Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Arch Resources, Inc. First Quarter 2024 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, April 25, 2024. I would like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead.

[Deck Slone, executive]

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 Federate Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are to different degrees, uncertainty. These uncertainties, which are described in more detail in the annual and quarterly reports that we filed 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 Investors section of our website at archrsc.com. Also participating on this morning's call will be Paul Lang, our CEO; John Drexler, our COO; and Matt Giljum, our CFO. After our formal remarks, we'll be happy to take questions. With that, I'll now turn the call over to Paul. Paul?

[Paul Lang, executive]

Thanks, Dick, and good morning, everyone. We appreciate your interest in Arch, and we're glad you could join us on the call this morning. I'm pleased to report that during the first quarter, Arch continued to drive forward with our consistent and proven plan for long-term value creation and growth despite some headwinds. During the quarter just ended, the team achieved an adjusted EBITDA of $103 million and generated $83 million in discretionary cash flow. We delivered a $56 per ton cash margin in our core metallurgical segment, underscoring the durability of our cash-generating capabilities across a wide range of market environments, reduced our outstanding share count by 3%, which includes 315,000 shares associated with the unwinding of the capped call instruments and the repurchase of an additional 95,000 shares including a quarterly cash dividend of nearly $21 million or $1.11 per share payable in June. And perhaps most importantly, extended our industry leadership and sustainability and the state of West Virginia named Leer and Leer South, co-recipient of the state's top safety award and honored Leer South with the state's top environmental award. As we've noted many times in the past, our capital return program is the centerpiece of our value propositions. We have now deployed more than $1.3 billion for this program since its relaunch in February 2022, a figure equivalent to 46% of our current market capitalization in a period of just over 2 years. Breaking that down further, we paid $727 million or nearly $39 per share in dividends over that time frame, while reducing our share count by 3.5 million shares or roughly 62% versus the full level in May 2022. As indicated, this last component, the systematic reduction in our share channel has taken center stage and is receiving our intense focus. We've already made significant progress on this front over the last 2 years, reducing the share count from 21.9 million shares in May 2022 to 18.4 million shares today. Along with this, we believe we've positioned the company to drive even greater progress in the quarters ahead through our efforts to streamline capital structure over the last 2 years, including the retirement of our convertible debt, the elimination of [indiscernible] and the recent liquidation of our cap call. And our decision to build a substantial cash balance to facilitate the opportunistic buying of our shares during market pullbacks. In short, we believe the sales is set for ongoing investment and Arch is compelling long-term prospects through a strong and sustainable share repurchase program. Turning to the coal market dynamics. After declining steadily throughout the first quarter, seaborne coking coal prices appear to have found a base over the last 2 weeks and are beginning to show signs of a rebound. At present, [ class ] is assessing high-vol A coking at $220 per metric ton that will be the U.S. East Coast versus an average of $285 per metric ton on the same basis, just last December. It's worth noting that despite the relative market softness year-to-date, certain demand fundamentals appear generally supportive. For instance, global hot rental output for the world, excluding China, was up 2% during the first 3 months of the year, while China's imports of high-quality seaborne coking coal continue to trend higher. Counterbalancing those positive indicators. The supply side has recovered modestly year-to-date, with Australian and U.S. coking coal exports rebounding somewhat, albeit to a level significantly below our respective books. It's important to point out as a world-class competitor with a first quartile cost growth, Arch is exceptionally well positioned to manage through extended periods of market weakness while still driving value for shareholders. In fact, periods of market weakness can be healthy in our view by differentiating the stronger operators and reinforcing the fact that this is a commodity business, the cycles that ebb and flows and being a low-cost producer does that.But we also continue to believe in our long-standing thesis that underinvestment in ESG-related constraints will continue to support a constructive long-term supply-demand balance with global coking coal markets. In fact, those dynamics could spur a quick recovery in such markets if global economic conditions start to strengthen or major economies begin to increase their steel intensive [indiscernible] spending. It's also worth noting that recent price declines may already be taken in coal on high-cost U.S. operation. In recent weeks, several small coking coal mines idled sections or ceased production entirely according to market [ ecology ].Turning now to the thermal markets. U.S. fundamentals remain challenged with natural gas trading below $2 per million at Henry Hub and utility stockpiles at historically high levels after the mild winter. These macro factors in turn build an estimated 10% decline in domestic thermal coal production on a quarter-over-quarter basis. On a more positive note, the seaborne thermal market has rebounded somewhat with [indiscernible] Newcastle price standing at $130 per metric ton and API-2 at $119 a metric ton.We [indiscernible] to this improvement in the price environment. U.S. thermal coal exports were up roughly 26% for the first 2 months of 2024 when compared with 2023. Looking ahead, we're sharply focused on driving continuous improvement across our operating platform in support of our ongoing and value-generating capital returns for our shareholders. At the same time, we're continuing to capitalize on the strategic optionality afforded to us by our ownership interest in the DTA terminal as we navigate through the tragedy of the Francis Scott Key Bridge collapse at the Port of Baltimore.While the closure of the Port should not have any impact on production in our mine, it's likely constrained second quarter coal shipments somewhat and in turn, dampened Q2 capital returns. However, we expect the impacts to be timing related only. If the Port of Baltimore reopens as anticipated with the effective cash flow merely delayed rather than lost. In closing, what we say in many respects, Arch is built for periods such as this, with our low-cost position and high-quality products afford us the ability to generate substantial cash flow despite softer market environments. At the same time, we believe we're equally well positioned to capitalize on our situation and return even more robust amounts of cash to our shareholders when the markets recover. With that, I'll turn the call over to John Drexler for further discussion on our operational performance in Q1. John?

