Arch Resources, Inc.

Good day, and welcome to the ARCH Resources third quarter 2024 earnings conference 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. 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, Senior Vice President of Strategy and Public Policy. 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. Joining me on this morning's call will be Paul Lang, our CEO. After Paul's formal remarks, we'll be happy to take questions. With that, I'll now turn the call over to Paul. Paul?

Thanks, Peck, and good morning, everyone. We appreciate your interest in ARCH and are glad you could join us on the call this morning. The third quarter marked a period of significant transition and change for ARCH. Since step Q3, the team has positioned the company for long-term value creation and growth in two fundamental ways. First, through the announcement of our transformational merger with Consolidated Energy. And second, through the near completion of a multi-quarter transition in a more favorable geology of both of our metallurgical long walls. We expect the culmination of these two processes in Q1 2025 for the merger at mid-November of this year for the operational transitions to bulk up a tremendous value for our shareholders going forward. During Q3, the company also continued to make strong progress in the development of the favorable BC reserves in our West Elk mine, where we produced a high-rank thermal coin focused on the seaboard market. Managed through a three-week outage of the ship loader at the current state terminal that reduced our coking coal shipments by approximately 200,000 tons, and declared 25 cents per share fixed dividends for a total payment of $4.6 million, payable on November 26th. While I plan to devote a large portion of my prepared remarks to the pending merger, given the transformative nature of the deal, let me start with some color on our Q3 results, as well as our views on the current state of the global coal mine. As you know, we spent much of 2024 transitioning through difficult reserve areas at Lear and Lear South. During Q3, both of the numerical segments longwalls were throttled back while development work was completed in the more favorable reserve areas, which depressed production volumes and led to slightly even higher normal operating costs. We expect both longwalls to start back up within the next several days after extended moves that were needed to complete this work. These extended days will in turn temper the results in the fourth quarter, but we still expect a positive step change in execution from these operations after that and continuing well into 2025. Turning to the thermal assets, the segment saw a significant turnaround during Q3. Here the results benefited from an improved performance from the legacy of current basin operations, where cost-cutting measures, now best aligned between stripping activities and sales volumes, contributed to stronger results. That's where I felt the mine operated well, although its results were again dampened by lower realizations related to legacy contracts, the vast majority of which will expire at the end of this year. Also, as noted before, we're still seeing higher costs of the mine associated with additional continuous miner work required for the development of the BC reserves. Back in the metallurgical segment, we're anticipating a significant step-up in the thermal service performance in the coming year. At West Elk, we expect to benefit from the roll-off of low-price contracts previously noted. In addition to this, we expect a further strengthening of our operating results at the mine with the completion of the development work in the D.C. and the transition into those thicker and lower-cost reserves in mid-2025. At the Powder River Basin, we expect the improved performance stemming from our recent efforts the right side of the operation to also continue in the new year. As for global cooking coal markets, we continue to believe that supply and demand are closer to balance than current prices seem to suggest. I say that for several reasons. First, our global customers continue to want their familiar bodies on a timely basis, and we've even been asked to accelerate shipments in flat instances. Second, global hot metal production, excluding China, remains close to flat year-to-date. Third, global coking coal supply remains constrained, as evidenced by flat production levels in high-quality supply bases. Fourth, China's seaborne imports of coking coal are up nearly 30% year-to-date, with most of that growth in supply coming from high-quality regions. And finally, we're starting to see the closure of smaller coking coal operations as pricing has started to impact marginal mines. In summary, intermediate and long-term coking coal market fundamentals remain constructive in our view. We believe that even a modest improvement in economic activity in key steel-producing regions has the potential to lift coking coal markets quickly. Meanwhile, the high-ranked seaboard thermal market continues to appear tight, benefiting from many of the same dynamics, such as years of underinvestment in new and replacement supply that underpin the coking coal story. With that, I'll shift my remaining remarks to our merger with Consolidated Energy. First, I'm pleased to report that we're making excellent progress in bringing the transaction to completion. In recent weeks, we've seen an expiration of the Hart-Scott-Rodino waiting period, while also securing all the needed international antitrust approvals. Clearly, these were significant steps. It's also important to note that since the announcement of the merger, the teams have been driving forward with efforts to deliver an efficient integration process following completion of the merger that should in turn unlock significant synergistic value in the combination. Basically, we plan to hit the ground running following close. The next step in the merger process is stockholder votes for both companies. In preparation for this, we're currently working to finalize the Form S4 document. The closing of the merger remains subject to approval by stockholders of both companies and the satisfaction of the remaining customary clothing conditions. We expect to complete the merger in the first quarter of 2025 and then to move full speed into the integration. To reiterate many of the projected benefits of this tremendous merger, we expect combination will join best-in-sector operating platforms anchored by world-class, high-quality, low-cost, and long-life long-law minds, create a broad, diverse portfolio of co-qualities and blends, capable of serving multiple growth markets and geographies, expanding North American logistics and export capabilities, including ownership of two East Coast terminals, and long-standing relationships with West Coast and Gulf Coast ports, creating a visible revenue stream with meaningful upside opportunities, balancing consults, seaborne industrial business, with Archer's exposure to higher-value metallurgical coals and associated demand dynamics, Enable robust adjusted EVTA and pre-tax flow generation. Unlock additional value creation from $110 million to $140 million of annual cost savings and synergies. And create the potential for robust capital returns and investment in innovation and growth, underpinned by industry-leading tax generation and a strong balance sheet. Once the transaction closes, will turn our full attention to realize the potential of the combined company, with a strong focus on capturing the significant quantifiable synergies we've identified in the areas of logistics, lending, marketing, procurement, and streamlining of the corporate structure, as well as aggressively pursuing the harder to quantify, but equally compelling opportunities in areas such as sharing best practices across an extensive level of fleet. In closing, let me say again how enthusiastic we are about the excellent progress the two companies are making in bringing the merger to a successful closing and the way in which the arch operations are aligning themselves for a strong 2025. One more time, remember that the pending merger will create a global industry leader, one equipped to capitalize on promising market dynamics in both its core lines of business, global metallurgical and high-ranked seaboard thermal products.

