Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2019-Q2

[Operator]

Good day and welcome to the Arch Coal Second Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Deck Slone, Arch’s Senior Vice President for Strategy. Please go ahead, sir.

[Deck Slone, SVP, Strategy and Public Policy]

Good morning from St. Louis. Thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance may be considered forward-looking statements according to the Private Securities Litigation Reform Act.

Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties which are described in more detail in the annual and quarterly reports that we 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 results of new information, future events, or otherwise, except as may be 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 investor 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, and John Drexler, our CFO. We will begin with some brief formal remarks and thereafter we will be happy to take your questions. John.

[John W. Eaves, CEO]

Thanks Deck and good morning everyone. I am pleased to report during the quarter just ended Arch delivered another strong operating performance while executing on its clear and compelling strategy for long-term value creation. Hitting just the highlights for Q2 our core coking coal portfolio delivered an exceptional cost performance and record margins. We again generate significant levels of free cash, we return a robust amount of that cash to shareholders via our highly successful capital return program, we announced plans for a new value creating joint venture involving our Western thermal assets and we made excellent progress on our promising growth story at Leer South.

In short, we maintained excellent momentum across every facet of the business and set the stage for more of the same in the year second half even against a backdrop of modestly weaker coking coal prices. I am particularly pleased with the strong continued progress on our capital return program. All totaled we returned $71 million to shareholders during Q2 consisting of $63 million via share repurchases and $7.4 million via dividend payments despite a temporary suspension of buyback program during the quarter. Importantly we maintained a strong and steady pace in that program even while directing more than $36 million to the Leer South growth project in the year's first half. So far in 2019 we have returned nearly $160 million to shareholders, nearly 20% more than during the same period in 2018. Our progress since the program's launch is impressive. Since initiating the capital return program in May of 2017 we have bought back approximately 35% of our initial shares outstanding and returned a total of nearly $800 million of capital to shareholders.

As we have stated in the past, we expect to have the capacity to maintain this strong pace in the year's back half and return as much if not more capital to shareholders in the full year 2019 as we averaged in 2017 and 2018. We consider the fact that we can return that level of capital while executing a transformative growth project to be a powerful evidence of our just significant cash generating capabilities across a wide range of markets scenarios.

Turning to coking coal markets, coking coal prices were strong for the majority of the second quarter. The U.S. High-Vol A price averaged a $197 per metric ton during the period and only started the road late in Q2. Despite this weakening we continued to view coking coal markets is generally well balanced. Global steel demand and blast furnace output were up roughly 5% in the first half and capacity factors in North American blast furnaces averaged above 80% more than counterbalancing weakness in Europe. Global coking coal demand was solid with Chinese coking coal imports up more than 20% through the first half of the year. And while India got off to a -- start in 2019 we expect to see an acceleration in that country see more in demand in the near-term.

We also see reason for optimism on the supply side. Australian coking coal exports were up modestly year-over-year during the first half of 2019 but continue to track well below the 2016 levels, the peak year for Aussie met exports. In the U.S. coking coal exports declined nearly 10% in the first half of 2019 despite the strong pricing environment, again underscoring the maturity of the U.S. coking coal reserves. Of course trade tensions and overall health of the global economy represent a risk to the marketplace going forward but are just built to weather such downturns when they come just as that structure did deliver exceptional value when the markets are healthy.

Looking ahead we remain highly confident on Arch's clearly defined strategy for long-term value creation and growth. We've identified four significant drivers that should elevate the company's long-term cash generating potential still further. These drivers include a robust improvement capital return program, the accelerated build out of our new world class Leer South longwall mine, the impending transition of the Leer mine into the heart of its reserve base later this year, and the ultimate completion of this strategic joint venture with Peabody Energy which should unlock very substantial synergies while sharpening our strategic focus still further. In combination these drivers should further enhance Arch's already powerful value proposition and deliver significant incremental value to our shareholders over the long-term. With that I'll now turn the call over to Paul Lang for some further commentary on our operational performance during the second quarter. Paul.

