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Arch Resources Inc
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Good day, everyone, and welcome to this Arch Coal Incorporated Second 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.
Good morning from St. Louis and 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 would 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 will be happy to take your questions. John.
Thanks, Logan, and good morning, everyone. I’m pleased to report that Arch turned in very strong results and excellent progress on a range of key objectives during the quarter just ended.
Our nine drain well are hoping to franchise benefited from the improving logistics chain and we achieved excellent margins as we capitalize on continued and persistent strength and global coking in international thermal markets. Perhaps more significantly, we continue to generate very robust levels of free cash, cash that we put excellent and value creating use through our aggressive and ongoing capital return program.
In total, we spend approximately $78 million during the quarter to buyback nearly a 1 million of shares of Arch stock, with those purchases we increased our total share repurchases to more than 5.3 million shares since launching the program in May of last year. That translate into an access of 21% of the share count since the program inception just 15 months ago.
We view that as good and significant progress and believe that is emblematic of excellent cash generating potential of the enterprise. Moreover, the board recently signaled the strong and continuing support for the capital return program by authorizing the repurchase of another $250 million of shares bringing our total current authorization to $331 million.
The additional authorization represents a strong vote of confidence in the value creating nature of the buyback program, as well as in the Company’s assets, management team, workforce and business outlook. As indicated, the Company’s second quarter results provide further support for such confidence.
We achieved strong prices and impressive margins in our coking coal franchise, we were in this strong cost performance at our coking coal mines and effectively addressed the isolated operating challenges we encountered in the first quarter.
We shift higher than anticipate levels in the Powder River Basin and we again capitalized on strong international thermal prices by shipping significant percentage of our other thermal output in the seaborne market.
I would like to now take a few minutes to comment on the broader coal market conditions before turning the call over Paul for further discussion on our operating results for the quarter. Let’s start with the coking coal markets, while prices have retreat somewhat in recent weeks, we still have the beauty of fundamental are quite strong.
Of course steel markets are always a critical driver of coking coal demand and news there continues to be encouraging. Global steel production is up 5% year-to-date and global steel prices continue to be strong on a historical basis across all regions.
Seaborne and coking coal demand remains bullion as well, both Chinese seaborne coking coal purchases are down 17% year-to-date, June imports were quite strong. That made the further evidence at currently prevailing price levels Chinese steel mills will continue to be buyers and less provide an important price supporting the marketplace.
We are also seeing good strength from India on a rapidly increased base of demand, year-to-date Indian coking coal imports are up 3.4 million tones or 16%, with continued and rapid growth in Indian Steel sector, we share that view that India maybe on pace to become the largest importer of seaborne and coking coal in not too distant future.
In recent days, U.S. East Coast products assessment have started to reflect the premium over Australian hard coking coals, which is encouraging and reflects strong fundamentals we are seeing across all demand centers. As of this morning, a high vol assessments stood at $173 per metric ton, FOB the vessel which provides an excellent net back in margin for a low cost coking coal operations.
Moreover, High-Vol A, which as you know is our primary product continues to be highly valued in the marketplace and is currently reflecting the $9 premium over Low Vol coals and an $18 premium over a High-Vol B products.
On the supply side, we continue to see challenges and disruptions on both production logistics front in Australia and elsewhere and those persistent issues are helping to keep the market in the healthy balance. Of course we are seeing new supply enter the market in response to the recent high prices, but the volume increases have been modest today.
For the most part, we are seeing high cost previously idled capacity being pulled back into the market, new investment continues to be scarce, which should bode well for continued market balance and nears intermediate term.
Looking now to international thermal markets, Newcastle prices remain at a very strong 112 per metric ton for prompt delivery, and API-2 prices for Northern Europe stand at $94 per metric ton. These are highly attractive levels for Arch’s West Elk and Coal-Mac operations, but just as important we believe the fact that the increased U.S. thermal exports overall are helping tighten the domestic thermal markets.
Also helping things here at home is a strong start to the summer, which is accelerated the liquidation stockpiles at the U.S. power generator. Cooling degree day were up 37% through June, when compared to normal and that’s helped accelerate the still needed stockpile for liquidation.
At present, generator stockpiles are estimated to be just over 60 days of supply, the lowest level we have seen in nearly four years. Given the ongoing liquidation and assuming stable natural gas prices, we would expect to see an increase in prompt buying activity if stockpiles approach target levels over the course of the next few quarters.