[John Drexler, executive]

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team successfully navigated through significant disruptions to the logistics chain and a weakening market environment during Q1, while still delivering substantial amounts of discretionary cash flow. While production levels for our core metallurgical segment were less than ratable from an annual guidance perspective, the portfolio is currently transitioning into increasingly favorable geologic conditions, and we expect good momentum as we progress through the year.In the first quarter, our core metallurgical segment once again delivered a first quartile cost performance and generated nearly $130 million in adjusted EBITDA despite less than ratable [indiscernible] stemming from longwall moves at both Leer and [indiscernible], typical geologic variability, and issues I would characterize as just mining. Included in this latter category, we lost 7 days of longwall production at the Leer mine during Q1 but an estimated impact of around 70,000 tons due to our efforts to coordinate the longwall start-up with a local utilities relocation of [indiscernible] that were to be under. While the steps we took on that front resulted in our receipt of the $9.1 million payment, which was recorded as other income, we estimate that the lost tonnage inflated our Q1 metallurgical segment costs by close to $2 per ton. Even with that impact, the segment's average cash cost came in at $94 per ton, which was modestly above the high end of our full year guidance range, but still top tier when compared to other U.S. coking coal producers. As indicated, our coking coal lines are transitioning into increasingly favorable geology. And as a result, we remain comfortable with our full year guidance and the cash cost midpoint of $89.56 per ton. In the Thermal segment, the West Elk mine continue to operate efficiently and generated solid adjusted EBITDA even as it continues to ship under several legacy contracts that dampened netbacks there. The Powder River Basin assets also operated efficiently, but lost cash in spite of that fact due to the rapidly improving domestic thermal demand environment. In short, we ended the year stripping at a pace consistent with the 55 million tonne per year sales volume level and are currently anticipating 2024 shipments that could be as much as 10 million tons lower than that. As a result, the PRB operated in the red in Q1, counterbalancing the solid performance at West Elk. On a more positive note, we expect to capitalize on the excess stripping completed in the PRB in the year's back half and as in the past, to preserve value by negotiating additional out-year commitments in exchange for any customer requested deferrals. Looking ahead, we continue to be encouraged by the general progression of our coking coal operations. Leer South is currently operating at a good productive pace and is well on track in our view to achieve the 3 million ton annual production figure we have targeted for the mine for 2024. Moreover, the development work we are currently doing in District 2 is serving to reinforce our confidence in the much enhanced geologic conditions we expect to encounter there. As previously discussed, our drilling data as well as our experience via the early development work in that district suggests a materially favored coal seam and more favorable cutability overall in District 2, which would prove beneficial when we begin longwall mining there in the fourth quarter. I will say again, at a time when many other operations are wrestling with the migration to less advantageous and higher-cost reserves, we are fortunate to be moving in the opposite direction at Leer South.Now let's spend a few minutes discussing the closing of the shipping channel in Baltimore following the tragic bridge collapse. As we have discussed, we typically ship the majority of our Leer and Leer South export volumes or roughly half of our coking coal volumes overall via the Curtis Bay terminal in Baltimore. With the channel closed, we are having to direct volumes elsewhere, and I'm pleased to report that the team is doing a terrific job on that front and remains focused on maximizing our shipments using alternative routes. Of course, our strategic investment in Dominion terminal associates in Newport News has been pivotal to our success on that front, as has been the great support we have received from our [indiscernible]. While we continue to work around capacity constraints at DTA, we believe we will be able to achieve sales volumes in the range of 1.9 million to 2.2 million tons in Q2, depending on the exact timing of the channel reopening that is currently projected for the end of May, according to the U.S. Army Corps of Engineers. That volume level would put us at around 4 million tons in the first 2 quarters, suggesting a little over a 2.4 million ton quarterly run rate in the year backlog. Given our available alternative logistics and stockpile capacity, we do not expect any impact to our production levels at the mines due to the port outage and continue to view our prior volume guidance of 8.6 million to 9 million tons as achievable. Before passing the time 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 Q1, Arch's subsidiary operations achieved an aggregate total lost time descent rate of 0.62 incidents for 200,000 employee hours worked, which was more than 3x better than the industry average. On the environmental front, the company again recorded 0 environmental violations under SPECTRA as well as 0 water quality exceedances across all of our subsidiary operations. Highlighting the team's excellent work, the state of West Virginia recently named the Leer and Leer South lines, co-recipient of the Governor's milestone of Safety Award, the state's highest safety honor. In addition, the Mount Laurel line and the Leer, Leer South and Mount Laurel preparation plants were each honored with the Mountaineer Guardian Award for Safety Excellence. In the environmental arena, Leer South claimed the Greenlands Award was state's highest honor for environmental achievement and Leer and Leer South were honored with additional environmental excellence. On behalf of the Board and the senior management team, I want to 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 color on our financial results. Matt?