[Paul A. Lang, President and COO]

Thanks John and good morning everyone. As John noted we're pleased with our strong execution during the quarter and we remain sharply focused on maintaining that operational excellence as we progress through the balance of the year. During the second quarter our core coking coal portfolio continued its strong operational and marketing performance as we achieved near record realizations on coking coal sales. We reported segment costs of $62.07 per ton which was at the bottom of our guidance range. We shipped 1.6 million tons of coking coal despite a longwall move at the Leer mine and more importantly we delivered record cash margin of $53.80 per ton.

Of particular note the Leer mine turned in another outstanding performance. Even with the longwall move the mine continued to achieve high productivity levels and exceptionally low cash costs. Later this year Leer will transition into the heart of its reserve base where the average same thickness will increase about 12 inches going from approximately 5 feet to approximately 6 feet. This transition should enable longwall to maintain and even improve upon its excellent track record during its first five plus years of operation.

I'm pleased to report that we're making excellent progress in the development of the world class Leer South longwall line which as I've discussed in the past is affectively a carbon copy of the Leer mine. As you know Leer South is expected to be among the lowest cost, highest margin coking coal mines in the United States. While we're just out of the gate with development process we are encouraged by the pace of the progress. As a result of this strong start we shifted the expected startup date of the longwall to the third quarter of 2021 as opposed to the fourth quarter as previously indicated. To keep this in perspective even at today's prices every month the longwall operation is accelerated it should deliver an excess of $14 million to $16 million of additionally EBITDA.

Obviously, we remain sharply focused on getting the longwall in operation as quickly as possible and will be looking for every opportunity to accelerate the development work still further. In support of the accelerated timeline we now anticipate spending approximately $100 million of development capital at Leer South in 2019 versus the $90 million that was initially indicated. While we are compressing the capital spending into fewer quarters than originally stated we remain comfortable maintaining our original estimate of $360 million to $390 million to complete the project. Moreover we still anticipate producing approximately 1.3 million tons of coal with continuous miners during the development process. These development tons which have the same qualities as our premium High-Vol A Leer product will be sold at market based prices.

Consequently we would expect those tons to generate roughly $100 million of EBITDA given the current market conditions. That equates to more than 25% of the anticipated capital needed to develop the mine. In short we expect a very rapid payback at Leer South across a wide range of market scenarios. It's also important to recall that the state of West Virginia recently passed legislation with the aim of incenting new investment in the state of coal mining sector. The legislation should enable us to recover up to 35% of our total investment in Leer South in the form of lower severance tax payments over the course of the next 10 years.

I'm also pleased to report with the strong execution during the first half and the positive operational outlook for the remainder of the year it gives us sufficient comfort to raise our coking coal guidance despite the somewhat softer market environment we've seen the past few weeks. With this we now expect to ship 6.7 million -- 7.1 million tons of coking coal in 2019 which represents an increase of 100,000 tons at the midpoint. Additionally we've tightened our cost guidance for this segment to a range of $61 to $65 per ton an improvement of $0.50 at the midpoint. While these are modest tweaks they are reflective of our commitment to continuous incremental improvement in every aspect of our business. As for the third quarter of 2019 we now expect the financial contribution from metallurgical segment to be relatively comparable to what we achieved in the second quarter as increased shipping volumes are projected to be counterbalanced by lower index based pricing.

On the thermal side we continue to take what the market is offering while being disciplined in terms of capital spending and managing our costs. That strategy allowed us again to generate meaningful levels of free cash from our thermal assets in the quarter just ended despite the impact of flooding that significantly curtailed rail service during the period. Looking ahead we expect a greater contribution of free cash from both Powder River Basin and other thermal segments in the second half of the year due principally to improve logistics and even lower capital spending. Thus we are maintaining our prior volume and cash cost guidance from all segments.

Moving to the recently announced joint venture with Peabody involving our Western thermal assets, the Hart-Scott-Rodino filing has been made and the transaction is currently under review by the Federal Trade Commission. We believe this business combination creates unique synergies that will lower costs and strengthen our competitiveness with both natural gas and renewables benefiting our customers and their consumers. As you can appreciate though given the nature of the review we will not be able to answer questions and provide additional information related to this process on today's call.