With that, we'd be happy to take your questions. Operator? We will now begin the question and answer session.

To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

And our first question comes from Lucas Pipes with B. Reilly Securities.

Please go ahead. Thank you very much, Operator. Good morning, everyone. Happy Election Day. Paul, my first question is on contracts for 2025. And apologies if I missed it, but could you speak to domestic or North American met coal contracts for next year tonnage and price? And then on the thermal coal side, would you be able to provide an update as it relates to the PRB and West Elk and pricing expectations for those operations as well?

Thank you very much.

I think I'll repeat the same thing I've probably said the last five years, which is we really appreciate the North American business. There's a lot of value to it as far as logistics and that. but we've been quite willing to walk away from it if the pricing is too low compared to what we think the international markets will be. And I think what you're going to see in 2025 is that very thing. You know, I think if I think back six years ago, we did about 50% of our cooking coal business in North America. If I look at 2025, I think that number could be down much lower than Right now, we have committed about a half million tons, and we're just under 150 on that price. So if that's where we end up, that's where we end up. I'm fine with it, Lucas.

Lucas, I just had one final point to that. That includes about 20% mountain laurels, so about 20% high ball B, which weighs on that a little bit. So given that fact, we thought that that 150 price was a fair estimate. A fair price given today's current, you know, soft market environment for, you know, that small amount of tonnage.

You know, we haven't given a lot of detail, but, you know, we're still plus $15 on our average price. And, you know, we call it the low 40s or 40s right now.