In summary, we are pleased with the excellent progress we made during the second quarter and we are feeling positive about the outlook for the remainder of 2018 and beyond. Our coking coal franchise is executing at its customary high level, market fundamentals supported going forward and we continue to generate very substantial levels of free cash flow. And we have a clear plan in place for returning capital to shareholders in a highly value creating way.
With that, I will now turn the call over to Paul for further thoughts on the second quarter performance. Paul.
Thanks, John, and good morning, everyone. As John mentioned during the second quarter, we had both strong operating and marketing performances. On the sales side, we continue to move forward with our global initiatives taking advantage of still strong coking coal markets and expanding our exposure to robust international thermal markets.
Operationally, we overcame the challenges of not [loyal] (Ph) that hampered our performance in the first quarter, in order to reduce our cash costs to both Metallurgical and the Powder River Basin segment.
Starting with the Metallurgical segment, we shipped 1.7 day tones of coking coal during the second quarter, exceeding our internal volume expectations by almost 200,000 tons. The improved shipping level was a result of a better performance in the logistics chain, as well as favorable timing on the scheduling, arrival and loading of export vessels.
As we have noted in the past, our greater participation in the seaborne markets can increase the variability and quarterly shipments taking making it difficult to forecast. However, looking ahead, we anticipate that our coking coal volumes for the next two quarters should be fairly ratable.
Moreover, our average realization continue to be supported by strong index pricing on assessed coking coal products. Overall, our pricing on the second quarter coking coal shipments averaged over $119 a ton, with approximately 80% of the volume going to international steel producers and 20% saying with North American customers.
During the quarter, we committed roughly 800,000 tons of new coking coal sales for delivery in 2008. About 80% of these sales were price at the time of the transaction and shipped during the second quarter. The balance of the tons were sold on an index basis for shipment during the back half of the year.
Notably, we continue to expand our reach into Asia and expect more than 20% of our 2018 seaborne coking coal volume will go into this growing market. At the midpoint of our coking coal guidance, we have approximately 600,000 tons left for sale for the year and another 1.5 million tons committed to subject to index pricing.
On the operating side, as indicated in the release not [loyal] (Ph) transition to a new panel in early June, while the pump sectors are relatively minor contributor to Arch’s financial results, we believe that could continue to generate value and we are pleased with its performance since the completion of the long run.
During the second quarter, segment cash cost declines $7 per ton as compared to the first quarter of 2018, this reduction reflects the larger percentage of shipments from the low costlier mine and a much improved cost performance at the Mount Laurel complex.
Looking ahead, we remain confident in our annual cash cost guidance range of $60 to $65 per ton for the franchise. This is a cost structure will support strong margins enabling Arch’s to competitively participate in global coking coal markets during all phase of the cycle.
Moving to the thermal part of the business, in the Powder River Basin we also recorded better than expected shipping levels thus seeing the sharp decline typically seen during the [indiscernible] season. Volumes were lifted by Black Thunder’s ability to increase train loading despite heavy rain fall that impacted the southern portion of the basin in late May and early June.
Additionally, the earlier arrival of summer and persistent above average temperatures worked to increased customer demand during the quarter, while facilitating the ongoing decline in utility stockpile. During the quarter, domestic power generators returned to the market to supplement the 2018 to requirements, and shore up the near intermediate term volume leads.
As a result, we committed and priced about 5.5 million tons of Black Thunder coal to 2018 delivery at an average price of around $12.30 per ton. Given the midpoint of our annual target volume levels of 65 million tons of Black Thunder, we had roughly four million tons less to sale for 2018 as of the end of June.
Additionally, during the quarter we layered in about 5.2 million tons for 2019 delivery including these volumes, Arch’s has around 34 million tons price at $12.40 per ton and over two million tons of 2019 to move subject to index pricing.
Looking at the operating results, we had a solid quarter in this segment, even with the sequential decline in volume levels, cash cost dropped by $0.11 per ton when compared to the first quarter.
This lower cost level was driven mainly by effective cost control and lower maintenance or current cost of Black Thunder that offset more than a $0.20 per increase in diesel prices. With this we are tightening our previously stated cash cost guidance for the segment to a range $10.50 to $10.90 per ton for the full-year.
