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Lucas Pipes from B. Reilly. Please go ahead.

Thank you very much, operator. Good morning, everyone. My first question is kind of on the margin outlook for the Metco business. There were a few moving pieces on the cost side in Q2, and I wondered if you could maybe speak to Q3. I assume that, you know, there's a $6 benefit from from the thermal byproduct, but then there's not the severance rebate, and I would anticipate much higher volume. And then on the realization front, you spoke to a somewhat higher contribution from Hyval-B in Q2, so wondering how that, as well as maybe lower rail rates, might impact realization. So broadly, kind of coke and coal margins in Q3 versus Q2. Thank you very much.

Hey, Luke. It's John Drexler. I'll start off here. And I think you hit on a couple of the key themes. Obviously, the second quarter was impacted significantly with what happened at the Port of Baltimore and the bridge collapse. And, you know, as a reminder, you know, 50% of our metallurgical exports go under that bridge on an annual basis. So the logistics team did a fantastic job of managing that. You know, we talked through the impact of the reduced margins there. You know, there was a component of us having to redirect a lot of rail transportation. It was a longer transport to our DTA facility as a result, so there's rail surcharge impacts, but the team did a fantastic job of working to get that cold flow redirected. We got creative as well. We talked a little bit about it on the first quarter call as well, where we had an opportunity to midstream, so when there was an opportunity to load some barges and get them through some lower draft openings of that bridge early in the recovery process. We took advantage of that and loaded several vessels that way as well. Once again, though, some incremental charges coming through there also. You know, again, you've also got to merge. You've got vessels that are getting tied up, getting delayed. So we had all of those costs coming through. Sure. So about $12 million of impact and reduced margin as a result of that. On the cost side, you hit on it as well. You know, the typical byproduct that we produce and have forever in the MET segment is the Midlings project, the thermal byproduct. It's about 10% of our production. Typically, that's on a standard cadence of shipments. As we indicated in our remarks, inventory value of that product is extremely low. So as a result of reduced shipments from what we had planned, there's a pretty significant impact in the unit cost. The opportunity, though, is those are going to be recovered in the back half of the year as we ship that middling product. And so we've got a lot of confidence here. We came operationally through a quarter where the MET segment produced at a record level. We expect more going forward, but With Lear South continuing its progress and ongoing improvement, in the District 2, we feel good about our ability to continue to produce at those higher levels. And then we'll work very hard and have confidence we can achieve the shipment levels that we've projected as well.

Look, it's Jack. I might just add, look, you know, we wouldn't expect, you know, that $6 sort of, you know, pressure on netbacks that we – incurred in Q2 as a result of the bridge collapse for all the reasons that John just articulated. But also, you know, look, the pricing today on the U.S. East Coast, down around $10. I think, you know, the positive side of that is that if you look at the average pricing in Q2, which was around $218 for HVA, you know, that implies a rail rate that might be $10 lower as well. So, you know, you take those two pieces and you sort of, they kind of net out right now, again, assuming prices hold up. We don't have those additional costs that we're weighing, you know, on net back. So, you know, I think that those are important components. Certainly suggest right now that we could see a step up and an expansion of barges where we are today. certainly would add the fact that, as you point out, you know, volumes are, you know, we would anticipate stronger volumes, which should also result in, you know, a lower unit cost. So all those pieces in aggregate, you know, really should deliver a stronger future.

And maybe one of the details on your question, yes, about the impact of Tyvol-B, you know, during Q2, there are typical splits on shipments of 70%, Tyvol-A 15%. high vol B, 15% low vol. You know, we were 20-plus percent high vol B during Q2 on the shipment front. You know, over all of the quarters, that ends up evening out. You know, it had a modest impact on the realization, but one we did want to note in our commentary.

Yeah, I think, you know, as I look at this, standing back and taking a longer view, the ridge collapse affected Q2 in a lot of strange ways. But Q2 is messy for reasons outside the company. I think John pointed out very well, the team did an outstanding job of reacting, considering what we were able to do and divert all those funds and bring them to market was amazing. We touched on the very big issues, which are the VAT facts were affected, costs were affected. But as I look at it, we were still able to do some capital returns. And I think probably the most important of all of this is It's behind us. It was outside of us, and we're moving on, and things should revert to normal.