[Matthew Giljum, executive]

Thanks, John. Good morning, everyone. Let's begin with the discussion of first quarter cash flows and liquidity. Operating cash flow totaled $128 million in Q1, which included a working capital benefit of $19.7 million. While we had anticipated working capital to build in the period, the decline in metallurgical prices over the course of the quarter, combined with lower thermal shipment volumes resulted in a meaningful drawdown of accounts receivable. Capital spending totaled $45 million and discretionary cash flow was $83 million. Turning to the balance sheet. We ended March with cash and short-term investments of $340 million, essentially flat with 12/31 levels. As we discussed in last quarter's call, we closed on a new $20 million term loan in Q1 and largely used those proceeds to retire the old loan and make other debt amortization cases, resulting in end of quarter debt of $146 million, which is only modestly higher than year-end levels. Our net cash position was $174 million at March 31, and our liquidity was $442 million, both of which remain above target levels. Turning now to the capital return program. We continue to execute on our two-pronged approach, systematically reducing the share count while also paying a meaningful dividend. Starting with the share count through a combination of the cap call unwind and share repurchases, we retired 410,000 shares during the quarter. The cap call unwind, which made up over 75% of that total was equivalent to a share repurchase of nearly $53 million without any cash outlay in the quarter. We also repurchased 95,000 shares in the open market in Q1 and in total, have now retired over 2.5 million shares at an average price of $139 since we relaunched the program. That combined with the return of the convertible debt has reduced our fully diluted share count by 3.5 million shares since its recent high point in 2022. Annual share count reduction is our clear priority. The dividend remains a significant component of Arch's value proposition. The board has approved a quarterly dividend of $1.11 per share today, bringing the total dividends to nearly $39 per share since the beginning of 2022. The company dividend will be paid on June 14 to stockholders of record as of May 31. Next, I wanted to provide some additional detail around Paul's comment on Q2 capital returns. John just provided an excellent overview of our approach to managing our export metallurgical shipments, while Baltimore Harbor remains closed. From a timing standpoint, as you would expect, much of April to date has been focused on redirecting activity away from Curtis Bay and 2 DTA and other alternatives with the net result being export shipments heavily weighted towards the latter half of the quarter. Additionally, we expect a further seasonal step-down in thermal volumes in Q2 before seeing modest improvement as we get into the summer. As a result, we currently expect a significant working capital increase in Q2 and the operating cash flows and discretionary cash flows will be at levels that we will offer significant share repurchases in the quarter. We view this strictly as a timing issue, and we anticipate cash flows and capital returns to normalize as we get to Q3. As a final point, while we expect second quarter volumes in both segments to be lower than ratable as compared to guidance levels, we expect stronger performance in the second half of the year and are maintaining our full year operating and financial guidance. With that, we are ready to take questions. Operator, I will turn the call back over to you.

[Operator]

[Operator Instructions] Your first question comes from Lucas Pipes from B. Riley Securities.