In the other thermal segment, ongoing demand and robust seaborne pricing continue to pull the high quality West Elk and Coal-Mac products into international markets. However, shipment levels in the segment decline 9% when compared with the first quarter of 2018 due to the less than optimal rail performance that impacted loading at both West Elk and Coal-Mac.
In fact the delay in rail loadings resulted in more than 200,000 tons looking for May and June into the third quarter in just those two operations. So far in July, rail performance has improved somewhat and we believe we will export more than 4.5 million tons from this segment in 2018.
During the quarter, we sold about 350,000 tons for 2018 delivery at average price of more than $46 per ton about 60% of this volume was for West Elk and the balance for Coal-Mac. Additionally, as highlighted this morning’s release, we continue to capitalize on the strength in the international thermal markets to reduce our risk in future periods by opportunistically layering in volume of pricing to provide attractive netbacks for a portion of our international thermal sales.
We continue to view the seaborne marketplace as an essential outlet for high quality thermal products and believe taking this position is a logical enhancement to our overall sales strategy. Furthermore, while cash costs during the period increased 9% due to a large portion of shipments from Coal-Mac, we remain comfortable with maintaining our full-year 2018 guidance of $27 to $31 per ton.
In closing, I’m pleased with our operating and marketing performance in the second quarter. These successfully exceeded sales expectations and lower cash costs with the key operating segments, while moving through logistical challenges and another.
We continue to be encouraged by the persistent depth in a global coking coal markets and the enduring strength of the seaborne thermal markets. We would like to thank all of our employees for their intense focus and hard work during the period, while at the same time delivering industry leading, safety and environmental performances.
With that, I will turn the call over to John Drexler, who will provide an update on Arch’s financial position. John.
Thanks Paul and good morning. During the second quarter, we continue to demonstrate our commitment to executing aggressively on our capital return program. As John describe, our portfolio of Tier 1 assets generated healthy cash flows that allowed us to buy back 960,000 shares spending over $78 million in an average price of $81.54 per share.
This represents the second highest quarter of open market purchases since the program’s inception just five quarters ago. Since May of 2017, we have returned a total of $419 million or over 21% of the shares outstanding at an average price of $78.40 per share.
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 September 14th to stockholders of record at the close of business on August 31st.
Since the initiation of the recurring dividend in the second quarter of 2017, we have paid $41 million in dividends to our shareholders. Between our share repurchases and dividends, we have returned $460 million of capital since the announcement of the capital allocation program.
Looking ahead, we will constantly evaluate which uses of cash provide the best risk adjusted return over the long-term. Having said that, we continue to view our stock as an excellent value and given our current capital resources and the expectation of strong free cash flows for the remainder of the year. We expect to build further upon our proven track record over the course of 2018.
Turning now to our liquidity position at June 30th, we had nearly $403 million of cash and short-term investments on the balance sheet. It should be noted that we do have an expect to continue to have access borrowing capacity under our two short-term borrowing facilities. Our account receivables utilization facility and inventory on the ABL.
As a reminder, we primarily utilize these facilities to issue letters of credits supporting various obligations necessary in our industry. Inclusive of the unused borrowing capacity under these facilities, we had $420 million of total liquidity at quarter end.
As you know the vast majority of our liquidity is in the form of cash and we have consistently targeted between $400 and $500 million of liquidity. Going forward, with the benefit of additional liquidity in the form of unused borrowing capacity, we will continue to target liquidity levels between $400 million and $500 million that are very comfortable with the cash balance that falls at the low end or even below the range.
We remain intensely focus on maintaining our industry leading balance sheet and ample liquidity. We recognize that we operate in an industry that will experience cycles and a strong balance sheet provide crucial support through each phase of the market cycle.
As Paul mentioned in his remarks, during the second quarter we continue to take advantage of an improving international thermal market to fix pricing on select expected export sales for the remainder of 2018 and 2019 by entering into SWAT.
As the physical sales have not transacted yet, we are not able to apply hedge accounting. As a result, as international thermal pricing strengthened over the course of the quarter, we recorded unrealized mark-to-market losses of $15 million on these swaps.
These positions will continue to be mark-to-market through the income statement until they are exploration that ultimately any losses incurred on the SWATs will be offset by higher pricing on the physical shipments.
