Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2018-Q1

[Operator]

Good day, everyone, and welcome to the Arch Coal Incorporated First Quarter 2018 Earnings Release Conference Call. Today’s call is being recorded.

At this time, I would like to turn the call over to Ms. Logan Bonacorsi, Director of External Affairs. Please go ahead, ma’am.

[Logan Bonacorsi, Director of External Affairs]

Good morning from St. Louis. Thank you 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 maybe 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 Investors section of our website at archcoal.com.

On the call this morning, we have John Eaves, Arch’s CEO; Paul Lang, Arch’s President and COO; John Drexler, our Senior Vice President and CFO; and Deck Slone, our Senior Vice President of Strategy and Public Policy.

We will begin with some brief formal remarks and thereafter, we’ll be happy to take your questions. John?

[John Eaves, Chief Executive Officer]

Thanks, Logan, and good morning, everyone. I’m pleased to report that Arch made excellent progress on a number of key objectives during the quarter just ended.

First, we continue to expand our reach in the seaborne coking coal markets, cultivating and expanding our international customer base and increasing our export volumes.

Second, we achieved our strongest-ever cash margin in our Metallurgical segment at $48 per ton, despite cost pressures in the portfolio. Put another way, a margin that represents over 40% of the selling price.

And third, we bought back another 400,000 shares of stock at a price of $39 million, bringing our total buyback since May 2017, when the program was first initiated to $341 million.

In fact, we’ve now bought back roughly 18% of our shares outstanding at a time of the program’s initiation in the span of less than 12 months. The size and speed of those buybacks is a clear testament to Arch’s substantial cash-generating capabilities, as well as our strong commitment to maximizing value for our shareholders.

As everyone on this call knows, we operate in a highly complex business environment, which can lead to significant degree of variability in our quarterly results. The first quarter of 2018 was no exception. During the period, we encountered operational challenges at our Mountain Laurel mine, pushed up our Metallurgical segment cost, as well as a series of logistical challenges that acted to dampen an otherwise strong financial performance.

Paul will discuss these issues further in his remarks. However, I’d like to note that our increased emphasis on seaborne coking coal markets is likely to result in more timing-related issues associated with ocean vessel movements. Despite these issues, we had a solid performance overall as we again generated more than $100 million of EBITDA for the quarter.

Looking ahead, we anticipate robust free cash flow generation, as the year progresses, with modest maintenance capital requirements, exceptionally low interest expense and effective tax rate of zero. That free cash flow outlook should facilitate a continuation of our proven and effective capital return program, which we believe is the powerful driver of shareholder value.

Turning now to the marketplace. We continue to see coking coal fundamentals in a strong and support of like. Steel demand is up more than 4% year-to-date. Steel prices remain strong in our core Atlantic Basin marketplace and global economic growth remains robust.

The upshot is that coking coal prices remain buoyant. At present, Platts is assessing East Coast price of High-Vol A coal at $185 per metric ton. While that’s down somewhat from recent highs, this is still translating into a very attractive margin for Arch’s primary coking coal products. Moreover, High-Vol A continue to trade at a significant premium to Low-Vol throughout the quarter, reflecting its relative scarcity in the marketplace. As of today, that premium is assessed at around $15 per ton.

On the supply side, Australia is the dominant supplier of seaborne coking coal peers to be headed for a stronger shipping year in 2018. In particular, second quarter 2018 volumes are likely to be up strongly versus last year’s cycle and impacted year. Still questions remain about the ability of rail and port system to move the increased volumes in 2018 and several large producers are guiding to flat or lower volumes for the year due to range of geologic and operational issues.

On the thermal side, the story has not changed much. Seaborne markets remain strong with API-2 prices in Northern Europe above $80 per ton. In Newcastle, Australia, prices above $90 per ton. That translates into attractive netback prices for our West Elk and coal mine volumes. This also means that incremental U.S. volumes will continue to be pulled in the seaborne market, which should translate into a more advantageous supply demand balance domestically.