[Lucas Pipes, analyst]

I want to start with a strategic question. So when I kind of think back over the last couple of years, there were a number of kind of unexpected issues, the Curtis Bay disruption, West Elk, geology, Leer South geology, and then obviously, the recent tragedy in Baltimore. Your strategy has been focused on kind of large productive mines, and you focused on these core assets. And I would expect mean reversion kind of from the events of the recent years. But is there a case to be made? And how do you think about adding more geographic or other diversification to the portfolio?

[Paul Lang, executive]

I think it's an interesting question, Lucas. I think I've told people many times over the years. I think back in 2012, when we were operating [ 38 lines ], for us, we found it was not the easiest. I think there's others that do it well. But where we have found our sweet spot, I think, is operating in very large, very efficient, very low-cost mines. And it does come with a certain degree of exposure.But by and large, I think particularly as we continue to improve Leer South, I think we really will be set up well drilling in the future. I think more importantly, what you'll see is that if you look at our maintenance CapEx, the status quo the next 10 years, our CapEx is going to be much lower than some of our peers that are operating [indiscernible]. For us, that's kind of a little bit of the offset to the very issue you're talking about being more spread out. So with that, I don't know if any of the others have any thoughts on that?

[John Drexler, executive]

So Lucas, with the stack. And so with the addition of Leer South, obviously, we were endeavoring to address just that. And I think we've done that to a meaningful degree. Of course, it's not going to be perfect diversification but to a meaningful degree. And I think DTA underscores what you just described, which is the investment we made to expand our investment actually at DTA several years ago is really paying dividends today. So we certainly are aware of that need to make sure that we have flexibility that we can be nimble, that we do have alternate routes and multiple production sources that are consequential. We have 2 big horses now rather than just one in the coke and coal segment as an example.So we have taken meaningful strides. And again, I think that's paying dividends significantly right now when we think about how much volume we expect to move in Q2 despite the fact that Curtis Bay is right now out of the market. But good comments.

[Lucas Pipes, analyst]

On the thermal side, it looked like you pre-stripped out quite a bit in the PRB given the market conditions. So for Q2, what would you expect this to mean on the cost? I assume there'd be a pretty sharp reversal. So if you could kind of walk through the implications on the cost side, also on the volume side for Q2, I would appreciate that. And then, Matt, I think you mentioned there at the end of your comments that working capital will be used in Q2, and you'd expect that to reverse later in the year. You have been very tactical in the past with the pursuit of share repurchases. Could this be a period right now where even though cash flow is maybe temporarily restricted, you continue to lean in, given the very bullish long-term outlook on met coal prices.

[John Drexler, executive]

It's John Drexler. I'll start out with a discussion on the thermal side. The PRB, as we described in our prepared remarks, the team there is prepared for stripping level that was meaningfully above what we've seen here start to play out at the beginning of the year. Obviously, the winter was less than ideal. We've seen gas prices that are displacing electric generation for coal. Just a lot of pressures, and everybody has been feeling it there.What I'm really proud of is the team out at -- in the PRB does a fabulous job. They've been through this before. They know what to do. Unfortunately, it's not something that just happens overnight. But they're in the process right now of adjusting schedules, eliminating over time, managing headcount, laying down equipment, doing all of the things that we've done and we've done successfully in the past. It typically takes several quarters. As we discussed, we have created some pit inventory. We stripped higher than what was shipped. As we realign the operation moving forward, we'll get that benefit, we've seen 50% growth essentially in our pit inventory that we'll benefit from in future quarters. But as you look at the second quarter from a seasonality perspective, there's typically a lot of pressure in that historically in Q2 anyway because of spring and the shorter season. So Q2 may be another challenging one as well, but the team right now is actively implementing all of the measures that we've done successfully in the past. We'll be working to control those costs, minimizing the negative impact in Q2 and we'll expect to benefit from that and get back to cash positive here as we work through the remainder of the year in 2022. And Lucas, in the past, look, if you look back, you can certainly see those periods when we do sort of flip over to shipping more than we strip. You can see the margin expansion. Now obviously, there's some headwinds out there on the thermal side, stockpiles are very high, gas prices are low. So we'll see how that manifests itself. But that could be pretty powerful when we do move to that point where we're shipping more than we strip as opposed to the headwind that we've had in Q1, we'll have to get in Q2, which is stripping more than we shipped. So certainly are feeling optimistic about the second half, but we'll also have to watch and see what happens with thermal demand overall.

[Matthew Giljum, executive]

On your question regarding the share repurchases, we clearly expect a working capital build this quarter. Harder to predict this quarter probably than most just given all the uncertainties around how the export shipments will be diverted and where those will end up. But safe to say, given the shift in volumes to the latter half of the quarter that we'll see that build.As it relates to the share repurchase program, we clearly last quarter, built up a nice bit of cash on our balance sheet to be opportunistic. And if the share price moves in a way that we think it's very opportunistic to be in the market this quarter, I think you'll see that. But clearly, that was meant to be 4x when the cycle really moved against us when the long-term fundamentals didn't necessarily do so. So I think we'd probably be more likely to continue to hold that cash absent a particularly good opportunity for buybacks.

[Operator]

Your next question comes from the line of Nathan Martin from Benchmark Company.

[Nathan Martin, analyst]

Just maybe sticking with the Thermal segment just real quick. I mean, obviously, you guys just highlighted the high stockpiles, low nat gas prices mild winter for the most part. So what gives you the confidence that you can still hit your full year thermal shipment guidance targets? How are conversations going with customers maybe? I think previously you mentioned we could see another 5% to 10% of those contracted tons roll over into 2025.And then maybe separately, you highlighted another negative contribution in the PRB likely for the second quarter. But is there an opportunity to have an overall positive contribution from the segment, the Thermal segment based on how you think West Elk will perform?

[John Drexler, executive]

Nathan, the goal here, and obviously, we believe over the course of the year, we're going to have the thermal segment cash positive position, both by [ Selk] and in the PRB as we move forward. We talked about this on the last call, we talked about it in the prepared remarks. We're essentially committed in the PRB to higher levels than what we're indicating in the thermal shipment levels. And the expectation is that we're going to continue to see pushback.I applaud the marketing team and their efforts to manage that when you have essentially significantly high stockpiles, the inability of utilities to take any more coal. We found ways and opportunities here to roll over tons, not just to preserve value of those tons that are rolling over, but to actually create value as well. We did that successfully in 2023, and the team is already focused on that and working through those types of opportunities as we move forward here. So yes, we could see ongoing pressure. We could see shipments continue to be challenged. But once again, with the work that's being done at the operation to realign for the expected shipment levels moving forward. And the work that the marketing team is doing, we do expect to get it back to cash positive as we get to the back half of the year.

[Paul Lang, executive]

This is Paul. I think one thing that gives me comfort is I look back. John and the team at Powder River Bain have just done an amazing job in the last 5, 6 years of responding to the market up and down. So it's a big buy. A 60 million ton a year mine doesn't change overnight. In this case, we've done a very good job over the years, responding to these changes in the market. And of all the locations that would have to do it might probably be the one I would fit, and I think they'll do a good job.

[Matthew Giljum, executive]

And then just on the granularity of the numbers. Look, right now, we could foresee potentially shipping as low as 45 million tons out of the PRB. We had 4 million at West Elk and the thermal byproduct in the East. And you're looking at 50 million, which is the low end of that range. And again, we may ship more than that. But right now, we continue to see value in working with customers, deferring shipments if they need to defer them and then using that to get some length.In an environment where stockpiles are very high out there, getting sort of out to your business could be challenging. But using this opportunity to work with customers to get length and maybe multiples of volumes in terms of if we defray land time, potentially getting additional volume beyond that 1 ton out years is a real opportunity. So we're going to be strategic about it. But I do think the 50 million to 56 million tons encompasses a reasonable range for what we would expect in almost anything.

[Nathan Martin, analyst]

Maybe shifting over to the met segment, John. I know you touched on some of this in your prepared remarks. But clearly, Lear had a weak production quarter, I think one of the weakest in 5-plus years. So do you expect that to kind of return to the typical, call it, 1 million ton per quarter kind of run rate post the power line relocation you mentioned? I believe you also previously said the mine should be moving into thicker scene. So great to get a little more color there. And then related, how should we think about the second quarter met segment cost per ton at least directionally from the first quarter? It seems like if we remove that $2 per ton from the power line relocation that you called out, maybe things should improve, but it would be great to get your thoughts.