At the end of the day, that's why we're optimistic about back half a year.

Thank you very much for all that detail. My second question is on West Elk, and you mentioned $70 in the prepared remarks, and I wondered, is that kind of a good number to use on the entire output of West Elk going forward, or is that maybe more specifically for export tons? And so if you could maybe comment on the opportunity from higher prices at West Elk, I would appreciate the additional detail. Thank you very much.

Yeah, Luke, it's a great question. I'll start off on trailers. I'll have some thoughts as well. You know, the opportunity at West Elk is that it produces at a relatively low cost, a great high-quality product, sought after in the export thermal markets. It plays incredibly well in the industrial market as well. As we've been discussing, we are transitioning to the B scene, from where we have been producing for some time and producing very successfully and at low cost. We're going to see an improvement in the quality of the coal, a higher BTU, a higher quality product that we think will be even more sought after. So, you know, expansion on the top line. As we continue to build out at West Elk, you know, we have deployed additional continuous miner units to get the B-seam developed. So as a result of that, we've seen a temporary step up in unit costs at West Elk here as we are finishing out the build-out. We expect to be producing from the long ball in the B-seam in mid-2025. At that time, we're going to see a step down in cost. So even as we sit here today, you know, with a lower realization product, you know, we indicated legacy products at $25 to $35 below on a carryover basis into this year from last year where we struggled a little bit. But we're still generating EBITDA there and feel very good about where West Elk is going as we move forward.

And look at that, you know, that pricing really pertains to, you know, about 2 million tons of North American industrial business. And so, you know, as those legacy contracts roll off, and really they're averaging around $40, and, you know, as the new contracts sort of kick in and they're averaging above 70, you know, that's a significant step up on that increment. You know, we do, of course, expect to have additional volumes the real movement of the seaborne market and the netbacks there will be determined by where the seaborne market trends. But clearly that base of North American business is significant for West Elk. It provides visibility and obviously a great step up. So when you get into mid-2025, we're getting into the bigger coal in the D-seam. You know, costs could come down $15 to $20. And we're talking about very substantial margin expansion. And West Elk really becomes a much greater contributor you know, as we, even as we progress into 2025 period, but certainly as we get into mid-2025 and we have that further step down in POS that comes with a much thicker cold in the BC and the 400 to 500 BQs of higher quality. So West Elk is becoming, again, an increasingly excited story.

This is very helpful. I appreciate all the color and detail and all the best of luck. Thank you.

Thank you. The next question comes from Chris Lafamina from Jefferies. Please go ahead.

Hi, thanks, operator. Hi, guys. Thanks for taking my question. I just wanted to ask about kind of the capital allocation framework. I mean, the balance sheet is obviously very strong. The outlook for the second half is that you should be highly cash generative. But let's assume we have some kind of nasty macro downturn. Should we assume in that case that the accumulation of cash on the balance sheet would then be used for buybacks? Let's assume that you're in a situation where free cash flow is negative because coal prices have gone down a lot. Would that be the strategy then to deploy that capital on the balance sheet to fund buybacks? Or in that scenario, do you want to maintain the very strong balance sheet because of the risks of further weakness in prices and weaker cash flow? I'm just trying to understand how you use that cash in a in a downturn. I mean, obviously in an upturn, the issue is your share price goes higher, which is a nice problem to have. But, you know, in a higher share price environment, it seems like the strategy is to not really aggressively buy back shares. So I'm trying to understand what happens in a downturn. Thanks.