Before closing I want to congratulate the Arch team for another exceptional performance in safety and environmental stewardship. Generally speaking we gauge our performance against Arch's past excellence which is a high bar. Even against those metrics it was a strong performance on both fronts. As just one example the Leer mine recently surpassed 1 million employee hours without a reportable injury. In addition it's also rewarding to be recognized by outside entities and we collected several noteworthy honors during the quarter. Among those accolades Black Thunder was honored with the Top 2018 Wyoming Department of Environmental Quality Reclamation Award. In addition our West Elk mine received recognition from the Rocky Mountain Coal Mining Institute as the safest underground mine in Colorado in 2018. These are significant and commendable achievements.

In summary we continue to hit our marks in every critical area of performance last quarter and we intend and expect to maintain that strong momentum during the second half of the year. With that I'll turn the call over to John Drexler, our CFO. John.

[John T. Drexler, SVP and CFO]

Thanks Paul and good morning everyone. As John and Paul have indicated we continued to execute on our plan of generating significant cash flows from our low cost operations, investing in and accelerating the start up of the high return Leer South project, and returning substantial amounts of capital to you, our shareholders.

First a brief update on our cash flows, capital allocation, and liquidity position. We continue to generate significant cash flows during the quarter with operating cash flows of approximately $141 million. That includes the refund of $35 million of alternative minimum tax credits. Capital spending for the quarter was $48.7 million. This total includes $18.9 million of development capital for Leer South with the remainder in maintenance capital. Due to the timing of equipment rebuilds the second quarter's maintenance capital is expected to be the highest of the year. As it relates to Leer South total capital invested in the project stands at $36.3 million and we now expect to spend $100 million over the full year. As John and Paul have discussed we have made substantial progress to date achieving significant milestones in the process of development allowing us to accelerate the startup of the longwall.

Consistent with the last several quarters cash flow in excess of our capital needs was devoted to our capital return program. For the second quarter we bought back 697,000 shares or approximately 3% of our initial shares outstanding for $63 million. We achieved this buyback level during the second quarter despite the fact we were out of the market for a period of time during the quarter in light of the pending announcement of our joint venture with Peabody. To date we have spent a total of $726 million buying back 8.8 million shares or over 35% of our initial shares outstanding in just nine quarters.

Also during the quarter we paid our normal recurring dividend of $7.4 million bringing our total dividends paid since we initiated the quarterly dividend program in the first quarter of 2017 to $71 million. The board also approved the next quarterly cash dividend payment of $0.45 per common share which is scheduled to be paid on September 13th to stockholders of record at the close of business on Aug 30th. We believe the dual focus of returning capital to our shareholders via recurring dividends and share repurchases while simultaneously funding the build out of our high return Leer South project represents an excellent allocation of our capital.

Looking ahead we will continue to evaluate which uses of cash provide the best risk adjusted return over the longer-term but having said that we continue to view our stock as an excellent value. Given our current capital resources and the expectation of strong free cash flows for the remainder of the year, we expect to continue to return cash to shareholders while simultaneously funding the build out of our Leer South operation.

Regarding our liquidity we ended the quarter with $395 million in cash and when combined with the borrowing capacity of our credit facilities we had $508 million of liquidity. As we have stated we like to maintain our liquidity in the range of $400 million to $500 million with a substantial component of that being cash and we are very comfortably positioned just above the high end of that range. Our strong balance sheet combined with our low cost operations provides us protection through the full market cycle by allowing us to generate substantial value when coal markets are healthy.

In summary we are pleased with our performance in the first half of 2019. Our low cost operations continue to generate substantial cash that we are using to enhance the value of Arch by investing in our high return Leer South complex and by driving forward rapidly and aggressively on our capital return program. We expect to continue down that same path for the remainder of 2019. With that we are ready to take questions. Operator I'll turn the call back over to you

[Operator]

[Operator Instructions]. We'll take our first question from Mark Levin of Seaport Global.