And we've been able to maintain that, Lucas, at that level. And right now that market is pretty soft. But because of the way we've managed deferrals with customers and been willing to sort of blend and extend, we've been able to keep that pricing at that higher level for 2025 and beyond. And so, you know, really managing the book carefully, despite the fact that, you know, right now the published prices are lower. And then when you look at West Elk, look, we – I think we've got a really nice job there as the existing legacy contracts that are scheduled to roll off start to come due. So we've got legacy contracts in the industrial space at around $40 on average that roll off at the end of this year, and those are getting replaced with prices that are as much as $30 higher. Now, we haven't committed all of the volume yet, but so far that's where it's shaking out. You know, that's a scarce product. We're able to capture, you know, really good value. So that's that first step up we would expect to see in terms of Westoff's contribution in 2025 is the roll-off of the, you know, the legacy contract and then sort of these newer commitments kicking in. And then mid-year 2025, again, would reiterate the fact that we'll also then see costs set down as development work on the B-team and as well as our transition to thicker coal in the BC, even higher quality coal. So, an additional step up in mid-2025 related to the cost side, if you think about it from a margin perspective. So, enthusiastic about how things are shaping up for West Elk for next year.

I appreciate all the detail. Question on the high volume markets. A few of your peers noted that kind of the high-volume markets are oversupplied. What's your take on that? Any ability to quantify the oversupply, if you agree with that take? And for a product like Lear in today's market environment, what are good netbacks to kind of think about? Thank you very much for your color.

Yeah, Lucas is back. What I would say about the high-volume market is You know, obviously right now it's generally a little soft out there overall. Look, I think the high-volume market is not different than the market for other products. You know, as Paul said, at this moment the market seems fairly finely calibrated. Now, maybe it's a little bit oversupplied and a little soft, but it doesn't seem like we're far from balance. And so it's not going to take much, I think, to tip things into sort of a more virtuous direction. sort of, you know, segment of the cycle. So if you think about, as Paul indicated, look, hot metal production globally for the world, including China, relatively flat. You've got aggregate supply from Australia, the U.S., and Canada, you know, relatively flat right now, so no change on that front. Chinese steel exports are up, so that's a negative on the flip side. Chinese seaborne token gold imports are up as well. So again... relatively finely calibrated here, we continue to see significant appetite for all our products in the marketplace. There's not urgency in terms of buying. It's not like we're seeing pricing being lifted by that, but Asian buyers are very focused on finding where the supply is going to come from for next year and very interested in our products. We've had really good uptake for all of our products in the Asian market. And I would say for Havole in particular, and that's because Look, we're providing that. Your brand is providing both a very high CSR quality, so a CSR of around 70, but also all those plastics properties that make it such a good blend stock. So, you know, the high fluidity, the wide temperature range, the strong RNA. So, all those things that also mean that when you put it into a blend, the result is more homogeneous coke out the back end of the coke oven. So, I would say this. The Asian buyers buy our high barley product for lots of reasons. It's not necessarily just the fluidity. It's also for the high CSR. We couldn't be more happy in terms of the uptake there. We continue to build new customers in places like Malaysia. Indonesian demand continues to climb for the merchant coke production there. The big Chinese buyers are very eager to increase the amount of LEER volume that they're able to access, and we can only talk about so much because we only have so much volume, but we're pleased with that, and we think the high-volume dynamics are really, again, not dissimilar to the other products, but for our LEER products in particular, we think there's a really strong enthusiasm out there.

There's two other small points I think we should make, and that is... One of my best indications, I think, of the market is if customers are pushing back on volume. And as I said in my prepared remarks, we're not seeing any of that. So we're still seeing what I would call normal demand. And, you know, I was also surprised by the fact that we had some customers trying to accelerate shipments. I think the other point I'd like to make is, you know, we, as I noted in my prepared remarks, We had to suffer through about 200,000 tons of lost shipments because of the shiploader incident at Curtis Bay. As I look at it, we ended up the quarter with about a half million tons of inventory. And I just don't feel a lot of necessary means to just go out and push that coal out in the market right now either. Look, I think the market is fine where it's at. I think another quarter or two of being flat like this should help things in general on the supply-demand balance. And, you know, I think we're going to be patient heading into the new year.