Hey, Chris, this is Paul, and I'll probably give you my thoughts, and Matt and I'll start. To be honest, James, be up a little bit. I'll start out. Central tenant of our capital program, to effectively return 100% of discretionary cash on shareholders. You know, this hasn't changed. You know, conversely, as we've said many times in the past, the allocation formula, which is to say the split between dividends and share repurchases, has always been flexible and dynamic as it should be. You know, as we look ahead, I think there's three reasons we've seen for heavier share repurchases going forward. First is the economic fundamentals, as you pointed out, metallurgical. segment is, you know, especially on the supply side, remains supportive. And the global markets seem to be relatively in balance. And second, you know, the ongoing improvement in operational execution in coming quarters, you know, gives a lot of, you know, a lot of comfort knowing where we're headed. And I think probably the third piece of this is the current phase we are in the commodity cycle, which we argue is somewhat of a cross, makes our stock a good buy. So as you would expect, the greater the pullback of equity, the more likelihood we'd be putting some of the cash we built on the balance sheet last year to work. That was the reason we did lead, as you recall. We wanted to be set up for these kind of conditions. And actually, the board's thinking on this is dynamic, so I don't want to be too specific as to what we'd likely spend in different equity levels. But I also want to reiterate that when we built That cash balance, we've always said our minimum cash level was about $200 million. That allowed us to keep a pretty robust 10-5-B-1 plans in place during blackouts. So in the end, I think it's not quite as binary as you laid out. I think this is more of a continuum along which I'd say the use of cash as the equity goes down is probably more prevalent than if the equity goes up and you slow down. But I think the good news is, and what I'm very proud of, is we set ourselves up for this very item to occur. There's been a downturn in the market, but that's why we built the excess cash on the balance sheet.

I guess the only thing I'd add, Chris, is you look at our cost position compared to our peers. In a situation where cash flows go negative for us, it's going to be extremely painful for others. So we would probably view that as something that can't really be sustained for very long. And so, you know, I think we still have room where we can deploy some of that cash that we built on the balance sheet last year and still maintain a very conservative profile, understanding that, you know, the conditions that are leading to negative margins are probably going to be more short-term in nature.

Chris, I just said, you know, if we simply see a pullback in pricing and cooking coal prices, we aren't at that point where you said that extreme point where you have negative margins. You just have some compression. We continue to believe that $200 million is sufficient, right? If we're generating a margin, a solid margin, where prices are today, even with a little further weakness, really comfortable with the idea of $200 million being sufficient amounts of cash, given very low debt levels, very low capital requirements, CapEx requirements. So we feel really pretty positively about the fact that that dry powder really will be available to us.

Yeah, I mean, there's no question, you know, you guys are in a position of strength in a downturn with the balance sheet. And I would agree, maintaining a strong balance sheet is obviously critical. And, Dec, you made a point earlier about pricing being in the cost curve, right? I mean, if you look at assets in Queensland today, some of these mines are significantly loss-making already. So hopefully, you know, as you alluded to, we're somewhere near a bottom in pricing, in which case, you know, you guys could be sitting here generating cash flow through the cycle and maintaining a strong balance sheet and delivering capital returns, even in a weaker market, which is, kind of the ideal setup on paper. And if you actually deliver on that, it probably works well for your stock. So thank you for all that and best of luck.

Thank you, Chris.

Thank you.

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

Thanks, operator. Good morning, everyone.

Good morning.

I wanted to come back to the Coke and Coal segment just for a second. Maintain full year shipment guidance there. By my math, it means you're going to need to ship roughly 2.4 million tons a quarter in the second half just to kind of reach the low end of that range. First, is that level achievable from a production perspective? Obviously, we just saw a record production quarter in 2Q. I don't know if that repeats or not. There's a question there on production side. I think you guys also mentioned maybe some inventory there. I think 160,000 tons slipped in the third quarter that's already moved, but any inventory there that would help that as well. And then maybe secondly, just talk to your confidence again around the logistics chain, both the rail and port to handle that additional coal in the second half. And then finally, maybe really just cadence of shipments, 3Q versus 4Q. That'd be great. Thank you.

Thanks, Nathan. Yeah, you hit on a lot of different items, so I'll touch on a few of them. You know, operationally, you know, we've positioned the MET portfolio, you know, at that level where, you know, we delivered record production. We expect, you know, to be producing at those higher levels as we continue to move forward. We've talked a lot about the opportunity of their south transitioning production. in finishing the last long-haul panel in District 1 and transitioning to District 2, where we're going to see an improvement in coal seam thickness of 15% to 20%. We expect to get there towards the beginning of the fourth quarter. You know, that will have an impact and benefit for us as well. So, you know, as a result of the production we saw in Q2 and with the constrained shipments that we had given the Port of Baltimore collapse, We did build inventory. I think we were around 350 or 400,000 tons of inventory built in the MET segment. We indicated we just missed a couple of vessels at the end of Q2, so that gives us a jump start as we go into Q3 and beyond. But clearly, we've got to work very closely with our rail providers and port providers, but we have confidence that we're going to be able to achieve the levels that we've seen are going to need in the back half of the year to get to the guidance lines.

And we've always envisioned that step up, right? This is not new. We've always envisioned the fact that, you know, we're going to need to step up as we get to sort of 9 million tons and perhaps beyond that 9 million ton level. And so, look, this is something we've been working on for a very long time. Quite frankly, rail service is looking good and solid, and we're, you know, we're getting the train sets. When you look at production so far in Panel 8, while we haven't quite made it to District 2, and the thicker coal conditions in Panel 8, we're stair-stepping towards District 2, and so far really progressing very well in terms of production in the Near South. So lots of positives. So we do feel confident that, A, the coal will be there, and that, B, the rail will be there to sort of move it. And, of course, FEELING VERY CONFIDENT ABOUT THE TERMINAL SIDE OF THE EQUALIZATION AS WELL.

WE STARTED PANEL EIGHT AND HE DESCRIBED STAIR STEPPING TO DISTRICT TWO. PANEL EIGHT IS RELATIVE PROXIMITY STARTING TO BE IN THE DIRECTION OF WHERE WE'RE GOING FOR DISTRICT TWO. WE STARTED IN THAT PANEL AT THE BEGINNING OF THE QUARTER. THE RAMP WAS GREAT IN PRODUCTION HERE SEVERAL WEEKS IN AND THAT PANEL HAS CONTINUED TO BE VERY POSITIVE. Once again, it's just giving us further confidence that as we get into District 2 and Q4, we're going to see that step up in the opportunity and production levels that we're suffering.

Appreciate that, guys. Any thoughts on the cadence of shipments in 3Q versus 4Q? Any remnants of issues at the port that would slow things down in 3Q versus 4Q or anything to consider there?

Yeah, no, I think the recovery from the port has been good. I think, you know, there's no real significant or material remnant carryovers, if any. So I think that cadence at that 2.4 million ton level by quarter, you know, would be a heavy focus for us as we go forward.

Okay, thanks, John. And then, Matt, you made some comments in your prepared remarks on the severance rebate. Maybe we could just get a little more color there. What's kind of the potential dollar amount there over time? You know, maybe what time period do you expect those rebates to occur? I think you said some of it will depend upon market conditions.

Yeah. Nate, in terms of the rebate, first, I think I want to reiterate a couple things I mentioned in my comments, you know, about this being a win-win for both ARCH and the state. You know, obviously the benefits for us are pretty clear today with the rebate that we've gotten and with LearSouth online for the state, our severance tax levels, if you look at what we've paid since the time that Lear South came up, the Longwall came up there, we've paid nearly $200 million in severance taxes over that time. That's about, for our mine portfolio today, that's about a 70% increase on an annual average compared to what we were paying back in 2019. So clearly we think this has been a good thing for both sides. There is a lot of work that goes into this, and I want to commend the folks at our operations and our tax department for what they've done to bring us to where we are today. So with all of that said, as we look ahead, I think the good news is we've taken, I think, the largest part of the benefit already. What we have coming in the future will likely end up being overall smaller than what we've gotten so far. Obviously, that makes some sense. We've had to qualify expenditures going back several years, so first bite was going to be the biggest as we look at the rest of this year we think there's probably an opportunity for something along the lines of roughly half of what we got in q2 and then as we look at next year um clearly things like what the market price is and what the ultimate level of severance tax we pay is going to weigh into this um but as we sit here today i'm looking like something in the college five to ten million dollar range for next year and then again depending on how markets progress there could be some additional amounts that trail into 2026 as well.

Okay, that's very helpful. And then I also wanted to just ask about the CapEx reduction. Matt, what kind of drove that?

Really, just looking at what we've experienced for the first half of the year, clearly from where we set our guidance at the beginning of the year, where pricing was at the beginning of the year, our results haven't been what we planned, quite frankly. And we're doing everything we can to defer costs costs and capital in order to sort of right size the cash flows as much as possible. So really just taking, you know, things that we thought we would be spending this year and trying to defer those to future periods wherever we can.

Okay. Got it. I appreciate that. I'll leave it there. Best of luck in the third quarter.