[Mark Levin, Seaport Global Securities]

Thanks. Just a second of editorializing, great execution. I can't -- I was thinking about it earlier, I can't remember a time where the execution has been this solid and this consistent for so long so my hat is off to the entire company. And related to that -- yeah my pleasure, great job. Related to that point maybe you can talk a little bit about something that we don't talk a lot about on calls which are tons per man hour which seem to improve significantly from Q1 to Q2 in your met operations and I think there was reference to again the reference to entering into thicker seams and maybe what you expect that to do to your overall cost when you're thinking about 2020?

[Paul A. Lang, President and COO]

Yeah Mark, this is Paul. I will take off on that. As you look at Q2 versus Q1 one we'll start with what was kind of the same, we just both had a -- both Beckley and Sentinel had what I'd call just a good solid quarter. Quarter-over-quarter they were strong. Probably the one aspect by the quarter is Mount Laurel continued to struggle and I think every day on the decision we made to pull longwall it's only been reinforced. But what offset that clearly was an outstanding performance by the team at Leer. The mine went through a longwall move, they got it done ahead of schedule and the productivity coming out of the move was outstanding. So, I think you're starting to see that reflected in the productivity in the ton per man hour numbers.

[Mark Levin, Seaport Global Securities]

And when you think about just now maybe more financially, when you think about Q3 versus Q2 EBITDA I think in the press release you referenced the met coal [ph] contribution being somewhat similar in Q3 to Q2 with more volume offsetting weaker pricing and better outlook maybe for PRB and also other thermal in the second half, maybe how to think about what the earnings will look like or what EBITDA might look like in Q3 versus Q2 given those factors?

[Paul A. Lang, President and COO]

Yeah, obviously Mark we gave pretty good indication on the met segment. As you look at the PRB and as you know PRB third quarter is usually the strongest quarter and I think there's every indication that we're not quite back to what I'd call normal but we are operating fairly well out there. So there's nothing that I see in the PRB that would offset kind of the normal Q3 strong shipping schedule. On the other thermal I think we're also expecting a pretty good pickup so in all things being equal I think you could take our typical Q3 say from last year, adjust it for prices, and give our indication on that and you would have a pretty good indication where we're at.

[Mark Levin, Seaport Global Securities]

Again my last question is a market question, so over the last couple months I know met prices have weakened a fair amount, what are you guys seeing in the market, I mean obviously U.S. exports are still down 8% to 10%, I think they recovered a little bit in the second quarter from the first quarter Australia. Australian experts haven't picked up a whole heck of a lot this year and I know we are all aware of what's going on kind of in the steel market but just kind of from your advantage point and what you're hearing from your customers in Europe and domestically about what's going on in the met market, do you guys expect prices to stabilize around here or what are you guys seeing or thinking?

[John W. Eaves, CEO]

Mark, I think what -- as we enter the third quarter I think we're comfortably at about 98% committed on the coking coal side based on the midpoint of our guidance and we're really not seeing what I would call any pushback. We've had a lot of conversations with our European customers. There's a lot of concern on the economy, there's a lot of discussion on what the global economic situation is tariffs. I think people are being cautious but right now I haven't had a lot of concern relative to the customers not taking coal.

[John T. Drexler, SVP and CFO]

Mark, this is John let me jump in. I guess as we look at the globe we continue to think there's been pretty significant under investment the last several years. We think that markets are overall pretty well balanced. Yeah, we've seen some weakness over the last couple weeks but I guess longer-term we still pretty confident about where we see prices going with depletion rates at 2% those are Arch's numbers, pretty conservative demand growth. We think you still need 70 million to 75 million tons over the next five to six years just to meet that new demand. So we're not looking at it short-term. We continue to look long-term, feel very confident with our cost structure, our quality, and our balance sheet being able to manage through these dips and really capitalize when they move up.

[Mark Levin, Seaport Global Securities]

That's great, thanks again. Congratulations on a very good quarter.