Meanwhile, generator stockpile correction is entering its 10th quarter and there’s still work to do. On the positive side, stockpiles were reduced by an estimated 10 million tons during the first quarter and currently stand at around 70 days of supply. That’s still 10 days or so too high, but it is progress.

Looking ahead, we believe that the outlook for continued value creation for the balance of the year is bright. We’re sharply focused on capitalizing on strong coking coal market, controlling cost across all three operating segments, and taking our thermal products to the market in a way that optimizes the value of our reserves. Moreover, we continue to believe that we have an excellent plan in place for driving shareholder value. We have proven and highly-effective capital return program.

In closing, I want to thank our employees for their exceptional work throughout the quarter. Simply put, our success rest on their talent, commitment and passion for excellence.

With that, I’ll now turn the call over to Paul Lang for more detail on our operating and marketing results. Paul?

[Paul Lang, President and Chief Operating Officer]

Thanks, John, and good morning, everyone. Today I’d like to provide additional color to John’s broader market comments by digging deeper into Arch’s operational results, as well as our sales and marketing tactics during the quarter.

Starting with the Metallurgical segment, we’re extremely pleased with the results of our decision to move more coking coal volume into the seaborne markets. In fact, our coking coal realizations were up nearly 30% over the fourth quarter of last year. Quarter-over-quarter, our segment cash margin increased more than 50% to about $48 per ton, leading to our strongest-ever cash margin on record for this segment.

These strong pricing levels were driven by increased seaborne coking coal shipments, higher pricing on index-linked and negotiated business, and better fixed pricing on annual North American commitments, as compared to 2017. It’s important to note that our first quarter coking coal realization included approximately 200,000 tons of North American carryover volume. This largely completes our fixed price legacy commitments from last year.

Beyond the carryover volume, we shipped 1.3 million tons during the quarter with nearly 70% of that volume priced on an index basis at an average netback of approximately $155 a ton. The quality mix on our quarterly deliveries was largely representative of our production profile.

In general, coking coal shipments during the quarter were less than ratable due to the previously announced weather-related logistical issues in January and seasonal restrictions for our Great Lakes customers. We’re continuing to see some vessel slippage in part due to competitor volumes not reaching the ports on a timely basis, contributing to delays.

Since our last update, we have committed approximately 800,000 tons of additional coking coal for 2018 delivery. Of that total, nearly 530,000 tons are linked to an index or subject to mutual negotiation and the remaining 270,000 tons at a fixed price of $125 per ton. A vast majority of these fixed price volumes are associated with spot seaborne sales that are likely to ship in the second quarter.

Looking ahead, we now expect to sell between 6.3 million and 6.7 million tons of coking coal in 2018, representing a 3% reduction from our previous midpoint. This revived target reflects the ongoing variability in ship – seaborne shipment timing, our cautious outlook for Mountain Laurel, as well as a conservative operating stance in our 2018 production at the Leer mine.

It’s important to note that we don’t expect our remaining coking shipments to be perfectly ratable for the remainder of the year. In fact, we anticipate second quarter coking coal shipments to be in line with the first quarter volumes due to the schedules longwall moves at Leer and Mountain Laurel, as well as a shipment schedule that is currently concentrated towards the end of June. As you know, and based on past experience, this could result in volume sliding into the third quarter.

For the year, we now have 5.1 million tons of coking coal committed, of which 2.3 million tons are subject to a market-based pricing mechanism and 2.8 million tons or an average fixed price of nearly $118 per ton. At the midpoint of our revived guidance, we roughly – we have roughly 1.4 million tons still uncommitted, with the majority of that open position being our High-Vol A coal destined for the seaborne market. We expect to call the mix of our coking coal sales will be 35% High-Vol A, 30% High-Vol B and 15% Low-Vol in 2018.

As John mentioned on the cost side, Metallurgical segment turned into mixed operating quarter. While our Leer mine delivered a better than expected performance, Mountain Laurel, again, encountered tough conditions associated with the sandstone intrusion in the current longwall panel. As indicated, the operation is preparing to move to the next panel likely late in the quarter, where we believe mining conditions will be more favorable.