At June 30, we have entered into SWATs for 1.9 million tons associated with this program with the majority per volumes that we will ship in 2019. As a reminder, we expect to ship 4.5 million tons of thermal coal into international market in 2018.
Our 2018 guidance is reflected in the press release and Paul has provided thoughts on our sales and operating cost outlook. A few additional items to note, we now expect our SG&A expenses to be between $91 million and $94 million this includes $15 million of non-cash equity compensation expense.
This increase of $2 million at the midpoint from last quarter primarily stems from additional accruals for our employee incentive program. While we had a small one-time non-cash benefit from a reversal of tax reserve in the second quarter, we continue to expect our tax provision to range from zero to a modest benefit for the foreseeable future.
In summary, Arch continues to be well position with its low cost met and thermal franchises to generate strong cash flows in this environment. We have been quite clear through our actions that we are firmly committed to our capital return program and expect to continue to utilize the program to generate value for you and our shareholders.
With that, we are ready to take questions. Operator, I will turn the call back over to you.
Thank you [Operator Instructions] And we will take our first question from Lucas Pipes with B. Riley FBR.
Hey. Good morning everyone and good job on the quarter.
Good morning, Lucas.
Morning Lucas.
I wanted to follow-up a little bit on a capital allocation front and obviously you have return tremendous amount of capital back to shareholder over the past five quarters. I think its $460 million is what you stated. But then when I look at the stock price kind of roughly flat from inception from late 2016 at least. And I wondered kind of how you make sense of that. And if that has maybe caused you to think about other capital return opportunities. Thank you.
Lucas, we have been quite clear and focused on that capital allocation, capital return program since its initiation. And I think that’s kind of where the management team and where the Board of Directors feel very comfortable and optimistic about the opportunities for this Company as we move forward, given its low cost profile to give them what we see markets moving forward. And seize the opportunity to invest in our shares is an excellent way to return that value and so we are committed to that program as we have indicated and expect to move that forward.
Lucas this is John. Look, we are always looking at how best to utilize our capital, we have looked at M&A, we have looked at organic growth, and as John said as we look at the best option for us today is really to buy back shares. And that’s something and I’m talking to the Board with almost every quarter.
As you have heard me say in the past, we have looked from an external M&A at about everything. Right now, we just don’t see anything that really works for us. We have got some pretty attractive organic growth opportunities down the road. But don’t feel compelled to do anything near-term, continue to watch the coal markets, the general business environment and make those decisions are appropriately, but right now buying back our shares we think this is appropriate decision for this Company.
That’s helpful, thank you and to switch over to the industry and market fundamentals a little bit. Where would you put the marginal costs kind of for the U.S. met coal industry. Obviously you are the lowest cost producer on my estimates. But where would you say kind of is the marginal ton produced on a [FOB] (Ph) port equivalent in the U.S. and if you have a perspective on the global market, on the global costs, marginal costs that I think I would appreciate that as well. And then secondly, met coal prices by and large have held really well and as we head here into the second half of the year and think about 2019 domestic met coal contracts with U.S. steel makers. Have those discussion started and if so, can you give us indication of where were prices are shaking out? Thank you.
Yes. Let me take the first part of that Lucas, this is John. I mean certainly on the cost side, we have worked hard to be on the low-end of the cost curve in North America, we think we are there. If I had to peg the cost today on a cash basis and I’m looking at it on an FOB mine basis because the transportation car vary, I would call it about $75 plus or minus. And quite frankly as North America brings on additional volume, that number has probably moved up a little bit. So it could be somewhere between $75 and $80.
So with our 60 to 50 guidance we think we are well below kind of industry averages. And when you think at the global cost curve too, we think that with our cost structure we can compete globally pretty effectively [indiscernible]. If you got it ongoing on a global basis if you could...
Yes. Lucas, Deck here. And John was talking you have to marginal costs. John was talking about the average costs being the $75 to $80 year in the U.S. Certainly, we think the marginal cost producer FOB to mine, certainly is up close to $100 level in a lot of instances.
Especially as John said, with some of the production comeback and pulled back into the market quite frankly, when the U.S. has been called upon to kind of fill the gap globally with higher cost production and production to rationalize the land site, that’s pretty encouraging from a longer term sort of supply demand outlook perspective.
And then when we look globally, I think what we are seeing, what is interesting is, we said for a long time, we think it’s probably $140, $150 FOB for vessel metric tons for the balance of the market, but really if you historically or last 10 years or so that prices has been more alike a $170 on average. And we have seen again and again here in recent months that as metro prices have hold back [indiscernible] hold back into $171 to $175 range, we think China come back into the market.
So, it certainly feels like the cost curve in China and everywhere else is moving up into right pretty rapidly. So, all that I think suggest that and as John said pretty healthy margins for us given our cost and are going ability to do coal into the seaborne market, but also a dynamic environment where cost are being pressured everywhere and again we see that cost curve shifting higher.
And I will let Paul jump in and talk about what we have seen from our domestic customers recently.
Yes, Lucas this is Paul. I think through this week we have see in all the two expected RFPs the domestic - North American steel producers. I think it’s interesting things that this is starting out every year a little bit earlier and a little bit of concern I think to the domestic steel producers about where the market is.
Frankly, I think our position hasn’t changed, ideally we would like to say as much as we can with the North American, it makes sense from a logistics point of view. But at the same time, it’s going to be where the value takes us.
I think we saw us take the pivot in 2018 where we went from about 50/50 domestic international to 80/20. And I get closer though where the market goes and where the steel producers are and we will move with that.
You know like I said at the end of day, Arch is going to go where we can create the most value. And fortunately we have a portfolio of products, the cost structure, the logistical options that allow us to ship choose the market that creates most value for our investors and as Paul said, you saw us pivot pretty quickly from 50/50 to 80/20 and we will just have to see how those discussions go for the balance of the year. But we are prepared to do whatever creates the most value for this Company.
Got it. Very helpful. I appreciate it and best of luck.
Thank you, Lucas.
And we will take our next question from Mark Levin, Seaport Global.
Great, thanks. First is a more of a bigger picture Arch question. After this quarter kind of seeing which going at Mount Loral, maybe talk a little bit about your confidence level in terms of getting the met coal cost structure in 2019 back to maybe where it was before some of the Mountain Loral issues appeared most recently?
Yes. Mark, its Paul. You know pretty much with the advertising maybe long-haul move at Mountain Loral and the lead panel is putting those forecast. And I’m going to tell you I have been underground at the mine two or three times in the last couple of months, or last two months, the face look pretty good.
So, I continue to feel good about where we are at, at this point in time. One of the thing I think that’s coming up, and as you know last quarter I said that layer is going to hit the lower coal in 2018 and we will see that somewhere in the third quarter, but if you recall we also know that the 2019, 2020, the coal puts us in the backup in the panel to get longer in steel. Longer-term I think it’s a pretty good outlook on our cost structure.
So, back to maybe that kind of 55 to 60ish kind of range. I understand there is a price component of that is well that can impact where you are. But just generally speaking kind of getting back to where you once were you feel as confident today as you have in the past?
Yes. I feel a lot better than I did three months ago.
Sounds good. Good to hear. Yes, John.
Mark listen we are starting our kind of preliminary budget over the next couple weeks. I think over the coming months, we will have a better assessment on what those costs look like post 2018. But, as Paul said, that the same high thicken valley at layer and I certainly is a good thing for us and portfolio moving forward into 2019.
Got you and when you think about like just Q3 and Q4, this is sort of my more modeling specific question. When you think about Q3 or Q4, if you look at sort of the various puts and takes. How will Q3 compared Q2 and then maybe how will Q4 compared Q3 just as you look at it directionally over the course of the year, I think you mentioned layer and the coals you will be end shortly also, I think you referenced the EBITDA impact of a few vessels that missed hitting the books in Q2 will hit Q3. But how will Q3 look to Q2 and then maybe how will Q4 look versus Q3 from an EBITDA perspective at least?
And actually you talked at overall Company.
Overall Company exactly, yes, overall Company.
So typically the power of basically Q3 a little bit stronger shifting, the appraiser running well out there. And that segment, we will have a few offsetting things, we will have a physical - but we think, we are expecting a good performance out of Mountain Laurel. And in other thermal segment, we need to pick the shipping in the back half and we are seeing signs - we are expecting the stronger shipping in Q3 out of that side.
You know pluses and minuses, I think Q3 is going to be stronger than Q2, but Q4 will have too long wall moves at both Leer and Mountain Laurel and possibly one on West Elk. So I think it will be a little bit of an upside in Q3 then a little bit down in Q4.
No. I got it. That’s very helpful. And then my last question has to do with the railroad. So if the rates moved higher when met price is move higher. Do you expect to see some relief on your rail rates as met prices have come off? And would we see that relief in Q3 or is there a lag and you would expect to see that more in Q4 if met prices don’t head backup again?
Yes. What we saw in Q2 Mark was obvious and I think we have talked about it for the rail rates tend to lag one quarter in the index pricing. So we had a pretty good uptick in rail rates in Q2 in $5, $6, $7 with the mark going down the roughly $20 to $25, we will see most of that brought back in Q3.
Got it. Great. Appreciate it. Congrats on a very good quarter and the buyback.
Thanks Mark.
Thank you Mark.
We will now take our next question from Michael Dudas with Vertical Research.
Good morning gentlemen.
Good morning Michael.
Good morning Michael
It seems like you had some pretty strong negotiating with U.S. steel companies came into the third quarter. But the spreads are obviously historically pretty wide relative to High-Vol A and Low-Vol B. Do you see anything in the near intermediate term that’s going to alleviate that, especially you would make it more difficult especially the Chinese comeback and you start to see pickup and consumption in Asia over the second half?
I think the one surprise we have all seen is the strength of the High-Vol B market, you pointed out Michael. It’s actually went up where the other indexes went down in Q2. Having said all that, I think we feel fairly confident heading into Q3 and the discussions with the domestic steel producers over prices. Given our view about full-year numbers, because that’s the perspective we will have to take and they will have to take, but I feel pretty good about where we are at.
Michael, this is John, I mean I continue to think that overall supply and demand are fairly well balanced. I think anytime you get a little bit longer, a little bit short you can have real movements in price, we have seen that. But you know this morning High Vol-A was at $173 and above, I mean net-net that’s very attractive number for us and that’s down quite a bit from first quarter.
So, we still feel like that the High Vol-A, what we call is the scarcity premium in the market that that product will move around from time-to-time, but with our cost structure, we think we are in a good position where that coal moves to domestically or internationally.
Appreciate that. And my follow-up is turning to your export market. How much more productivity volumes that can you squeeze out into that marketplace. And how given your discussion with customers the sustainability of this fairly tight thermal market. Is there a visibility that could lead to some obviously continued strong performance of your export business, but also maybe tighten up the U.S. market quicker than people would have thought maybe six to nine months ago?
Well, I mean we are certainly encouraged of what we are seeing in the international market. Michael, our internal forecast have about 62 million tons of met going export this year and about 59 million going in the thermal market.
I mean that’s quite a step up particularly on the thermal and I think if you look around the globe, there just hasn’t been a lot investment whether its met or a thermal. And the U.S. as always been perceived the kind of swing supplier in that market and I think you could see that changing.
So, as an industry we are going to export almost over an 120 million tons in 2018 and if you go back five years that’s pretty strong. So, we like what we are seeing its Paul and Dex and we are going to put 4.5 million tons of combination of West Elk and Coal-Mac in that market its much more attractive prices than we see domestically.
So, as you are seeing coal inventories domestically come down strong pricing in international market, I think you are right I think it does tighten up the domestic market going forward. And you know natural gas process is 275 to three, I mean we like the way that we are positioned from a cost standpoint.
And Michael we are already seeing that obviously, it’s a great point stack. We are already seeing the stock house come down possibly. Finally, we are getting into sort of what we would view as target range and it’s been a long time coming, we saw stockpiles at the lowest level and we think stockpiles are at the lowest levels in the end of July than they have been in four years.
And so, that’s encouraging and certainly early summer heat has been a big part of that, but as you point out, the strength in thermal export has also been a very substantial part of that story. And as you look out, the cash curves stays above $90 through 2020, so it’s not just current strength, I think there is a view that that there is a real link to this and that you are going to continue to see a fairly healthy balance of thermal market globally. So, we expect that to continue into 2019, 2020.
And Michael, if you look at the forward prices, I mean for the next several years, I mean they work extremely well for West Elk and Coal-Mac, so it’s not really just 2018, 2019, its beyond that.
That’s [indiscernible] ashamed we couldn’t get those export terminal from the west. Thank you.
We will take your next question from Daniel Scott with MKM Partners.
Hey good morning and great quarter.
Good morning Dan.
Good morning Dan.
Thanks everyone. The question goes back, I guess to offer what Mark was asking about kind of the next two quarters on the coking side, I think you guys said in the comments that the back half of the year should look closer to ratable. What is the kind of ratable run rate we should think about for the Company is at the 6.3 to 6.7 or is there upside to that? And I guess tied to that is what is the long wall schedule for the next two or three quarters moves?
You know Dan, I think, right now, we think the 6.5 is a good number, I mean, I think you want to model third and fourth quarter I assume about 1.7 roughly plus or minus third quarter 1.7 fourth quarter that’s their assessment. Paul?
That’s correct.
Okay. And long haul moves for Leer in particular coming up?
Leer is in Q4, I think there is a chance not long fall into Q4, we also have West Elk that could fall into Q4.
Okay and then John I think I ask this every quarter. But with the capital allocation obviously doing a lot of return cash to shareholders. Leer 2, is still an option out there for you guys organic growth that not a lot of your peers have. Any changes on thoughts and timing there, permits being pursued, milestones, that sort of thing?
Dan, we continue to push that ball in the permitting process continues I mean as you know, it’s a very attractive project. We actually control 200 million tons you can see there. We will look for the appropriate market environment, business environment, something we continue to talk with the Board about, when the right time is.
But as I mentioned earlier, we continue to look at any external M&A opportunities and we always have to benchmark against, Leer 2 and we just hadn’t really found anything that’s comparable that. So at the appropriate time we will make that decision, but right now, we are very comfortable with our capital return program through a dividend and share buyback program.
And I appreciate that and I think that’s at this point the right decision versus M&A. But if the conditions all of a sudden were right. How long would it take from decision to the first coal?
Just round numbers, it’s about three to four years. Is that all the long wall coal.
Sure. Alright guys, great quarter. Thank you very much.
Thanks.
Thank you.
We will take our next question from Chris LaFemina with Jefferies.
Hi thanks guys, thanks for taking my question. Congratulations on the very strong quarter. I have one question about your cash generation and then second bigger question about capital allocation. So first on the cash generation, I think you had about a $50 million working capital cash outflow in the first half of the year. Should we expect some of that to reverse in the second half of the year or into 2019? And I guess, what is really the reason for the big working capital cash outflow in the first half of the year. Is there some seasonality behind that, and we have to kind of look going forward.
And the second question, sorry, just about capital allocation. Obviously, you guys are in the enviable position of generating more cash and you can spend buying back shares, certainly, mathematically is pretty compelling. I mean, its earnings accretive evaluations and expensive. But at what point do we have to worry about a lack of liquidity and your shares because you have brought back so many. And does the Board - I guess the question really comes down to a question of buybacks versus dividends. Because your yield right now I think, is around 2% probably not high enough to attract marginal income investors into your stock, which is a large pool of capital in the world. And if you want a 4% or 5% yield, which you can easily do. I would assume that you are going to get incremental buyers to the shares who are buying into the yield that you are getting now.
So, it seems like that the decision of buyback versus capital returns here [indiscernible] special dividends I would argue overtime means more towards dividends as liquidity in your shares declines. And I’m wondering how the board and how you guys think about that in general. Thank you.
Hi, Chris this is John Drexler, so we will jump into those questions. I guess first in regard to working capital, you are correct we did have a fairly large negative working capital adjustment for the first half of the year.
The majority of that was experienced kind of in the first quarter, we had rising receivable balance, rising the inventory levels. And as we have talked about in the first quarter, our expectation over the course of the year is that ultimately will normalize as we play back the remainder of the 2018. So, that will play self out as we work through operating plans, shipment schedules, obtain the cash and the receivable, et cetera as we move forward. So hopefully that addresses that question.
In regard to the share repurchase program, the capital allocation as John indicated earlier that the constant discussion between Management and the Board, as we sit here today, clearly we have indicated that the share repurchase program is the focus for us, it has been how we have executed since the initiation of the program going forward.
As you noted, we didn’t put in place the recurring sustainable dividend and so that will be a constant discussion that we have as a Management team with the Board, right now we are comfortable continuing to buy back shares, there is appropriate liquidity and the stock as we move forward. And feel it’s a right value creating opportunity for us as we look at the uses of capital within our portfolio.
We will take our last question from Vincent Anderson with Stifel.