[John W. Eaves, CEO]

Thank you, Martin.

[Operator]

Thank you. We'll take our next question from Lucas Pipes of B. Riley FBR.

[Lucas Pipes, B. Riley FBR]

Hey, good morning everyone and I would like to echo Mark's comments, fantastic execution, that's really great to see.

[John W. Eaves, CEO]

Thanks Lucas.

[Paul A. Lang, President and COO]

Thank you Lucas.

[Lucas Pipes, B. Riley FBR]

I wanted to hone in on one of Mark's questions on the met coal side with very strong productivity and then the higher seam height at Leer I think later this year, starting later this year I wondered if you can maybe quantify for us what that impact could be on a both production and cost basis and from that have a few more follow-up questions? Thank you.

[Paul A. Lang, President and COO]

Lucas, obviously this has been baked into our numbers. We've echoed this is coming for quite a while and obviously the impact is positive. A 20% increase in seam high was effectively what we're expecting. As you go to that it should have a corresponding impact on costs but at same time as I have said we've got Mount Laurel that's been out there, a little bit offsetting this but overall I couldn't be happier with where Leer has gone and expecting the same thing with Leer South.

[John W. Eaves, CEO]

I mean Lucas if you think about second quarter I mean Paul has been a little modest. I mean with longwall move at Leer we continue to fight this same amount while we had cost of 62.07 so going forward you got to feel good about our cost structure particularly with Leer's performance.

[Lucas Pipes, B. Riley FBR]

And then I assume in 2020 we would have a full year impact of those higher [indiscernible] correct?

[Paul A. Lang, President and COO]

That is correct.

[Lucas Pipes, B. Riley FBR]

So, and I guess they have to be a little bit patient in terms of how 2020 would look like in terms of production and cost but looks very promising. So, another question on the met coal side, in the release you mentioned about 1.3 million tons of development tons as you advance in Leer South, where would we see those tons precisely, would this be captured under Sentinel, would be this in your normal production guidance, or could production be already low -- be a little bit higher as you develop this new mine, I would appreciate some additional context around placing those tons in our model? Thank you.

[John T. Drexler, SVP and CFO]

Yeah, Lucas this is John Drexler. The 1.3 million tons we talked about the development tons and how they will generate EBITDA as we move forward. As far as how they're being reported right now it's a very modest development that's occurring. They are included in Sentinel's times but it's very small as you can imagine as we're just initially into the Lower Kittanning scene there. And so that will grow as we move forward but remember we're transitioning some CM units at Sentinel into the Lower Kittanning scene. So we'll -- all in all that's incorporated on all of our met coal guidance as we move forward.

[Lucas Pipes, B. Riley FBR]

Okay, got it, perfect. Thank you and then one last one for me, is your phone ringing in regards to the PRB, I would think that if you take 10% out of supply it shakes things up even in the what is otherwise a pretty lackluster demand environment, would appreciate your thoughts?

[Paul A. Lang, President and COO]

Yeah, I would tell you Lucas it's hard to talk about the PRB without at least acknowledging there's a pretty tough story out there with a large number of people lost their jobs and the impact what I'd say the County, the vendors, the States, the cities. It's a tough story. What I find fascinating about this thing having said all that is we pulled out 35 million or 40 million tons out of the market and that was a combination of Central App, High-Vol B, PCI, PRB and the market reaction was effectively zero. We've had a few calls but to be honest there's just not been a lot of concern over the issue at least from the customer's perspective that we've heard from.

[Lucas Pipes, B. Riley FBR]

Paul I share your thoughts on the PRB and to reach in and thank you for that additional color. I'll turn it over and continued best of luck.

[John W. Eaves, CEO]

Thank you.

[Operator]

Thank you. We'll take our next question from Michael Dudas of Vertical Research.

[Michael Dudas, Vertical Research Partners]

Good morning gentlemen.

[John W. Eaves, CEO]

Good morning Michael.