[John Drexler, executive]

Yes. Good question. And we'll start with Lear and kind of some of the commentary around that. The power line relocation came at the end of a longwall move. We have the right to subside the panels that we mine. There was a power line towers that came across that. The local utility requested that they wanted a little more time to shore up those towers. We were compensated for that $9.1 million that we recorded in other income. But clearly, delaying the start-up of the longwall is impactful, 70,000 tons, $2 a ton impact for us as we move forward.We describe other things as well. You can have geologic variability. It's at the end of the day, immaterial in the grand scheme of things. So you might have had an impact or 2, a few things there. Those are all things that we manage each and every day and don't expect any longer-term impact. So yes, absolutely. We are confident Lear's going to get back on track. It is going to be heading into some, typical of the panels that is going to continue to mine here for the remainder of '24. We touched on Leer South as well. It went through a move also. All of the teams do a fantastic job with the longwall moves. We don't typically end up talking much about them, but it was a little bit of an impact for Leer South. But once again, the opportunity that Leer South has had, as we transition out of District 1 and into District 2 in the beginning of the fourth quarter of this year, we're going to see a meaningfully improved coal seam thickness, somewhere in the range of 15% to 20% thicker than what we've experienced here since the longwall started in District 1. So we feel really good about that moving forward. So once again, we'll manage through that and expect volumes to improve as we go forward. As related to costs, obviously, you're impacted by the volume. So we expect improvement in the cost as we move forward into Q2. We would expect somewhere getting back into the mid-$86 a ton type range just as we go forward according to our plans moving forward.

[Nathan Martin, analyst]

And then maybe just one more if I may. Paul, you mentioned, I think, according to some market sources, some small coking coal mines may have idled. Do you think we need more of this to support or even drive U.S. met coal prices higher? And maybe where do you guys peg the marginal cost to met coal ton these days?

[Paul Lang, executive]

Nate, I think the source of our statement is we have a lot of people showing up at the door looking for jobs. So it's a pretty direct data point. If I look at the marginal cost, and I think we've talked about this many times. If you look at the -- most of our peers are in call it that 110 to 120 range. You've got mines that are probably plus or minus 10 or 15 of that. We are right at the marginal cost at this $220 High-Vol A price. And you have to remember that some of those mines are not producing High-Vol A. They're producing High-Vol B or lesser met products.So I think that's what you're seeing is these marginal mines right on the edge are starting to drop out. It's just a general slowdown across the East. And frankly, I don't wish harm on anybody, but it is good for the industry. I think it's keeping things in check. We're built for this, I think. We're low cost. We have a high-quality product. I think another quarter or 2 of this would not be bad.

[Matthew Giljum, executive]

So you're looking at $195 right now High-Vol B. That's per metric. The best on U.S. East Coast, if you agree with our assertion that the marginal cost of reduction might be in that sort of $135 even $140 range, $195 High-Vol B per metric backs down to, once you include the rail rate something that makes that marginal producer cash negative at this point. And while we've only seen some very small indications of rationalization, the prices have been at these levels for a very brief time.So certainly we believe this is going to weighing on some of those high cost operations if it persists. I would also add that you're seeing the same thing in Australia as we continue to see [ New Dive Australia ], the way in which the mine costs continue to increase, the pressure related to the royalties, the significant sustain in CapEx you're seeing. I would say PLV, it's sort of the same issue. With PLV sitting at $240 today. And if you're getting straight PLV, and you're a premier producer, you're making some cash. But I would say the marginal cost producers are struggling and an awful lot of them are not producing premium [indiscernible]. They're producing mid-vol product or they're producing a semi-hard or a semi-soft. So look, these current prices feel very supportive and the good news for us as a first quartile producer, we named the cash in this environment. But as we look further out, we do believe there's potential for some lift.

[Operator]

Your next question comes from the line of Katja Jancik from BMO Capital Markets.

[Katja Jancic, analyst]

First, on the met coal guide for second quarter. Can you talk a bit more what would bring you to the lower versus the higher end?

[Matthew Giljum, executive]

If you look at volumes in the met segment, they're very dependent on vessels, right? So short tons, 80,000 tons a vessel, very quickly, 3 or 4 vessels essentially covers that range and that spread here. Clearly, the impact of the Baltimore Bridge and the collapse and the lack of access through Curtis Bay is significant.As we've indicated, the logistics team working with our partners, utilizing the strategic investment of DTA, we've done a fantastic job of redirecting the core flows. So far, those are going very well. A lot of what is encompassed in that range is going to be dependent on when the Army Corps of Engineers is able to get that deep channel reopened and get the flow of full going again. That range encompasses our assumption that based on what they're saying that this opens back up sometime towards the end of May. Clearly, there'll be a lot of additional logistic considerations whenever it reopens and we'll continue to manage that. But that's why we got a little bit of a wider range. And once again, it's just going to be dependent on timing. But as we sit here right now, we feel good that given the good start we had managing everything since the bridge did collapse that we're going to be able to hit within that range.

[John Drexler, executive]

And as Matt referenced, it is a heavy June schedule. So some of it can just come down to that last leg, that last 10-day loading window and what gets in and what gets out. But the fact that it's 1.9% to 2.2%, I think, underscores just how well the team is moving to redirect the volumes.

[John Drexler, executive]

I think a simple way to think about this, Newport News is about 300 miles further than Curtis Bay. So if you think about we got to send 6 trains a vessel plus or minus, it's 300 miles. That's a sense of the additional rail capacity and the strain that it's under. So the timing of the Curtis Bay reopening is pretty significant. And a week or 2 won't matter either way with Curtis Bay as far as our volumes.

[Paul Lang, executive]

I'll add to that just to kind of wrap up that discussion. Working with our rail service providers, they've done a wonderful job. That's a big shift for them in realigning kind of their flows of trains and power and people. So they've done a great job working to support, be responsive to everything that's happened with the tragic collapse of the bridge.

[John Drexler, executive]

And finally, maybe one final point on this, which is the fact is, as Paul said, it's a much -- it's a meaningfully longer haul, the rate is not that different. Now we do get -- the rates fairly equivalent, I will say though Curtis Bay included in the rate is the transload. If we go to DTA, we're charging ourselves there. So maybe you could say it's a $3 differential, but it's not that significant. We actually have some advantages when we move to DTA, some opportunities, blending, storage, et cetera, that are useful to us. So it actually ends up being a move that we're quite comfortable with, but it is a change.

[Katja Jancic, analyst]

And then, let's say, I know you mentioned maybe a week or 2 delays or in reopening doesn't make a difference. But what if we see further delays potentially? What happens? What are your options?

[John Drexler, executive]

Yes, clearly, we will continue to execute on the opportunity to continue to move coal through DTA. So that's primary and that can be extended and extended meaningfully if it is a longer delay on the bridge. The team is also doing a fantastic job of looking at other alternatives and ways to move the core. We can midstream, we can get coal to the river and take it south down to the Gulf. They're evaluating opportunities actually to get coal on barges and through the port and the shallow draft of the Port of Baltimore and mid-streaming there as well.So they're evaluating those types of opportunities now. We're hopeful we don't have to lean on any of those in a meaningful way. But clearly, we can continue to manage if this is an extended impact. I'll share with you every update we get through the Army Corps of Engineers has remained confident on that opening date. Some of the shallow channel work that they've done actually appears to be opening a little bit earlier than what they had been indicating. And so we feel confident that they're going to continue to work to hit those schedules and will be hitting them. But clearly, if something else happens, we're prepared and ready and actively looking at if it does get extended, how we're going to manage it.

[Katja Jancic, analyst]

And then maybe just to confirm, did you say that cost on the met side in the second quarter are going to be $86 per ton?

[John Drexler, executive]

Let's call it somewhere in the mid- to high 80% range. That's all going to be dependent on volumes and shipment levels and will be impacted even with the range of the shipment levels being described the 1.9% to the 2.2%.I think the key here is, look, the 87% to 92% guidance that we provide for the year still feels very comfortable. Obviously, the 94% was a little high for Q1. We do believe as we go through the year that you're going to see us sort of move towards sort of the middle of that range and hopefully a little better, but we still feel very comfortable with that range.

[Katja Jancic, analyst]

And then just one more. On Leer South, are you still expecting around 3 million tons this year and then higher next year? Is that still fair?

[John Drexler, executive]

Yes. As we described Leer South, we are very confident this year that we're going to be in the 3 million tons. And then once again, the real benefit occurs in the fourth quarter when we moved the district to where the coal is 15% to 20% thicker. That's going to allow additional production and volume that will carry over into '25 clearly and beyond.

[Matthew Giljum, executive]

The way we need to think about it would be from a sort of a cadence perspective. Look, we were lower than ratable in Q1, Q2, Q3, we would expect to be around ratable, understanding there's always variability here. And then Q4 higher than ratable, which bring us into that sort of 3 million tonne per year range based on that cadence.

[Operator]

Your next question comes from the line of Michael Dudas from Vertical Research.