Thank you for all the color. I'll try a quick one, and sorry if I missed it. Is there a date for the shareholder vote? Not yet. All right. Well, thank you very much for all the color. Best of luck, and, yeah, look forward to the merger. Thank you.

Thank you. Thank you, Justin.

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

Thanks, operator. Good morning, guys. Morning.

Maybe just to follow up on the second part of one of Lucas's questions regarding a net back deck, I don't know if you could give us kind of an idea of what that looks like right now. Again, it seems like some of the price realizations that you and your peers are seeing are maybe reflecting higher than normal discounts, so that might be helpful.

Yeah, Nate, so I would say that, look, you know, I understand how you get there when you look at the average price of HVA during Q3. It looks a little light from an impact perspective, but I would say, look, there are a couple of reasons for that. You know, the first is that during Q2, you know, we shipped a fair amount of volume, particularly in June, that ended up getting priced in Q3 in a declining, you know, market environment. So, you know, even though you look at the average realization in Q3 as being somewhat higher, you know, some of the provisional pricing that we had committed to in Q2 ended up coming in lower. So, you know, that did weigh a little bit on the, you know, on those netbacks. It would also point to the convergence of premium low on HVA pricing. You know, as you know, as we ship tons into Asia, they're the transportation differential. And so, You know, in recent quarters, that stronger pricing for premium low vol had really served to counterbalance that transportation differential for those times that were, you know, based on, you know, PLV prices. So both those things weighed somewhat on our average net back. I would say that the good news is that, you know, all that will right itself over time. But, you know, the good news is we're not having to discount. The good news is, as discussed, there's really good appetite out there for our products. You know, there are lots of different structures that we use without a doubt, but in terms of going out there and having to discount our products just to move them, you know, even in this off-market environment, we're simply not having to go there, which I think really does bode well for the future and further underscores the great success we're having in getting these tons placed in Asia.

Thanks for that, Jack.

Maybe kind of shifting over, you know, to the fourth quarter. I mean, I appreciate you guys don't want to give updated full-year guidance due to the merger. But, you know, given some of the challenges in the third quarter, obviously the shiploader outage you called out lost about 200,000 tons of shipments there. Is it reasonable to assume that met coal shipments could increase sequentially in the fourth quarter? Or do you think, you know, other headwinds such as in the extended long-haul moves you guys called out and as well as the weaker markets we're talking about might make that not the case?

But I think the way to look at Q4 is, you know, we're coming through, you know, what I would call one of the roughest couple months that I've had in a long time. You know, it was a difficult period for lots of reasons. And the good news is that we set ourselves up very well, both near and near south, and come through some very difficult areas. And the near south low mall is expected to start up later this week in District 1. excuse me, in District 2, and we still believe that that panel looks very good and have a lot of optimism. You know, and we also had a stretch here in the last couple weeks where we had an extended long, long week due to some of the conditions we were carrying. Look, I've got huge faith in the team at Lear. They've delivered constantly year after year. And, you know, if you look back at the history of Lear in the last 13, 14 years, You know, about every couple years we'll get a bad quarter, and that's pretty well what we did in Q3. But, you know, as I look at Q4, you know, some of those residual pains carry on into October. But, you know, as I said in my prepared remarks, I am expecting, you know, a step up in performance in the back half starting a little later this week, early next week. And the way I would look at Q4, just for simplicity, and just kind of in general is, you know, I would start with kind of a very similar quarter to what we had in Q3, volume-wise. And part of that is, you know, if the market doesn't respond, we're just not going to push a lot of coal into it. And second, you know, I think, you know, we can come up better than I anticipate, but I want to be relatively cautious in what we're saying on the startup and both panels. And I think in just in general, you know, If you look at the rest, we didn't give explicit guidance on the rest of the quarter. I think you can infer from the silence on everything else that we're going to be pretty much as we've said before.

Thanks for that, Paul. And then maybe just one final one.

You guys gave a pretty thorough discussion and prepared remarks about your thermal coal business. I guess... Just how do you think about the role of those thermal assets kind of heading into the closing of the proposed merger with Consul?