The next conference calls from Katja Jancic from BMO Capital Markets. Please go ahead.

Hi, thank you for taking my questions. Maybe starting off on the thermal side, the expectation is that the contribution from the thermal side is going to improve in the second half versus the first half. Can you maybe provide a little more color how much of an improvement we could see?

I guess I'll start out here. We can have others weigh in as well. I guess we've already talked about West Belt, and even in this challenged environment, that they have. They're generating EVPA, and we've indicated that we see the lion's share in the improvement occurring with where we're at in the PRV. We've done a lot of work over the first half of the year, really the first three, four months of the year, where we saw the significant step down in demand. We came into the year kind of targeting 55 million tons of shipments. We already had 50 million tons committed BUT THEN WITH THE CHALLENGING WINTER, LOW NATURAL GAS PRICES, YOU KNOW, THE REST OF THE BASE SEEMS JUST A TREMENDOUS AMOUNT OF PRESSURE. THE TEAM AT BLACK THUNDER DID A GREAT JOB. THEY'VE DONE A GREAT JOB OF REDUCING THE HEAD COUNT AGGRESSIVELY. THEY'RE DOING THAT THROUGH ATTRITION AND SURLOS. THEIR PARKING EQUIPMENT, OPTIMIZING MAINTENANCE WITH THE PARKED EQUIPMENT. BUT WHAT WE DID SEE IS WE HAD HIGHER production and stripping that we had in shipments. And so we saw a build in pit inventory. That pit inventory, we've incurred the cost to uncover that coal. We have probably twice as much as we would typically have. We're at 8 million tons. We probably typically would run normally around 4 million tons. So as we get into the back half of the year, what we expect to see is an improvement in shipments compared to our production levels. And as a result, you know, we're going to get the benefit of having incurred the cost to uncover that cold that we incurred in the first half of the year. We'll get that benefit and reduce costs in the back half of the year. So with all that said, I think, you know, if you look at our thermal segment, we expect it to recover all the losses and be modestly cash positive as we step into the back half of the year.

Yeah, I mean, one of the things we've said is, look, at West Elk, the dye is kind of cash. We kind of, you know, for the most part, have good visibility there and if you're looking at sort of high single-digit EBITDA contributions from West Elk each quarter, you know, that continues. But the very thing that was the headwind for the PRB, which was, you know, stripping and, you know, inducing or incurring more costs than we otherwise would have because we were stripping more times than we were actually shipping, becomes a tailwind in the back half. So suddenly you've got, you know, the high single digits coming from West Elk, and then on top of that, we should have a meaningfully positive contribution from from the PRB. So, while that's not a lot of clarity, I would say this, that it is a meaningful contribution in the back half. You know, the simple fact of shipping, you know, two to four million additional tons that we've incurred the lion's share of the cost in the back half will be very significant for PRB margins. So, the two together means that, once again, we'll be generating some pretty meaningful cash contributions from the thermostat.

I get a lot, I have a lot of faith and comfort in the team at Wyoming. They've become very good at reacting to changes in the market on a very short-term basis. And I think what they've done in the last two months has set them up very well for the second half of the year. We'll have the mine right-sized. We'll have the effects of the tailwinds from the inventory change. We'll do what we've done well, and that's adjust, you know. Whether that means furloughing or whatever we have to do to cut costs, converting to reclamation or all those other things that we've done well the last couple of years, we'll do well in the end.

So I still feel pretty good about what's going on and that the team can pull it off.

And maybe quickly on Lear South with the mine entering District 2 and the production or the seams being thicker. Heading into next year, is it fair to assume 3.5 million tons plus is where Lear South could shake up?

Actually, I think we're not providing specific guidance, but once again, with a meaningful improvement in that coal seam thickness, 15 to 20% improvement from what we've incurred in District 1. You know, we have high expectations for Lear South, and what you're describing, absolutely, from my perspective, without having provided any formal guidance yet, is absolutely within the range of expectations.

And the guidance we did provide, Patty, as you'll recall, is kind of 3 million times this year, sort of, you know, or at least a 3 million-ton run rate. So, look, if we go from a 3 million-ton run rate, so 750,000 tons per quarter, and we get the higher yields that we anticipate in district two, then obviously it implies a meaningful step up from that three million ton level. But again, as John said, no formal guidance at this point.

Okay, thank you. The next question comes from Michael Dudas from Vertical Research. Please go ahead.

Good morning, gentlemen.

Hello, Michael.

John, maybe you could share a little bit how, you know, Baltimore and DTA, how operations are, how the activity's been, you know, is it back to a more normalized level? There's still fits and starts. How do you assess that given all the tremendous work that's been done and all the logistical issues that everybody needs to overcome?

Yeah, Michael, you know, good question. I think we commented a little bit on it, but to expand further, I think, you know, Post that bridge collapse, post the closure of the Port of Baltimore, for all practical purposes, that was a significant event, clearly. We talked about it. The logistics team working with our logistics partners did a fabulous job of reacting and responding to that event, keeping the coal flowing, adjusting the coal flows. Our partner, DTA, with 35% ownership in that, stepped up well. CSX stepped up well. And so we're real proud of what we were able to achieve in the second quarter, despite the significant challenges. With all that said, you know, that report opened the floor without restriction, essentially, you know, June 10th. You know, since that time, I would say everything has really kind of gone back to the traditional flows. And so I don't see any residual impact going forward. And so we'll work to optimize on the traditional flows. the experience that the team gained through the process, I think, you know, makes them stronger going forward as well. And so, you know, we'll take this, put it behind us, as Paul indicated in his discussion, and move forward and move forward positively.

So no residual effects. I might maybe add to the fact that, look, DTA performed really well, you know, during, you know, those challenging times, too. And in fact, probably you know, we have a different appreciation for what's achievable there in terms of throughput, that we can probably achieve higher levels than we thought we could because, again, there was, you know, really highly efficient movement out of DTA and an impressive performance by the team there. So we sorted a fair number of things and actually believe that there may be more throughput capacity at both facilities going forward.

I mean, let me ask you again, Michael, about I don't normally say a lot of good things about the railroad, but unfairly, but CSX did an amazing job. We ended up having to haul, I don't know the exact numbers, but roughly a million tons from Baltimore down to BTA. Now, that's an extra 300 miles of haulage that the railroad or us were not set up to do, and they reacted very quickly and did an amazing job, so. Nothing but compliments for the people at Kurtz Bay, the Corps of Engineers that, you know, resolved the problems and solved the tragedy as long as they're aware of the people at VTL.

I'm sure Joe Hendricks will appreciate that shout-out from you, Paul. Thank you very much.

Thank you. The next question comes from Alex Hacking from Citi. Please go ahead.

Yeah, thanks. Morning. I just wanted to ask on the industry outages that we saw. Unfortunately, there were a couple of outages in the quarter due to fire.

I think Grosvenor is fairly well understood, but what's your perspective on the long view fire? Like how much capacity has that taken out and for how long? And does that have any impact on your end markets? Thank you.

But, you know, both those events are, you know, very tough, and I feel sorry for both the management teams and the employees. They are difficult things to do. I think you touched on the denominator. It's pretty well known. The issues that Longview or the mine, which is about 10 miles south of Rear South, they had a fire also. As we understand it, the fire is still active. As you think about that mine, it's a longwall mine somewhat in the size and capacity of our rear and rear south. That mine, the longwall came on in December.

We were expecting it to do, you know, around number 3 million tons in 2000. Around number 3 million. billion tons in 2024. Those tons are effectively out of the market. The world's grabber. I think I think, you know, as you look at my comments earlier, what we think we'll see is about a 2% to 3% reduction in C borers. Again, yes, for either of these minds, I won't. It's a minimum of 90 days, maybe 180 days, if they get it back. If they get it back. That's it. There's no equipment damage or residual profits. Tough situation for those guys.

I wish them only the best, but it's going to take some volume out of the market.

And, Alex, pulling back a little further, obviously, as Paul said, those averages are unfortunate. We talked a fair amount about kind of the subdued nature of the market right now, but we would say this. Look, the market doesn't feel – if it's imbalanced, it's not imbalanced by a significant amount. If you look at hot metal production year-to-date in the world, including China, which is what we tend to track, it's up 1.4%. That's obviously a positive thing. India continues to click along despite the fact that they're in the middle of sort of monsoon right now of 2.7% year-to-date.

The Chinese seaboard imports are on track to be up 10 million tons. And, you know, while in third... ...is sort of lower quality, you know, volume from Russia, and they're being opportunistic. Two-thirds of that is higher-quality seaborne, so that's a positive. On the supply side, you've got Australia, the U.S., and Canada in aggregate. of the U.S. and Canada in aggregate, which is, of course, where all the high-quality coal comes from the seaborne market, up only about a million tons from the seaborne market, up only about a million tons million times. So, again, you know, that's supportive. You know, we talked about the Mayan outages of, you know, two to three percent, which are really sort of back half of the year. sort of back half of the year. So, look, the reality is that there are a lot is that there are a lot of positives here. In fact, we start to see demand . In fact, we start to see demand reasserted. We could indeed see a pretty quick move in the markets. Now, if they stay down for longer,

You know, we're really sanguine about that, right? We've talked about where we are on the cost curve. You know, a little pressure, a little rationalization of high-cost supply is good for any market environment. So, you know, that's great if it plays out that way. You know, but we are looking at, you know, an environment that feels relatively well kind of calibrated right now I would reiterate again that we have had great interest, continue to have great interest from Asian buyers. We talked a lot about Vietnam, Indonesia. We're now looking at a major buyer in Malaysia, and that is progressing well in addition. So there are a lot of positives out there. I will finally say this, that while the market might be a bit subdued, we're getting no pushback.

on volume, which I think is always . Everyone wants their coal, is taking their coal. Everyone wants their coal. The coal is taking their coal. They're just not buying with urgency. They're just not buying with urgency. So I feel pretty good about what we're seeing out Thanks. I guess just to follow up on those comments, Dec, like the logical My conclusion would be that the Asian mills are just destocking, right? Because China imports are up, India steel production is running strong, Groven is out. But the met coal price has, you know, been falling, you know, been falling, you know, consistently now for a few weeks. Are we effectively in a de-stalking mode? Are we effectively in a decent talking moment? I do think that's right. I think that's right, Allison. Again, it doesn't mean that this can't persist for a while. Again, I think the Asian buyer

for a while. Again, I think the Asian buyers aren't buying with great urgency because they see, you know, what's transpiring elsewhere. Obviously, you know, Europe has been, you know, pretty slow and continues to be. Capacity factors there are low. Again, the level of interest from Asian buyers and non-Asian buyers, they look longer term, you know, continues to grow. And We talked about the three Southeast Asian countries where we're seeing a lot of interest, but in China as well. If you go back three years or so ago, we were mainly just selling to brokers there. Two years ago, we started to sell to mid-sized producers on a spot basis. A year ago, we started to do term business with those Chinese buyers, and now we're really talking to the largest

largest steelmakers in the world in China who want more volume than... Really, we can agree. to provide to them because we've got to balance out our customer base. So that does all feel challenging. And I don't want to suggest that there's not this you know, this, you know, sort of subdued tone in the market. There absolutely is, but it feels If the market's oversupplied, it's oversupplied very modestly. And I agree. You know, destocking could be a component of that. Yeah. One little piece of color I would add to what Dex said is, And it's something I worry about and watch very carefully. The prices are down and there's no question that these stocks The one thing we're not seeing is pushback. Customers are taking their volume.

As long as customers take their volume, I don't like where the pricing are particularly, but at the same time, I get nervous very quickly when customers start pushing back. We're not seeing that, so... I think, as Nick said, I don't want to be overly optimistic, but I don't think what's going on is bad.

Thanks. I appreciate the call. Thank you, Alex.

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

I want to thank you again for your interest in ARCH. I hope you will agree that the challenges in the past few months have served to underscore the key aspects of our value proposition, including our low-cost asset base, our exceptionally strong balance sheet, and our ability to act quickly and liberally for changing circumstances, particularly in the marketing and logistics arena. I want to again commend the ARCH team for rising to the challenge.

We plan to build on this positive momentum and make our focus on continuing to improve with the operations while simultaneously driving costs on the entire platform. I have great faith in our team and fully expect that the current period of market software will set the stage for any astrologers in the future. With that out of the way, we'll operate open. Good call, and we look forward to responding. Thank you. Stay safe and healthy. The conference has now concluded. Thank you for attending.