[Michael Dudas, analyst]

I appreciate your thoughts on the global met coal and the tightness you're seeing some out of the difficulty of supply coming out of the U.S. and elsewhere. Just wondering how your global met customer base is feeling relative to some of the dynamics going on globally on the demand front? And maybe even timing towards like the high-volume market, and how you see that playing out, especially maybe going into next year or so, given the tightness that could occur in your high-quality product? Is there continue -- are you shifting some of the interest levels to certain other regions or countries? Are there -- everybody's talking about India being very aggressive and have some opportunities relative to China. Maybe give a little sense of how that's flowing through from your marketing book.

[Deck Slone, executive]

Yes. Mike, it's Deck, and thanks for that. We've talked a lot about this continuing shift towards Asia and absolutely, we are seeing interest continuing to grow from new customers, new projects in Asia. Look, it's not like they're out there buying with great urgency right now or you see that in the price. But in terms of the outreach and the engagement that continues to grow, and we're talking to multiple sort of potential new customers right now who are interested in not just a spot deal, but are interested in term business.So we do feel good about that. And when you look at the overall fundamentals, the fact is that continental production, as Paul referenced, and [indiscernible] China is up about 2% year-to-date. That's nothing heroic certainly. But relative to where we were last year, bumping along the bottom in terms of hot metal output globally relative to where we were in 2022, it was down 10% or so. But we do see signs of life. We do feel like there are some positive indications. Chinese imports are continuing to be strong. Chinese imports of particularly high-quality seaborne coking coal. So we've seen China was up 10 million tons in terms of imports of Seaborne Coal last year and really stepping up again through the first few months of 2024. And I would say there, too, we're growing interest from some of the world's largest steel makers in U.S. volumes and our volumes in particular.You asked about High-Vol A. We certainly think there's a role for High-Vol A to play out there in a way that it facilitates a better coke product when you're using a lot of disparate products. And the fact is a lot of these customers are actually just looking for high CSR coal, and we can give them high CSR coal. So High-Vol A right now is continuing to be sort of a meaningful demand, recognizing again that the buyers at this moment are feeling urgency but the level of interest is significant. So again, I think most importantly, we do continue to see those new glass furnaces that are being built in Asia actually come online and outreach to us about supplying those either in the immediate or the longer term.

[John Drexler, executive]

And Michael, I'll add to that. Just specifically with customers in the High-Vol A product, the marketing team does a fantastic job of developing the relationships and then technically marketing that product, right? It is relatively new into the region. They've done a fantastic job of getting it introduced. Once customers start using it there, they view it as a very favorable product. It's something that then brings up repeat buyers for that specific product. And so we feel really good about the portfolio, that product, how it continues to get introduced and accepted, and how we expect it to continue to grow as we move forward in that fast developing region.And the simple answer is, I look year-over-year, we've added a significant number of new customers in Asia. Marketing team has done a great job. And what I really judge it on is these are quality customers also. These are large steel mills and they're ones being built between Indonesia, Vietnam and Malaysia. And we're not selling the brokers. So I feel very strong about the position we're taking in Asia, and we're really building out that business. And you're seeing it by the quality of customers we're picking up.

[Paul Lang, executive]

And just one final point, just on the supply side, which you sort of alluded to, where is the coal going to come from. Look, if you look back sort of the 3 big suppliers into the seaborne market, Australia, the U.S. and Canada, [indiscernible] supply of high quality coking coal in aggregate peaked in 2014. We're down 45 million tons. Those 3 countries in aggregate are down 45 million tons since 2014. So certainly, the demand is there, not only do we see demand grow, and we see those supply constraints continually to manifest themselves. So again, pretty constructive on a long-term view, even though, as we always say, we don't need a great long-term sort of demand story because the fact is we are a first quartile cost producer. But it is what we see playing out.

[Michael Dudas, analyst]

I just mentioned that the investment you guys have made into the sales force and the marketing team in that region is certainly going to pay benefits as we're seeing it right now.

[Operator]

There are no further questions at this time. I would like to turn the call over back to Mr. Paul Lang, CEO. Please continue.

[Paul Lang, executive]

Thank you again for your interest in Arch. As I noted earlier, we're sharply focused on driving continuous improvement across our operating platforms for the value generating [indiscernible] returns, especially as we lean towards better emphasis on share repurchases. We believe the current market softness is acting to highlight the value of our low-cost coke and coal portfolio, as evidenced by our substantial discretionary cash flow in Q1.While at the same time, the tragedy in Baltimore showcased the nimbleness as well as the capabilities by our people at addressing such serious situations on a timely basis. With that, operator, we'll conclude the call, and we look forward to reporting to the group in July. Stay safe and healthy everyone.

[Operator]

That concludes today's conference call. Thank you for your participation. You may now disconnect.