I'll start with the easiest one, which is West Elk. West Elk fits clearly in our strategy of pursuing high-quality seaborne thermal business. West Elk is going to be a big player in that business for the next 10 years plus. So clearly West Elk has a place. You know, you move on to PRV, it's a tougher discussion. You know, I've been very open the last couple of years about, you know, whether it fits well with the permanent portfolio and what we can do. But we've made no bones about talking to people about our alternatives with it, and we will continue to do so. But at the end of the day, you know, we've set aside the reclamation fund, and, you know, we have a view of what the value of that fund is. If someone's willing to give that to us up front, We'll listen to them, but it has to be a clean exit. And by that I mean we're going to get out of it with no bonds, no permits, no leases, a truly clean exit. And if somebody could do that with the value brought forward, we'd definitely listen to them.

Nate, I'd just add just a little bit more color around West Elk and what a good fit that is. You know, look, as we move into the B scene in particular, West Elk will move up again in terms of heat content, and already it's a high-quality coal. But as we move into the B scene, it'll be approaching a 12,000 BTU product, very low sulfur. You know, when you think about West Elk and, you know, PAMC, you're talking about two of the highest-ranked coals in the seaboard marketplace. So... That fit couldn't be better. We're enthusiastic, quite frankly. West Elks Glen, you know, our only asset that is focused on the seaborne thermal market. The fact is that I think there'll be a greater understanding and appreciation of it being truly a core asset for us going forward and, you know, an exceptionally strong fit with the portfolio.

All right. Very helpful, gentlemen. Appreciate the time. Good luck here in the fourth quarter and get the merger completed.

Thank you, Nate. Thanks, Nate.

And the next question comes from Katja Jancic with BMO Capital Markets. Please go ahead.

Hi. Thank you for taking my questions. I might have missed this, but you mentioned Lear was going through a bit of a challenging geology. Is that now behind, or when should we expect it back to, let's say, more normal operations?

Hi, Katja. This is Paul. You know, It really started in, what I'd say, kind of late September and through October. It was a pretty rough period, really, both times. The good news is both longwalls are through it. I'm expecting to start off with a Lear South longwall later this week, and the Lear longwall will be a couple days behind that. By all indications, the panels that we're going into are in good condition. and we're expecting production to pick back up kind of to what our expectations are.

And what would be like a normalized production level at Lear? Can you remind us?

Yeah, roughly we've been running, you know, basically about a million tons a quarter, both Coca-Cola and Mids, and we've been slightly better than that. I wouldn't be surprised to see that at Lear going into the fourth quarter. at a normalized rate after the fourth quarter. Lear South is still continuing to ramp up. I think it's got a chance of coming up to its potential. At the end of our last panel in District 1, we saw some really good rates and a lot of optimism at that point. I still think that operation's got some ability to grow and continue to increase production.

Everything was changed out here in District 2 at Lear South. you know, is reflective of our expectations. It is the, you know, nearly a foot thicker in terms of the coal team there relative to where we've been in District 1, so a very substantial, you know, improvement there, and that should, you know, translate into higher yields, which should also translate into lower costs, and then it is going to be a very thick coal in 2025, so both those, you know, both those developments really bode well for you know, a strong execution in 2025. As you know, we've been talking a lot about transitioning from District 1 to District 2 at Lear South, and we've put a lot of focus on that, but feel really good about what we're seeing. And, you know, as Paul indicated, development was a little slower in getting District 2 ready, so we had to, you know, the long wall's been down for the first, you know, six weeks or so of this quarter. But as we look at development on the next panel in District 2, that's, you know, we expect that to proceed and be ready to roll as we go through the first panel in District 2. So feeling really quite positive about what we're seeing.

So is it still fair to assume that now that Learsoth entered District 2 that we should be seeing, you know, coal production closer to 4 million tons per year plus?

I mean, Connie, we've avoided putting numbers out there and don't feel like that. you know, is appropriate here. Obviously, we're going through our own budgeting process and fully expect to integrate our budgeting process with consults before, you know, too long. So, you know, we're not going to provide explicit guidance, but clearly what we're saying is that both Lear and Lear South, we expect productivities to be higher. We expect costs to be lower. That, you know, that clearly should translate into a better performance for the memorable portfolio overall in 2025.

Okay, thank you. Thank you. Next question comes from Michael Dudas with Vertical Research Partners. Please go ahead. Hello, Michael. Your line... Oh, go ahead, please. Oh, yeah. Yeah, go ahead. No, thank you. Good morning, Dick and Paul.

Hello. Paul, maybe you could share some thoughts on the stress on the supply side in Appalachia, given where pricing is for cooking cold product. And if we continue to see some softness, will it be noticeable? And are you seeing that in from whether it's the labor side or some vendors, et cetera? Maybe a sense of how that's going to play out as we move into 2025.

Hey, Mike, apologies. We're struggling to hear. We've got bits and pieces. But can you repeat?

Can you hear me now?

Oh, yeah.

Okay. I'm sorry. Thank you very much. Just, Paul, just, you know, the supply side in Appalachia, given the weakened market next couple quarters, I would think that could see some more meaningful kind of supply pullback, and are you seeing that from vendors or labor flows or what the talk is in the marketplace?

I think you hit on what I would call some of the main leading indicators, which are But people are all of a sudden not an issue. We have, you know, we're in as good a shape as we've been in a long time. And, you know, the labor pressure, you know, by that I mean just finding the people to work the mines as well as pressure on wages has really diminished. And, you know, I think that's the first main indicator. I think the second one is that you're also starting to see the availability of that's better on parts and supplies, and we're starting to hear some of the lead times on equipment dropping. So I think all those indicators tell you that there is a slowdown coming. And as I said in my remarks, you know, we're seeing, you know, particularly some of the smaller mines drop offline, you know, as the cost pressure is starting to hit them. Look, I, you know, these periods of weak markets aren't any fun, but Yeah, it kind of cleans up the production side, but I think it's good for everybody.

And like, you know, Paul just talked about Appalachian. You asked about it, and that's probably where we see the leading indication. The reality is these prices don't work anywhere, is our view. And that's not to say first-portal producers can't continue to generate cash, but you've got a lot of players out there. that are struggling. And I'd say that even in Australia, when you add back things like sustaining capital, you're looking at prices that are well below a break even, even with the big horses in Australia, particularly post the changes in the wealthy structures there and the other pressures we've seen. So we do believe that supply side is going to come under pressure. It's why we're, you know, feeling positively about, you know, 2025 and where the market might trend. You know, a little demand uptick would certainly be positive and I think could have a significant influence on cooking coal markets and prices. But by the same token, this will fix itself as well if these prices stay down where they are for much longer.

I'll tell you the last comment I'd make, and I don't want to try and make It sounded any better than it was because Q3 was a tough quarter. But as bad as the quarter was at $93 costs, that's still probably $20 below the bottom of the midpoint. I mean, there's a lot of mines in the U.S. that are out of the money with these prices.

Yeah, you duly noted, Paul and Dec, and given your improvement in operations and maybe the improvement in market, I guess the timing on the transaction could be quite helpful for everyone. Thanks for your time, guys.

Thank you. Thank you, Mike.

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

Paul, thank you again for your interest in ARCS, not only today but also over many years. Upon the anticipated closure of the merger, we'll be turning a page in our long and successful history, and at the same time starting an exciting new chapter with Consolidated as core natural resources. As we prepare for the transition, I want to thank the people who made this new beginning possible. Throughout the process, the Arch Board, the management team, our employees, the employees of Consolidated have worked tirelessly and selflessly, bring this value creation merger to fruition, believing that it is the right path forward to ensure the company's long-term success. It's truly been an admirable show of professionalism that the organization, its shareholders, and its other stakeholders are in their debt for delivery. But that operator will conclude the call, and I look forward to the possibility of reporting to the group in Q1 as part of the first core natural resources earnings call. Stay safe and healthy, everyone.

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