Thanks. I wondered against the Asian export strategy, with freight rates where they are on a delivered basis you are probably going to be the most price sensitive of the major suppliers there region. Is this more opportunistic given where the markets are or is this in more deliberate shift where you run it to the concern that in a low price environment you will have to find in your home for that coal some place closer by or is this just more of a factor you are not really willing to compete for more share in Europe and risking negative price reaction there versus just sending it to Asia?
Vincent, this is Paul. I guess the easy answer is a little bit opportunistic and strategic shift. We cleared that well in Asia and I would also tell you our longest term met contract is within Asian steel producer. We have entered into a five year agreement. So, yes clearly this is a coal particularly on the layer that the Asian steel mills like, but there is also a little bit of an opportunistic phase to it we will go with the value right.
That’s helpful. Thank you. And then just a little bit higher level in case you have some insights. The most recent reports set of China they are continuing to go after their overcapacity in steel and it’s unmet been a huge benefit of course. However the most recent rounds have specifically targeted BOF production. So, I don’t know if you have any insights on to what you think initially the supply demand impact would be, obviously still supportive of steel prices. But really favoring EAF. So if you had any thoughts there that would be great.
Yes. Let me jump in and Deck can pile on. You know certainly a fact in China that EAF is growing. But I think as we look at the global over the next five years or six years, we are actually seeing about 35 million to 40 million tons of demand growth in met coal and obviously the biggest piece of that is India.
But we are also seeing some growth in Europe, which is a big market for us South Korea as well as South America. So we think China holds their own, but really as I said in my opening comments. We see India is kind of an up and comer and a lot of that growth over the next five or Six years come from India. Deck.
Yes. Hi, this is Deck. So absolutely agree what John just said. India is now more than 50 million tons of coking coal, that’s moving them very close to where China is, certainly the next few years we just see India surpass China. But we fully, China is going to continue to avail themselves with the seaborne market.
And you are right of course, there is a first for additionally [EAF] (Ph) but it’s a pretty slow process. We would expect that to take substantial amount of time for that to change appreciably. Right now as you know the [BF, BOF] (Ph) represents more than 90% of the output in China. And so a change a few percentage point is a huge increase in EAF but really doesn’t move the needle that much in terms of coking coal demand.
And even if we reached speak steel in China or if we are approaching is the fact, the China is a massive consumer, you have got about 70% of steel in China that are in coastal provinces that are going to get some benefit from looking to seaborne market from a logistical perspective gets have to advantage for looking at the seaborne market often.
And certainly from a quality perspective I mean China has been mining their Metallurgical reserves at a phenomenal pace, something we have never seen before obviously over the course of the history of the industry. And so at that pace they are certainly putting pressure on their cost structure, pressure on quality. So we think they are going to be looking to seaborne market for the time of premium coking coal that are available from Australia but also from the U.S.
As Paul said, there are opportunities for us there. So we see China continuing to be significant player in the seaborne coal market and even as we potentially see, China step out of mark from time-to-time as we have seen for the first six months of this year or for the first five months of this year has probably pulled back, China has come back looking for the best economics. And so again, we see them as a significant player and are overly concerned and certainly we will watch that trend.
Thanks. And I’m glad you India backup because I didn’t want to end on that briefly. And I was kind this isn’t another capital allocation question. But strategically, when you look at the Indian market, a lot of major exporters of bulk commodities to that market find a beneficial to have some kind of hard assets on the ground, whether it’s a distribution network or to some kind of trucking capacity. Is that similar in this sense and is that something that you think is that market continues to grow and importance, you would explore investing in?
Yes Vince that’s a question we have asked ourselves quite a bit over the last couple months. Currently we handle all the Indian sales out of Singapore office and frankly it’s worked very well. As we continue to look at India and its growth potential. I think at some point in time, we may have to have physical presence in the country.
Alright. Thank you.
Thank you.
That concludes today’s question-and-answer session. I will turn the conference back to Mr. John Eaves, Arch’s CEO for any additional or closing remarks.
I want to thank everybody for their interest in Arch Coal. Also, I want to take a moment to thank our employees, their hard work and focus during the second quarter, really generated some positive results. We feel good about the way we position the Company, to execute on our plan second half of 2018 and look forward to updating you on third quarter results in October. Thank you.
That concludes today’s presentation. Thank you for your participation. You may now disconnect.