However, considering this recent development, we are tempering our expectations for the year with the operation. Outside of the operating issues noted, we also incurred increased sales sensitive costs related to higher coking coal prices, as well as several one-time expenses that hit during the first quarter. Together, these items accounted for more than 50% of the quarter-over-quarter cash cost increase.

Going forward, we’re now targeting an average cost structure in the range of $60 to $65 per ton for full-year of 2018. While this is a level higher than originally anticipated, we continue to view our portfolio as one of the most cost competitive in the U.S. metallurgical coal sector.

Turning to the thermal franchise in the Powder River Basin, the customer shipments were flat when compared to the fourth quarter of 2017, supported by favorable winter weather that persisted for most of the quarter. However, ongoing uncertainty in future burn forecasts, still high-coal inventory levels, and lower pricing for competing fuel sources led muted buying activity during the period.

In fact, we elected to place only 1 million tons of additional 2018 coal sales at an average price of approximately $12.60 per ton, representing a premium to the current fiscal spot pricing levels.

Given the current market fundamentals, we’ve made a strategic decision to reduce the production level to our Black Thunder mine. We now expect to produce between 62 million and 68 million tons from the operation in 2018, a roughly 10 million ton reduction from the midpoint of our most recent guidance.

This approach will allow us to keep the tons in the ground for future periods rather than sell them for an adequate return. We believe this measured marketing strategy for our Powder River Basin franchise is in the best long-term interest of the company and the shareholders.

Despite targeting a lower volume level, we remain keenly focused on holding the line on costs, as we progress through the balance of the year. As a result, we are maintaining our previous cash cost guidance for this segment at $10.45 to $10.95 per ton for 2018. It’s important to keep in mind that due to the normal seasonality of Powder River Basin shipments, we’d expect the second quarter to be our lowest shipping, the highest-cost period of the year.

With the new sales commitment signed in the quarter and our decision to lower the production level at the mine, we have reduced our uncommitted 2018 Powder River Basin volumes to approximately 5 million to 7 million tons, all of which is at Black Thunder.

Moving on to the Other Thermal segment, shipments were slightly below the fourth quarter results on planned lower volumes from our West Elk mine. Both West Elk and Coal-Mac continue to participate meaningfully in the export thermal markets, as attractive international pricing and strong market conditions pulled U.S. coal in the Northern Europe, Asia and South America.

For the year, we expect exports from this segment of more than 4.2 million tons, which is over a 50% increase from our 2017 levels. For 2018 deliveries, we committed 550,000 tons at an average price of around $34.50 per ton. We now have 8.3 million tons sold for this segment, all of which is priced.

As expected, the cash costs at our Other Thermal segment trended up in the first quarter, reflecting a smaller contribution from the lower-cost West Elk mine and a higher relative contribution from the higher-cost Viper mine. Given the anticipation of a slight increase in volumes from this segment and ongoing cost control initiatives, we have slightly decreased our 2018 cash cost guidance for this segment to a range of $27 to $31 per ton.

Overall, we now expect our 2018 thermal shipments for the company, as a whole, to be between 80 million to 84 million tons. Based upon the midpoint of this guidance, we are approximately 90% committed for the year. Once again, our first quarter results demonstrate that the scale and range of our asset base is a competitive advantage.

As we progress through the remainder of the year, we’ll remain focused on reducing costs, executing on our seaborne centric marketing approach, which continues to pay dividends and increasing the profitability in each of our operating segments.

I’ll now turn the call over to John Drexler, Arch’s CFO, for an update on our financial position. John?

[John Drexler]

Thanks, Paul, and good morning. During the first quarter, we continue to execute on our plan to generate healthy cash flows, maintain a strong and flexible balance sheet and execute aggressively on our capital return program.

During the quarter, cash generation continued to be strong with $66 million [ph] of operating cash flows, despite the impact of negative working capital adjustments of $70 million. The negative working capital adjustment stem in part from the logistical challenges amidst seaborne vessel shipments that occurred during the quarter.

We would expect our working capital adjustment – adjustments to moderate over the course of the year. Despite the operational and supply chain challenges this quarter, all of our operating segments continued to make solid contributions, demonstrating the capability of our low-cost asset base.

As John indicated in his remarks, we continue to return capital to you, our shareholders. Since the program’s inception, approximately a year ago, we have returned $341 million by repurchasing 4.3 million shares, or approximately 18% of the shares outstanding at an average price of $77.71 per share. During the first quarter, we bought back an additional 407,000 shares for $39 million.

As of March 31, we had approximately $159 million of capacity remaining under the $500 million repurchase authorization. In addition, the Board of Directors has approved the next quarterly dividend payment of $0.40 per common share. That dividend will be paid on June 15 to stockholders of record at the close of business on May 31. When combined, we have returned $373 million in just 12 short months.

Looking ahead, we expect to continue to execute on our plan of returning excess cash to our shareholders, and we will constantly evaluate, which uses of cash provides the best risk-adjusted return over the longer-term. With this deliberate process, proven strategy and expectation of strong free cash flows for the remainder of the year, we expect to further our progress on our capital return program over the course of 2018. The capital return program remains an important focus for the company and our Board.

We ended the quarter with $433 million of cash in short-term investments well within our expectation to maintain a cash position of between $400 million and $500 million. We also ended the quarter with $329 million of debt leaving us in a net cash position of $104 million.

We continue to remain intensely focused on maintaining our industry-leading balance sheet and ample liquidity. We recognize that we operate in an industry that will experience cycles. And as we have learned, the strong balance sheet provides crucial support through each phase of the market cycle.

Also, in early April, we took another step in lowering our cost of capital further. On the back of ratings upgrades from both S&P and Moody’s, we repriced our $300 million term loan, reducing the interest rate from L-plus 325 to L-plus 275. The rate reduction will lower our cash interest expense by $1.5 million on an annual basis.

Since our reorganization, we have refinanced and repriced our debt three times, taking an initial rate of L-plus 900, down 625 basis points to L-plus 275 and reducing our annual interest expense by $22 million. In addition, we have entered into interest rate swaps for a portion of the term loan fixing the floating rate for the next several years. Details are disclosed in our security filings, but for the remainder of the year, we have swaps in place for $250 million of principal at an interest rate well below current market rates.

Our 2018 guidance is reflected in the press release, and Paul has provided thoughts on our sales and operating cost outlook for 2018. A few additional items to note. We now expect our SG&A expenses to be between $87 million and $92 million. This includes $15 million of non-cash equity compensation expense. This increase of $3 million at the midpoint from last quarter, primarily stems from one-time compensation-related expenditures and legal expenses during the first quarter.

Our interest expense guidance of $16 million to $18 million reflects the impact of the term loan repricing, and we continue to expect our tax provision to be zero for the foreseeable future. Wrapping up, we continue to believe there is great strength in our coking coal and thermal coal franchises. In fact, we are confident this expertly paired operating portfolio, pristine balance sheet and clear and systematic approach to capital allocation, will continue to generate significant value for our shareholders.

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

[Operator]

Thank you. [Operator Instructions] And we’ll take our first question from Mark Levin with Seaport Global. Please go ahead.

[Mark Levin, Seaport Global Securities]

Okay, thanks very much. A quick question on the – or my first question is on met coal cash cost, obviously elevated and you referenced what’s been going on at Mountain Laurel. When you think about 2019, so I’m just – I mean, obviously, 2018 you’ve run into a sandstone intrusion. You had lots of logistical-related issues well-documented. But when you think about the cost structure maybe looking out a year, is there anything that has changed in terms of the way you look at what the cost are for the met enterprise, as a whole, beyond the issues that you mentioned in 2018? Put another way, can we go back to where we were before?

[Paul Lang, President and Chief Operating Officer]

Yes, Mark, good morning. This is Paul. As you – 2019 here, it’s a little bit out and I think it’s a little premature to speculate too much on it. But I think, as you listen to what we’ve said in the past, we are expecting better conditions getting back into thicker coal and longer panels at Leer, that’ll happen. And the geologic issues in Mount Laurel to us, obviously, been a little more vexing for us.

With that though, I think, I always get a little humbled by the central lap longwalls, particularly Mount Laurel. But I think, we have a quite a bit of hope of getting back to a more normal life cost structure.

[Mark Levin, Seaport Global Securities]

Is it – Paul, is Mountain Laurel core? I mean, I know it’s an asset it’s been around for a while and it feels like there have been issues there from time to time over the years. Is that an asset that I guess, the political answer is, if somebody offers the right price, nothing, everything is for sale. But just in general, like it just feels like this asset is – it tends to create some issues or has created some issues over-time?

[Paul Lang, President and Chief Operating Officer]

Mark, I think six months ago, I said, I think I made a comment, Mountain Laurel has had a great run. But obviously, it’s no longer in the elite status it was 10 years ago. Obviously, we mined our best coal first. But having said that, we’re still expecting some significant volume contribution from the mine, particularly in 2018. And look, it’s got a middle of the road, the higher, as far as the competitor cost structure. And I think, unfortunately, we ran into a similar condition this quarter as we did in the summer of last year.

[Mark Levin, Seaport Global Securities]

Okay.

[Paul Lang, President and Chief Operating Officer]

I think, we are expecting better conditions in the next panel and we’ve not seen anything in development. But if the geology and mining costs stabilize, which is what we’re shooting for, I think, Mountain Laurel could remain a significant part of our portfolio. I think it’s in the case, where we’re at now with that mine as we’re going to have good quarters and we’re going to have bad quarters.

But I think, as you look at it, the mine as a whole has a good international standing as far as coking coal. It’s been used by steel makers all over the world, and I think it’s clearly worth the struggle right now. It’s a well-known brand, but we – and we have a great management team there. So I’m hopeful, but it’s a very wide-eyed as we go into this year about that operation.

[John Eaves, Chief Executive Officer]

Hey Mark, this is John, let me just tag onto what Paul said, I mean certainly it was a tough quarter for Mountain Laurel, you’ve heard me say many times, I mean we are always looking at our portfolio and trying to make revisions to make sure that we’ve got assets that are creating positive EBITDA on our long-term strategic basis. I mean if you remember last year in the third quarter 2017, we finally came to conclusion with Lone Mountain that it just wasn’t contributing enough, it wasn’t strategic so we decided to sell.

So, this management team is always looking at our portfolio, we’re willing to make the tough decisions, I don’t think we are there on Mountain Laurel at this point, but longer-term if we have an asset that’s not making a contribution we have two options, we can close it or we can sell it and I think this team has been willing to do that. But as Paul said, I mean we are going to move the Lone and Laurel later this quarter, the next panel looks better, we’ll manage it and see where we are, but if you look at our overall cost structure we’re still on extreme low end of the cost structure in Central App and feel like we’ll stay there.

[Mark Levin, Seaport Global Securities]

Okay fair enough and then just the last question, I guess this might be more to, on John Drexler, when we are kind of thinking about Q2 and I know you don’t give quarterly guidance, but I was just trying to like kick off some of the positives and the negatives in Q2 at least relative to Q1, I think you referenced flat met shipments, may be some – the potential for some vessel shipping into Q3, weaker PRB shipments due to seasonality, obviously met prices have come off Q2 versus Q1. So, I mean is it reasonable to expect obviously that Q2 would be down, potentially significantly from Q1 before maybe recovering later in the year, is that the right way to think about it, just the puts and takes?

[John Drexler]

Yes, I think, Mark if you look at kind of how we’ve laid things out, right you’ve highlighted what we’ve identified in the release that the second quarter is going to be in the PRB, the widest quarter from a shipment perspective and I think we’ve been very clear also with the volume expectations in the met portfolio as well. With all that being said, I think we continue to believe that we’re going to be generating substantial cash over the remainder of the year and the portfolio is well-positioned to operate here as we work through the remainder of 2018.

[Mark Levin, Seaport Global Securities]

Okay.

[John Eaves, Chief Executive Officer]

Mark, this is John, let me just tag on a little bit here. We do have two longwall moves during the second quarter, I mean we’re building inventory to mines obviously, but when you look at our vessel schedule, we’ve got quite a few vessels that are scheduled in the back half of June and what we found was that know with that shipping schedule some of those could slip into the third quarter. So, I think we’re trying to be measured as we look at the second quarter, but certainly volume should be stronger as we think about third and fourth quarter.

[Mark Levin, Seaport Global Securities]

One more and I’ll get off and let someone else answer, but has the logistical situation improved materially, not a little – not – I mean how would you kind of characterize what you’ve seen you know as we’ve exited winter, I mean is it getting any better or has it gotten a lot done, I mean how would you characterize it?

[Paul Lang, President and Chief Operating Officer]

I guess, I’ll take the first shot, let’s see if John wants to add. From what we’ve seen, CFX has really come around, they’ve pretty well got themselves back in line. The – it has on the other hand is still struggling pretty hard. Now most of our impact has been on the thermal side of our exports because of that. And the third item I think I’d point out is, where we see lot of delays is when we are loading parcel vessels, by that I mean if we are – we sold maybe three of the hulls of the six hull vessel and the other party has not filled their obligation or doesn’t have the coal, our vessel is tended to sit. So I think things are working out, but there’s clearly been some growing pains in the last six months, especially on the export side.

[Mark Levin, Seaport Global Securities]

Fair enough. Thanks very much.

[Operator]

We will take our next question from Lucas Pipes with B. Riley FBR. Please go ahead.

[Lucas Pipes, B. Riley FBR]

Hey good morning everybody.

[John Eaves, Chief Executive Officer]

Good morning Lucas.

[Lucas Pipes, B. Riley FBR]

I wanted to follow-up on the cost side as well and I thought I would kind of start with Q1 versus full-year guidance, so I think in Q1 we were at $68 full year guidance is $60 to $65, obviously that’s cap met. And then in the second quarter you alluded to two longwall moves, so I would think kind of all else equal costs maybe rise in the second quarter, so should we think like second half of this year is substantially lower from where you were in the first quarter and I would appreciate your thoughts around that, thank you.

[Paul Lang, President and Chief Operating Officer]

Yes Lucas, as you look at the first quarter the cost is in the $68 range and if you look quarter-over-quarter there were really kind of three things that or two things that really brought that in. First obviously was a good one, we had a impact of sales sensitive which was about a $1.50 a ton. The second was we had a series of what I’d call usual adjustments in Q2 or Q1. There were things like a big subsidence claim we had at Mountain Laurel and a workers’ comp adjustment, those things are one time, but they accounted for about half of the quarter-over-quarter increase.

So if you look at Q1 kind of normalized, it was about $64, I think that’s probably in the range of what you are going to see slightly higher because of longwall moves then normalizing back to our guidance range in the back half of the year.

[Lucas Pipes, B. Riley FBR]

Got it, that’s very helpful, thank you. And maybe to hone in a little bit on Mount Laurel, when I look at MSHA data showed at about 450,000 tons of production in the first quarter and that was a little bit lower from the fourth quarter, but also much better compared to kind of the second and third quarter of last year, so what’s kind of the right run rate from here on out on Mount Laurel and if you could maybe give a little bit more perspective as to the specific issues that you had I would appreciate your perspective, thank you.

[Paul Lang, President and Chief Operating Officer]

Yes, Lucas, one of the issues with the MSHA data, as you know, it is on a produced ton and not a sold ton basis. So what you saw in Q1, particularly for us is the met segment had a pretty good run rate as a whole, but we built about 240,000 tons of inventory in the quarter. I think John alluded to that in our working capital adjustment, now about 140 of that or 170 of that I can’t remember exactly which was metallurgical coal and the balance was met. So you saw some of that in Mountain Laurel and as you look going forward at Mountain Laurel, I think we’re still in that 1.8 million to 2 million ton range if we can sort out this issue that we’ve been having.

[Lucas Pipes, B. Riley FBR]

Got it, okay, well thank you very much for that and best of luck.

[Paul Lang, President and Chief Operating Officer]

Thank you Lucas.

[Operator]

We will take our next question from John Bridges with JPMorgan. Please go ahead.

[John Bridges, JPMorgan]

Hi, good morning John, everybody. I suppose the good news is the High-Vol A price is still holding this premium over Low-Vol, just wondering if you could give us a bit of color as to why you think that’s happening to begin with?

[John Eaves, Chief Executive Officer]

John, this is John. Certainly we think there’s scarcity value in that product if you look at the production on High-Vol A, particularly that has been taken out over the last couple years whether it’s U.S. or even Australia, there is just not a lot of people producing High-Vol A and low cost High-Vol A.

So we’ve seen that premium kind of move back and forward, but if you look over the first quarter, we’ve seen a $15, $20 premium typically between the High-Vol A and going forward we just don’t see a lot of additional High-Vol A coming into the market, if you look back over the last year or two and all the new buy and coming into the market, more of that was Low-Vol and Mid-Vol and not High-Vol A.

So we think we are positioned well with not only the Leer production today, but if you think about the 130 million ton Tygart Valley Reserve we have, we’ve get tremendous organic growth opportunities out there, not in any hurry to bring that on, but we think it’s pretty unique that we actually can replicate with two additional longwalls up in that valley with low cost High-Vol A coal. Paul, you got anything to add?

[Paul Lang, President and Chief Operating Officer]

I’d make the same comment, the High-Vol A is still very popular in Europe, it’s very good for their blends, but I think surprisingly there is still a very good market over there in Asia, particularly in Japan and Korea.

[Deck Slone]

John I’d add, this is Deck, I’d add that it really in 11 of the last 20 quarter exactly High-Vol A has traded a premium so and we are starting to see this pretty consistently and as Paul said, we really think there is great value and use for the High-Vol A and real appetite for that in Europe in particular, but increasingly globally.

[John Bridges, JPMorgan]

I guess I’m going to change my models to go from a $0.10 discount to a $0.10 premium. So the logistics problems, could that be contributing to the strength of the High-Vol price because I’m just thinking that you’ve seen more volumes going out of Chesapeake Bay than it’s coming out at the moment without these apparent checkpoints?

[John Eaves, Chief Executive Officer]

Look John I think that they factor into this is that the ability to get that coal offshore has been strained a little bit.

[Deck Slone]

But, John did – as John pointed earlier, it’s carefully valued across a wide range. So logistics have been strained in a number of places. But again, just really that that lack of High-Vol A availability, I’m just not seeing more of it come online. And in fact, some of the High-Vol A mines are out there have struggled with cost and with production issues. So we feel pretty positively about the outlook.

[John Eaves, Chief Executive Officer]

And John, on the logistical challenge, I think, would hit all the products. I mean, not just High-Vol A, but it would be kept in your Low-Vol and your High-Vol B, as well as PCI.

[John Bridges, JPMorgan]

Thanks for the color on those logistical issues. And then just finally, on Mount Laurel, as you said, you take the best coal first. So the – do you say, you’re going to be moving to another seam. What should we expect from the character of the coal going forward? And it’s part of the inventory issue difference in yields of High-Vol deep coal that you’re producing from that that asset?

[Paul Lang, President and Chief Operating Officer]

John, the panel we’re going to is adjacent, that’s why I remain a little bit cautious on our outlook for the rest of the year. And we’ve actually frankly, dropped our guidance a little bit on that issue. As far as quality in that and yield, it’s about the same. Frankly, the biggest issue with the sandstone intrusion is really what it does to get through and it just tears the equipment out there. I’m sure that has not made to cut solid rock and we get through the intrusions and we fight the maintenance issues usually for six or eight weeks after that.

[John Bridges, JPMorgan]

Yes. Okay. Good luck, guys. Many thanks.

[Paul Lang, President and Chief Operating Officer]

Thank you, John.

[John Eaves, Chief Executive Officer]

Thank you, John.

[Operator]

And we will take our last question from Michael Dudas with Vertical Research. Please go ahead.

[Michael Dudas, Vertical Research Partners]

Good morning, gentlemen, and Logan.

[Logan Bonacorsi, Director of External Affairs]

Good morning, Michael.

[John Eaves, Chief Executive Officer]

Michael.

[Michael Dudas, Vertical Research Partners]

John, as you commented on your pullback on your PRB volumes. And so on top of that thinking about – and you were, of course, should we expanded for being so open going into 2018 on the met coal side? How are you thinking about this broad marketing strategy as you look into the second-half year into 2019, as the U.S. negotiations come up on your positioning?

Is it going to be difficult to be had in the past, given where the market prices are relative to expectations in the past from the market where you guys? And what do you need to see before you want to get PRB kind of back to a better run rate volume, obviously, an inventory day level would be management then to shareholder where you take it from there?

[Paul Lang, President and Chief Operating Officer]

I’ll start that question. As far as the met going into the future and I think, we’ve been very honest in the past. I think, we believe North America is an important customer base for us for the met segment. But at the same time, we’re not willing to accept a huge discount to stay in that arena. And going forward, I think, we’re just going to play it as it comes. And if there is an expectation of a discount in the U.S., that’s more than the value and that value is easier logistics, we’ll stick to international market.

[John Eaves, Chief Executive Officer]

Michael, I think, it’s a credit to Paul and his team. I mean, we did a pivot from – we went from 17 to 18 and we went from 50-50 to about 80% of our product been in the international market, 20 domestic. If you look at our portfolio, the products that we offer into the market are logistical options. I think, it allows us to be pretty nimble.

So to Paul’s point, we’re going to evaluate the market opportunities later this year and really go with where the best economics for this company are. And fortunately, we have the ability to react like that fairly quickly.

[Deck Slone]

John, the Powder River Basin, just to come to that side of it. As we look at where stockpiles are today, we think it is sitting at around 70 days, that’s still more than enough, obviously. Now we have seen some of our fee activity that’s been somewhat encouraging. The fact is that, we’re still too much closing an inventory, there’s not enough demand coal.

And so, as indicated, we were comfortable pulling back to a lower level of production. We think that’s the right place to be. Natural gas prices are sitting at 275 versus 275 right now, given that and given that outlook. We’re comfortable with these lower levels of production. But obviously, if we see meaningful movement and demand in pricing, we can revaluate.

[Michael Dudas, Vertical Research Partners]

Maybe a follow-up on the domestic versus international mix. Any thoughts on 232 aftermath and what indications we’ll be hearing from some of your current or anticipated U.S. customers on the Coker or the met coal side?

[Deck Slone]

Yes, Michael, it’s Deck, again. And certainly, we continue to feel fairly positively about section 232. We think this administration is time to find the right balance here to advantage the U.S. industry without precipitating too much contentiousness in the international arena, because obviously, the international market is important to us. Clearly, higher steel production in the U.S. directly benefits U.S. metallurgical coal producers and even if it’s not us selling into that U.S. market as much it is our competitors.

So and that’s advantages. And if we see increased production steel in the U.S., that’s a direct benefit. We are seeing indications, obviously, some additional steel output and expectation for increased output as the year goes on. As you see the restarted Granite City being contemplated maybe even the actual work.

And so, as we look at that, we do see that as relatively positive. Meanwhile, it does appear that administration has signed to work with some of our larger trading partners to make sure that they are not passively disadvantaged and those trading partners are important to us, obviously, as we are selling into the Atlantic Basin selling most of our metallurgical coal into the Atlantic Basin. So we feel relatively positively at this point, we’ll continue to watch it.

[Michael Dudas, Vertical Research Partners]

Yes, it’s all about making deals and watching it, Deck, isn’t it? Okay. Thanks, gentlemen.

[John Eaves, Chief Executive Officer]

Thanks, Michael.

[Paul Lang, President and Chief Operating Officer]

Thank you.

[Operator]

That does conclude our question-and-answer session for today. I would now like to turn the call back to Mr. John Eaves for any additional or closing remarks.

[John Eaves, Chief Executive Officer]

I want to thank you for your interest in our call today. This management team is laser-focused on managing our costs, managing our balance sheet, being nimble on the marketing side, executing on our capital return program. Again, we thank you for your interest. We look forward to updating you on second quarter results sometime in July. Thank you.

[Operator]

Ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.