[Michael Dudas, Vertical Research Partners]

First question I guess on the lines of the great performance at Leer and the productivity enhancements you're having, how do you feel about current lever where you are relative to your needs and since there's been more trouble and more concern in the coalfields is that going to be helpful to help you get better quality especially as you're ramping up and trying to plan for Leer South as you target 2021? And are some of these activities from some of your competitors going to maybe start to impact some issues from vendors and some other negative issues as move into 2020?

[Paul A. Lang, President and COO]

Michael I'll start by talking about the PRB on the labor front and move to the East but relative to people we were in pretty good shape. Obviously there's been a lot of good people put on the market. I think you've read some headlines of some of the other competitors picking up people and honestly we've picked up some people and frankly I've been willing to pick up some skilled people that we didn't necessarily need and it's just a good opportunity to hire what are some very good operating electricians and those type of people. In the East it's always a little more interesting on the labor side. Clearly we have to bring on and I'll forget the exact number but somewhere between 150 and 200 people at Leer South and we've been doing it pretty methodically and had relatively good luck doing it.

I think the one advantage we have is that we've anticipated this issue. We started a training program at Leer about three years ago where we're starting to train new miners. That process is paying off and we're starting to build a pipeline of employees that were not so dependent on trying to go out and steal people from each other. And probably the one thing I'm probably most proud of in that process is we have a very good stick rate with those people. And I think taking young people that are interested in the industry and train them the way we want has really been the way to go and this poaching people from each other just doesn't seem to ever work out.

[John W. Eaves, CEO]

Michael just to jump on to that, I think our employees certainly we have a low turnover rate but when you look at Leer South and the growth and the future of the company I think people feel good about where we are today and where we're going and therefore we're just not seeing a lot of turnover people. And as Paul said we're not having a whole lot of trouble bringing people on for Leer South. So from a labor standpoint I think we're probably has positioned as well as we could be.

[Michael Dudas, Vertical Research Partners]

Appreciate those comments, it is very helpful. And I guess my follow up would be as we're gauging the export market especially globally on thermal how that's been performed pretty well over the last several months. How just from your angle looking at the overall met side has the quality of the coal that you and the U.S. providers into the marketplace are going to offset maybe their economic slowdown on the met side and I guess you did have a bit export on West Elk, are we getting close to bottoming and are you anticipating seeing some of the supply issues that come out of the marketplace to help tighten up the market? Thanks guys.

[Paul A. Lang, President and COO]

Yeah, I'm not sure I caught the entire question but I'll just try and hit the high points and maybe John can jump in. But we export principally roughly about 750,000 or a million tons out of the East from our Coal-Mac operation off API 2. At current marks those values won't come -- those tons will not go into the European market. We've done a fairly good job though displacing some of that export with some domestic sales that we jumped on earlier in the year. So generally feel good about that position. In the West, West Elk has always been a strong participant in Newcastle. We were aggressive in taking out hedges which obviously have paid off the last couple of quarters and so we're in relatively good standing as far as West Elk going into 2020. And I think the way West Elk is always going to run is as we watch the Newcastle market will enter in and come out of it and just we're not going to try and judge the market at the top, we're just going to layer it in and be careful how we do it.

[John W. Eaves, CEO]

Mike on the coking coal side we do feel good about what we're seeing on the quality front. If you look at where High-Vol A is trading today it's just a couple of dollars below Australian hard coking coal and that's just the advantage of Australia being right there at the doorstep of the Asian market. But we do feel good about that. We certainly continue to believe that our High-Vol A product is going to be really instrumental as additional lower quality time has to make their way into the market, semi soft tons, pet coke etc. The High-Vol A is a really significant advantage from a lending perspective and allows the cokeries [ph] to bring in those lower quality products. It does feel to us like the market feels is sort of getting a little steadier here. We've obviously had a dip over the last month and a half or so but we are starting to see what we think might be a little bit more stability. We'll see how that plays out. The last couple of days have seemed to have looked better and as indicated we are hearing good interest continue to be sort of encouraged by the tone despite those macro concerns that John and Paul referenced. So we do feel decent about sort of the export markets. It's just we have the sort of same uncertainty at that sort of global economic level that everybody else does.

