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.