[Michael Dudas, Vertical Research Partners]

I appreciate those thoughts. I think the only team that had a better second quarter than Arch Coal was the [St. Louis Blues.] Thanks guys.

[Operator]

[Operator Instructions]. We'll take our next question from John Bridges of J.P. Morgan.

[John Bridges, J.P. Morgan]

Good morning everybody. And I'd like to echo Mark and Lucas's comments on your results. Well done. Maybe I'd also like to take another shot at the seam thickness question. You're going in to the heart of the seam in 2020. How long will the engineers let you stay there before you come out of it and then Leer South presumably that's not in the bulls eye as well, so what do you expect the seam thickness to at Leer South in 2021?

[Paul A. Lang, President and COO]

Hey John, this is Paul. First of all thank you for the comments. John this is kind of the heart of the reserve. We're going to be in this seam thickness for quite a few years out. It was simply the way we had to develop the mine that we had to go basically to the Southeast core and come back out. But as we head North and we head West the coal seams relatively thick. And it's a pretty good story. It's a little unusual that you don't start off in your best coal and that's the way the mine had to be developed.

[John Bridges, J.P. Morgan]

And certainly a South is in the six foot coal as well?

[Paul A. Lang, President and COO]

Yeah. Leer South as we've talked in the past has a couple advantages actually over Leer. It's a little bit thicker coal and probably more importantly it's got longer longwall panels. So we're expecting productivity very similar to Leer.

[John W. Eaves, CEO]

So John what we've said about that is that the Leer South looks a lot like Leer has been over its first five years plus of operation. Actually as Paul said a little bit thicker, longer longwall panels all good. It's just that Leer now takes this sort of this step change into even thicker coal still. So we would expect Leer South to look a lot like what we've seen out of Leer with the additional benefits that we've learned a lot over the last five plus years of operating there in Lower Kitanning and longwall mining and we have really refined those processes. So feel really positively.

[John Bridges, J.P. Morgan]

Okay, great. And you were commenting a lot about the shortfalls on supply affecting met coal and helping keep the price up. One of things that's sort of intriguing me is that certainly in theory given the pressure on thermal coal from ESG investors etcetera, etcetera is that that effect should be having a bigger impact on the supply of thermal coal. But of course we have this big disconnect between Matt Coleman thermal coal prices at the moment. I just wondered if you had any thoughts as to what was depressing the seaborne thermal coal prices and when that might abate?

[John W. Eaves, CEO]

Well let me jump in and Paul can add on. I think certainly on the thermal we're starting to see a lot of pressure given where API 2 is. I think the reason you haven’t seen a more significant drop off is people hedge their selves for 2019. As those hedges come off later in the year and you go into 2020, I think there'll be a lot of pressure and quite frankly John I don't know that there's any place for that coal to go domestically. So I think you'll see a lot of pressure as we move into 2020. Paul you got anything.

[Paul A. Lang, President and COO]

No, the only comment I'd make John is the usual commentary you hear on Europe, the met is LNG prices were relatively low, we have displaced a lot of coal. Coal inventories build up and API 2 crashed.

[John Bridges, J.P. Morgan]

Okay, okay. Yeah, I was hoping you had some new revelation that’s smallest in line with. Now if you hear it I'd like.

[John W. Eaves, CEO]

Yeah, we'd love to hear you John if you try anything else out.

[John Bridges, J.P. Morgan]

I will keep on looking. Thanks again and congratulations, good results.

[John W. Eaves, CEO]

Thank you John.

[Operator]

Thank you. We have no further questions at this time. I'll turn it back to John Eaves for closing remarks.

[John W. Eaves, CEO]

I want to thank you for joining the call this morning. The management team will be focused on executing on the four drivers in the back half of 2019 our capital return program, development of Leer South, the transition in the heart of the reserve at Leer, and the completion of the JV with Peabody Energy. We look forward to updating you in October. Thank you.

[Operator]

Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect.