Arch Resources Inc

NYSE:ARCH

Earnings Call Analysis

Arch Resources Reports Q2 Results, Focuses on Long-term Growth

Arch Resources achieved an adjusted EBITDA of $60 million in Q2 2024, despite logistical challenges. The company set a quarterly production record in its core segment and expects enhanced production at the Leer South longwall district. $13 million of debt was repaid, resulting in a net cash position of $146 million. Arch returned $19.6 million to shareholders through share repurchases and declared a $0.25 per share dividend. The company maintained its full-year shipping guidance and expects improved thermal segment performance in H2 2024, benefiting from reduced costs due to earlier inventory build-ups and stronger production rates .

Arch Resources: Resilience and Strategic Focus Amidst Challenges

In the second quarter of 2024, Arch Resources showcased its resilience as it navigated through significant logistical challenges and a soft market environment. Despite the complexities posed by the tragic collapse of the Francis Scott Key Bridge, Arch managed to achieve an adjusted EBITDA of $60 million while setting a quarterly production record in its core coking coal segment. This performance underscores the effectiveness of Arch's strategic focus on long-term value creation.

Financial Highlights: Capital Returns and Debt Management

During Q2, Arch executed a robust capital return program, deploying $19.6 million, which included the repurchase of 94,000 shares worth $15 million and a quarterly cash dividend of $0.25 per share, amounting to approximately $4.6 million to shareholders. Since the relaunch of the capital return program in February 2022, Arch has returned over $1.3 billion in cash to its shareholders, highlighting a clear commitment to providing value. The company also achieved a net cash position of $146 million by paying down $13 million in debt, leading to an overall debt total of $133 million.

Demand Dynamics: Market Insights and Competitive Positioning

Arch is strategically positioned in the high-quality coking coal market, particularly as Asian steelmakers increasingly seek reliable sources for their long-term coking coal needs due to a lack of new investments in coking coal supply. While global steel demand has softened, Arch remains optimistic about future demand. This is bolstered by robust customer interest in Arch's high-quality products and its competitive advantages, including a cost-competitive coking coal portfolio and a strong sustainability record.

Operational Performance: Record Production and Future Expectations

In Q2, Arch's metallurgical team produced over 2.5 million tons of coking coal, reflecting a strong operational momentum. The guidance for the full year includes a sales volume target of between 8.6 million and 9 million tons. The company anticipates increased production and sales stemming from its ongoing projects, notably the development of the Leer South longwall district, which is expected to yield significantly higher production rates in the near future.

Market Conditions: Navigating Logistical Challenges and Supply Issues

Arch faced substantial logistical challenges in Q2, reflected by an estimated $12 million reduction in margins due to increased transportation costs and specific operational disruptions. However, Arch capitalized on its ability to redirect shipments and optimize logistics. With inventories building in the Powder River Basin, Arch is poised for a strong second half as it projects a substantial increase in shipments, particularly from its thermal segment, which it expects to strengthen in Q3 and Q4.

Outlook for Margins and Cost Management

Looking ahead, Arch projects improvements in cash costs across its segments. The company has recalibrated its spending, expecting federal spending to range between $155 million and $165 million, which is a reduction of $10 million at the midpoint. Total SG&A guidance has been adjusted to approximately $92 million. Interestingly, Arch anticipates not paying any cash taxes in 2024 due to significant tax carryforwards totaling around $250 million. This positions the company favorably to manage its costs effectively and maintain profitability.

Sustainable Growth: Commitment to Safety and Environmental Stewardship

Arch Resources not only focuses on financial performance but also emphasizes safety and environmental responsibility. The company recorded zero environmental violations, underlining its commitment to sustainability. Moreover, Arch's operations received multiple safety awards in recognition of its culture of safety and environmental stewardship, which are pivotal for long-term success in the industry.

Strategic Vision: Positioning for Future Growth

Arch maintains a forward-looking perspective, with a firm belief that current market softness may set the stage for stronger future growth as conditions improve. The management team highlighted their readiness to adapt and enhance operational strategies to take advantage of potential upturns in market demand. Their flexible approach to capital allocation, combined with a strong balance sheet, suggests a prudent strategy that prioritizes shareholder returns while preparing for market fluctuations.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Arch Resources, Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Deck Slone. 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 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 annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different from 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 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 earnings call will be Paul Lang, our CEO; John Drexler, our President; 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 Lang, executive]

Thanks, Deck, and good morning, everyone. We appreciate you hearing to Arch are I'm glad that you join us on the call this morning. I'm pleased to report that during the second quarter, Arch continues to drive forward with our clear and consistent plan for long-term value creation growth.

During the quarter just ended, the team achieved adjusted EBITDA of $60 million, set a quarterly production record in our core logical segment while driving ahead with the development of our second longwall district, Leer South, where we expect substantially more favorable federations. 2 million tons of coking coal despite significant logistical challenges stemming from the tragic collapse of the Francis Scott Key Bridge, paid down an incremental $13 million of debt, giving us a net cash positive position of $146 million and to rightsize the operating activities in our thermal segment, setting the stage for cash generation at these operations in the back half of the year.

In addition, within a particular note, we deployed an incremental $19.6 million in our capital return program during the second quarter, even in the face that we have just discussed logistical challenge and a subdued near-term market environment. We returned this capital through the repurchase of an additional 94,000 shares of common stock with an investment of $15 million and the declaration of a quarterly cash dividend of $0.25 per share payable in September with a total projected payment of $4.6 million to shareholders.

In aggregate, we've now deployed well over $1.3 billion in our capital return program since its relaunch in February 2022, which we hope to agree represents a substantial amount of value generation in a relatively brief period of time. This total included $732 million or $38.78 per share in dividend payments and the repurchase of $615 million of common stock as well as the repurchase and retirement of our convertible notes.

It's worth pointing out that, including the Q2 repurchases, we've now reduced our diluted share count by well over 3.5 million shares or more than 16% when compared to the level in May 2022. Looking ahead, we remain sharply focused on driving that share count value [indiscernible]. As you know, the central tenet of our value proposition is to return 100% for the company's discretionary cash flow to shareholders with a strong emphasis on share repurchases. We believe that this framework has created substantial value for our shareholders in the past, and we fully expect them to continue to do so in the future.

Let's now switch to some brief commentary on the steel and coking coal markets before turning the call over to John for additional comments on our operating performance during Q2. As we are now aware, seaborne coking coal demand remains speckled through principally our estimation through a challenging global macroeconomic environment related in part to weak infrastructure and property market spending in China.

The predictable, but nonetheless, consequential effects of the monsoon season in India and a slow climb out from multiple quarters in economics valuation in work. These factors have coalesced to lay on global steel demand as evidenced by the recent erosion of steel prices.

Our rolled coal prices in major steel-producing regions are down approximately 50% versus the peak seen in 2021. As part of this, European steel markets are under pressure with the average capacity factor of blast furnaces standing around 65% according to our estimates. The steel market weakness has had to predict up knock on effect on global coking coal markets.

Even with these pressures, however, customer interest at Arch's high-quality coking coal products, particularly in Asia, continues to drive. Asian steelmakers appear increasingly focused on identifying strong, consistent and long-lived sources for their long-term coking coal requirements, given their own expansion plans in order to buffer themselves for the lack of new investment because the coking coal supplies.

Given the number of customer inquiries over the last couple of months, we expect to have ample opportunity to continue to build on our global customer base with a strong Asian emphasis that represents a good strategic fit with our high growing assets. Meanwhile, the coking coal supply side of the story remains new, reflecting degradation and depletion of the resource base and major suppliers, only a modest investment in new replacement mine capacity.

Recent mine outages that have removed 2% to 3% of supply for the global seaborne market and an increasingly fragile supply chain. Moreover, we believe that the current coking coal prices are below the marginal cost production on a global basis. We achieve accurate, we'll take predictable coal on production minings over time, assuming such prices persist.

As a result of these various factors, we expect seaborne coking coal markets to balance quickly once the global company begins to strengthen and global steel demand starts to reassure themselves. Looking ahead, we remain sharply focused on driving continuous improvement with execution across our entire operating platforms supporting strong value-generating capital returns for our stockholders, even its very soft market environment.

With our cost-competitive coking coal portfolio, high-quality products with rapid rate spend in presence in Asian markets and recognize sustainability leadership, we believe we are exceptionally well positioned to capitalize as global steel demand stabilizes and then returns to its anticipated upward growth.

With that, I'll turn the call over to John for further discussion on our operational performance in Q2. John?

[John Drexler, executive]

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team navigated through the extreme disruption to the logistics chain in an effective manner in Q2, shipping more than 2 million tons of coking coal, even as we were forced to direct virtually all our seaborne volumes to an already busy DTA during April and May. I want to commend the Arch team for that excellent work, and I also wanted to extend our appreciation to our rail and other logistics providers for their great support during that challenging time.

I would also point out that we had 2 additional vessels, representing more than 160,000 tons that just slipped into Q3 due to the extremely busy June shipping schedule at both the East Coast terminals. While we were disappointed that those vessels fell out of Q2, those early July loadings provide a jump start to the year's back half when we anticipate moving substantially more bond.

Given the strong performance of the overall logistics chain in the phase of Q2 [indiscernible] as well as our positive operating momentum, we are confident we can achieve the step-up necessary to deliver on our full year sales guidance of between 8.6 million and 9 million tons. Bolstering that confidence further is our continuing operational progress. As Paul indicated, the metallurgical team delivered a record performance during Q2, producing more than 2.5 million tons in total for the first time.

Just as important, Leer South progressed into the final panel in District 1 in early July and is achieving strong advanced rates there even as the mine prepares for the transition in District 2 in late September or early October.

As you will recall, our data shows that the coal seam 15% to 20% thicker in District 2 and that the overall mining profile is more advantageous, which should drive a step-up in production levels in future periods. Now, let's spend a few minutes on the metallurgical segment's operating margins, which were compressed in Q2 due to the challenging logistical environment.

In total, logistical disruptions had an estimated impact of greater than $12 million in Q2 related to vessel demurrage, retimed vessel movements, increased rail fees and midstreaming activities, which, in aggregate, acted to lower our average sale netback accretion. As an aside, it may also be worth noting that we had a higher than ratable percentage of High-Vol B shipments during Q2, which also actively dampened the average net. The metallurgical segment's cash costs were also pressured due to the difficult logistical environment during Q2 as we directed every possible loading stock to coking coal.

As a result, we deferred the shipment of nearly 150,000 tons of thermal byproducts during the quarter. Given that the thermal byproduct inventory value is immaterial, the reduced shipping schedule for this product served to increase the Metallurgical segment's unit costs by an estimated $6 per ton.

We expect these unit costs to reverse in the year's second half. We are also expecting an appreciably stronger performance from the thermal segment in the year's back end. That positive outlook is driven principally by the expectation of an improving contribution from our Powder River Basin operations in Q3 and Q4. As you will recall, we entered 2024 at an annual production rate of close to 55 million tons.

Based on the expectation that we would ship 50 million tons of our estimated volumes and an incremental 5 million tons or so related to intra-year sales.

Unfortunately, muted power demand, coupled with depressed natural gas prices grow virtually all new buying activity while spurring an influx of requests for [ different roles ]. As a result, we spent the first 6 months of the year realigning operating activities and stripping rates with a much reduced shipping quarters.

On a more positive note, the excess stripping that we completed during Q1 and Q2 resulted in a significant build in pit inventory in the year's first half in our PRB month. As most of you are aware, pit inventory is formed and is still sitting in the pit post the removal of the overburden, a step that constitutes the lion's share of the production cost.

Consequently, these tons, when they do ship will have a positive impact on our per-ton cash margins since most of the operating cost has already been incurred. We are currently sitting on more than 8 million tons of pit inventory in Wyoming, which is twice as much as we would typically do. During the year back half, we expect shipments to exceed production, which will allow us to monetize some of this pit inventory balance.

Meanwhile, West Elk again operated efficiently and generated solid adjusted EBITDA, even as it continued to ship under several legacy contracts that dampened netback. More importantly, the longer-term outlook at West Elk remains compelling.

During Q2, the marketing team continued to build out West Elk's book of industrial business in the outer years at fixed prices in excess of $70 per ton, $25 to $35 per ton above the legacy contracts that are expiring. At the same time, the mine continued to drive ahead with the development of the piece, where the goal is significantly thicker, the quality is markedly better, and the first time cash cost should be substantially lower. Those factors in aggregate should translate into a step change in profitability for West Elk across a wide range of market conditions once the longwall transitions the leasing in mid-2025.

Before passing the baton to Matt, let's spend a few minutes discussing the team's exemplary achievements and the sustainability of REIT. As you know, we firmly believe that a culture of safety and environmental stewardship is essential for long-term success of our business. During the first half of 2024, Arch's subsidiary operations achieved an aggregate total lost time incident rate of 0.47 incidents for 200,000 employee hours or more than 4x better than the industry app.

On the environmental front, the company recorded 0 environmental violations under SMCRA as a result, as well as zero water quality exceedances across all our subsidiary operations. Further highlighting the team's excellent growth, the State of Colorado recognized West Elk in Q2 with an Outstanding Safety Award, an Excellence in Innovative Safety Technology Award, and an Excellence in Mining Reclamation Award. In the state of Wyoming honored Coal Creek was a surface mine safety award.

On behalf of the Board and the senior management team, I want to once again commend the entire workforce for their deep commitment to excellence for the potential 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, and good morning, everyone. Let's begin with a discussion of second quarter cash flows and liquidity. Operating cash flow totaled $59 million in Q2, which was negatively impacted by a working capital increase of $15 million. In April, we have discussed the likelihood of a significant working capital increase in the quarter in light of the tragic bridge collapse in Baltimore and the impact it would have on shipment tons, with the ability to quickly pivot to alternative shipping methods resulted in a much smaller than anticipated build. Capital spending for the quarter totaled $47 million, and discretionary cash flow was $12 million.

Turning to the balance sheet. We ended June with cash and short-term investments of $279 million. We reduced debt levels by $13 million during the quarter, ending June with total debt of $133 million, a net cash position of $146 million and liquidity of $366 million.

Turning now to the capital return program. As Paul detailed, we remain active in the program in the second quarter despite the challenging logistical and soft market environment. Our cash flows for the quarter is not supported variable dividend, our Board has declared a fixed dividend of $0.25 per share, payable on September 13 to stockholders of record on August 30. I'll discuss our guidance in more detail shortly, with the expectation of increased volumes in segments in the back half of the year, we will anticipate cash flows to support more significant returns in Q3 and Q4, and we would expect share repurchases to be the primary vehicle for those returns.

Next, I want to spend a few minutes expanding on the severance tax rebate that we received from the State of West Virginia in the quarter. Rebate stems from visionary legislation bring the most levels in the state to encourage coal-related investment and employment. As you may recall, the incentives of the state created in that legislation were an important consideration in our ultimate decision to move forward with the $400 million build-out and [indiscernible]. We're now pleased to report that the legislation has proved highly beneficial to both parts.

On the art side of the operation, we have a new world-class coking coal mine that we expect to remain set-piece of our operations for decades. For the state, that investment has translated into 600 well-paying direct jobs, a significantly higher number of indirect jobs and substantial incremental severance tax receipts as well as a host of other state and local tax revenues.

The remainder in the second quarter was the result of a long process of refining of the law, not only in documenting the investments that remain and also demonstrating the benefits to the state from increases in coal production, employment and severance tax payments under a baseline period. Looking ahead, we expect to qualify for additional rebates in the future, although the extent and timing of those potential future recoveries will be driven by a host of factors, including market dynamics.

Finally, I'll conclude my remarks with some comments on our guidance for the rest of the year. In the Metallurgical segment, we have maintained our full year guidance for taking about sales volumes and gas funds.

While volumes for the first half of the year were less than [indiscernible], particularly in April, shipments in May and June were in the annual pace of more than 9 million tons. For cash costs, our guidance excludes the Q2 benefit and any potential future incremental benefits of our severance tax rebate while anticipating a meaningful reduction in the thermal byproduct inventory by year-end.

Additionally, we have adjusted several other items in line with the weaker operating results thus far this year. Federal spending is now expected to be in the range of $155 million to $165 million, a reduction of $10 million at the midpoint. Total SG&A guidance is now approximately $92 million at the midpoint, including both cash and noncash expense, representing a reduction of $5 million. Finally, we now expect that we will not pay any cash taxes in 2024 and will carry several and all carryforwards totaling approximately $250 million in 2025.

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

[Operator]

[Operator Instructions]

Our first question comes from Lucas Pipes from B. Riley.

[Lucas Pipes, analyst]

My first question is kind of on the margin outlook for the met coal business. There were a few moving pieces on the cost side in Q2, and I wondered if you could maybe speak to Q3. I assume that there's a $6 benefit from the thermal byproduct, but then there's not the severance rebate, and I would anticipate much higher volume. And then on the realization front, you spoke to a somewhat higher contribution from High-Vol B in Q2. So wondering how that as well as maybe lower rail rates might impact realization. So broadly kind of coking coal margins in Q3 versus Q2.

[John Drexler, executive]

Lucas, it's John Drexler. I'll start out here. And I think you hit on a couple of the key themes. Obviously, the second quarter was impacted significantly with what happened at the Port of Baltimore and the bridge collapse. And as a reminder, 50% of our metallurgical exports go under that bridge on an annual basis. So the logistics team did a fantastic job of managing that. We talked through the impact of the reduced margins there. There was a component of us having to redirect a lot of rail transportation. It was a longer transport to our DTA facility as a result. So there's rail surcharge impacts, but the team did a fantastic job of working to get that coal flow redirected.

We got creative as well. We talked a little bit about it on the first quarter call as well, where we had an opportunity to midstream. So when there was an opportunity to load some margins and get them through some lower draft openings of that bridge early in the recovery process, we took advantage of that and loaded several vessels that way as well. Once again, there are some incremental charges coming through there also. Again, you've also got the merge, you've got vessels that are getting tied up, getting delayed. So we had all of those costs coming through. So about $12 million of impact of reduced margin as a result of that.

On the cost side, you hit on it as well. The typical byproduct that we produce and have forever in the met segment is the middlings project, the thermal byproduct. It's about 10% of our production. Typically, that's on a standard cadence of shipments. As we indicated in our remarks, inventory value of that product is extremely low. So as a result of reduced shipments from what we had planned, there's a pretty significant impact on the unit cost.

The opportunity though is those are going to be recovered in the back half of the year as we ship that middling product. And so we've got a lot of confidence here. We came operationally for [indiscernible] the met segment produced at a record level. We expect more going forward, but with Leer South continuing its progress and an ongoing improvement. In the District 2, we feel good about our ability to continue to produce with those higher levels and then we'll work very hard and have confidence we can achieve the shipment levels that we've projected as well.

[Deck Slone, executive]

Lucas, it's Deck. I might just add, look, we wouldn't expect that $6 sort of pressure on netbacks that we incurred in Q2 as a result of the Bridge glass for all the reasons that John just articulated, but also look, the pricing today on U.S. East Coast down around $10. I think the positive side of that is that if you look at the average price in Q2, which was around 218 for HVA, that implies a rail rate that might be $10 lower as well. So if you take those 2 pieces and you sort of -- they kind of net out right now, again, assuming prices hold up, we don't have those additional costs that we're raining on netbacks.

So I think that those are important components, certainly suggest right now that we could see a step up in an expansion of margins where we are today. Certainly would add the fact that, as you point out, volumes are, we would anticipate stronger volumes, which should also result in lower unit cost.

So all those pieces in aggregate really should deliver a stronger future. And maybe one of the details on your question, you asked about the impact of High-Vol B. During Q2, there are typical splits on shipments are 70% High-Vol A, 15% High-Vol B, 15% Low-Vol. We were 20-plus percent High-Vol B during Q2 on the shipment front. Overall, in the quarter, that ends up evening out. It had a modest impact on the realization, but when we did want to note in our commentary.

[Paul Lang, executive]

I think because as I look at this sort of standing back and take it all viewed. The Bridge collapse affected Q2 in a lot of strained roles. But Q2 was best seen for reasons outside the cover. I think John pointed out very relevant. Team did an outstanding job of reacting, considering what we were able to do and divert all of those tons and bringing the market was amazing.

We touched on the very big issues, which are the netbacks were effective, costs were effective. But really, as I look at it, we were still able to do some capital returns. And I think probably the most important to all of this is it's behind us. It was outside of us. We're moving on and then should revert the door at the end of the day and that's why we're optimistic about the back half of the year.

[Lucas Pipes, analyst]

My second question is on West Elk. And you mentioned $70 in the prepared remarks. And I wondered, is that kind of a good number to use on the entire output of West Elk going forward? Or is that maybe more specifically for export tons? And so if you could maybe comment on the opportunity from higher prices at West Elk? I would appreciate the additional detail.

[Paul Lang, executive]

Yes, Lucas, it's a great question. I'll start off and Charles will have some thoughts as well. The opportunity at West Elk is that it produces at a relatively low cost, great high-quality product sought after in the export thermal markets in place incredibly well in the industrial market as well. As we've been discussing, we are transitioning to the BC where -- from where we have been producing for some time and producing very successfully and at low cost, we're going to see an improvement in the quality of the coal, higher BTU, higher quality product that we think will be even more sought after, so expansion on the top line.

As we continue to build out at West Elk, we have deployed additional continuous miner units to get the BC developed. So as we -- so as a result of that, we've seen a temporary step-up in unit costs at West Elk here as we are finishing out the build out. We expect to be producing from the long haul in the BC in mid-2025. At that time, we're going to see a step down in costs. So even as we sit here today with a lower realization product, we indicated legacy products at $25 to $35 below on a carryover basis into this year from last year where we struggled a little bit, but we're still generating EBITDA there and feel very good about where West Elk is going as we move forward.

And look at that, that pricing really pertains to about 2 million tons of North American industrial business. And so as those legacy contracts roll off and really they're averaging around $40 and the new contracts sort of kick in and they're averaging above 70%, that's a significant step-up on that increment where we do, of course, expect to have additional volumes we love in the seaborne market and the netbacks there will be determined by where the seaborne market trends. But clearly, that base of North American business is significant for West Elk. It provides visibility and obviously, a great step up.

So when you get into mid-2025, we get into the cyclical of the BC, costs could come down $15 to $20. We're talking about very substantial margin expansion and West Elk really becomes a much greater contributor as we progress into 2025 period, but certainly as we get into mid-2025 and we have that further step down in cost that comes with a much thicker coal in the BC with 400 to 500 Btus of higher quality. So West Elk is becoming, again, an increasingly exciting story again.

[Operator]

Next question comes from Chris LaFemina from Jefferies.

[Christopher LaFemina, analyst]

Just wanted to ask about kind of the capital allocation framework. I mean the balance sheet is obviously very strong. The outlook for the second half is that you should be highly cash generative. But let's assume we have some kind of nasty macro downturn. Should we assume in that case that the accumulation of cash on the balance sheet would then be used for buybacks? Let's assume that you're in a situation where free cash flow is negative because coal prices have gone down a lot. Is that -- would that be the strategy then to deploy that capital on the balance sheet to fund buybacks? Or in that scenario, do you want to maintain the very strong balance sheet because of the risks of further weakness in prices and weaker cash flow?

I'm just trying to understand how you use that cash in a downturn. I mean, obviously, in an upturn, the issue in your share price was high, which is a nice problem to have. But in a higher share price environment, it seems like the strategy is to not really aggressively buy back shares. So I'm trying to understand what happens in the downturn.

[Paul Lang, executive]

Chris, this is Paul. I'll give you my thoughts and Matt wants to [indiscernible]. I'll start out several tenet of our capital returns program with to effectively return 100% of discretionary cash on shareholders. This hasn't changed. Conversely, as we've said many times in the past, the allocation program, which is to say the split between dividend and share repurchases has always been flexible and dynamic as it should be.

As we look ahead, I think there's 3 reasons we've seen for heavier share repurchases going forward: Firstly, the economic fundamentals, as you point metallurgical segment -- especially on the supply side remains supportive when the global market seems to be relatively imbalanced; And second, the ongoing [ prudent ] operational execution in the coming quarters gives a lot of comfort knowing where we're hit; And I think probably the third piece of this is the current phase we are in the commodity cycle, which we argue is somewhat of a cross makes our stock a good buy.

So as you would expect, the rate of the pullback of equity, the more likely we'd be putting some of the cash we voted on the balance sheet last year to work. That was the reason we did, if you recall. We wanted to be set up for these kind of conditions. And actually, the Board is taking on this is dynamic. So I don't want to be too specific as to what we'd likely spend in different equity levels. But I also want to reiterate that when we built that cash balance, we've always said our minimum cash level was about $200 million. That allowed us to keep a robust -- a pretty robust 10b5-1 plans in place during blackouts.

So in the end, I think it's not quite a binary as you weight now. I think this is more of a continuum among which, I'd say, the use of cash as the equity goes down is probably a little prevalent and if equity goes up we slow down. But I think the good news is what I'm very proud of is we set ourselves up for this very item to occur. There's been a downturn in the market but that's why we built the excess cash on the balance sheet. Matt, do you have a...

[Matthew Giljum, executive]

I guess the only thing I'd add, Chris, as you look at our cost position compared to our peers, in a situation where cash flows go negative for us, it's going to be extremely painful for others. So we would probably view that as something that can't really be sustained for very long. And so I think we still have a room where we can deploy some of that cash that we built on the balance sheet last year and still maintain a very conservative profile, understanding that the conditions that are leading to negative margins are probably going to be more short term in nature.

[John Drexler, executive]

And first, I just said, if we simply see a pullback in pricing, coking coal prices, we aren't at that point where you said that extreme point where you have negative margins, you have some compression, but we continue to believe that $200 million is sufficient, right? If we're generating a margin and a solid margin where prices are today, even with a little further weakness, really comfortable with the idea of $200 million being sufficient amounts of cash, given very low debt levels, very low capital requirements and CapEx requirements. So we're feeling really pretty positively about the fact that, that dry powder really will be available to us.

[Christopher LaFemina, analyst]

Yes. I mean there's no question you guys are in a position of strength in a downturn with the balance sheet. And I would agree to maintaining a strong balance sheet is obviously critical. And Deck, you made a point earlier about pricing being in the cost curve, right? I mean if you look at assets in Queensland today, some of these mines are significantly loss-making already.

So hopefully, as you alluded to, we're somewhere near a bottom in pricing, in which case, you guys could be sitting here generating cash flow through the cycle and maintaining a strong balance sheet and delivering capital returns even in a weaker market, which is kind of the ideal setup on paper. And if you actually deliver on that, I'd probably work to all for your stock.

[Operator]

The next question comes from Nathan Martin from the Benchmark Company.

[Nathan Martin, analyst]

I wanted to come back to the coking coal segment just for a second, maintain full year shipping guidance there. By my math, it means you're going to need to ship roughly, call it, 2.4 million tons a quarter in the second half, just to kind of reach the low end of that range.

First, is that level achievable from a production perspective? Obviously, we just saw a record production quarter in 2Q. I don't know if that repeats or not. There's a question there on the production side. I think you guys also mentioned maybe some on the inventory there. I think 160,000 tons slipped into the third quarter that's already moved, but any inventory there that would help that as well. And then maybe secondly, just talk to your confidence again around the logistics chain, both the rail and port to handle that additional coal in the second half. And then finally, maybe really just cadence of shipments through 3Q versus 4Q?

[Matthew Giljum, executive]

Thanks, Nathan. Yes, you hit on a lot of different items. So I'll touch on a few of them. Operationally, we positioned the net -- our portfolio at that level where we delivered record production. We expect to be producing at those higher levels as we continue to move forward. We've talked a lot about the opportunity of Leer South, transitioning and finishing the last longwall panel in District 1 and transitioning to the District 2, where we're going to see an improvement in coal scene business of 15% to 20%. We expect to get there towards the beginning of the fourth quarter. That will have an impact and benefit for us as well.

So as a result of the production we saw in Q2 and with the constrained shipments that we had, for the Baltimore collapse, we did build inventory. I think we were around 350,000 or 400,000 tons of inventory built in the met segment. We indicated we just missed a couple of vessels at the end of Q2. So that gives us a jump start as we go into Q3 and beyond. But clearly, we've got to work very closely with our rail providers in port providers, but we have confidence that we're going to be able to achieve the levels that we've seen are going to need in the back half of the year to get to the guidance model.

And we've always envisioned that step-up, right? This is not new. We've always envisioned the fact that we're going to need to step up as we get to sort of 9 million tons and perhaps beyond that 9 million ton level. And so this is something we've been working on for a very long time, quite frankly, rail service is looking good and solid, and we're getting the train sets.

When you look at production so far in Panel 8, while we haven't quite made it the District 2 and the thicker coal conditions in Panel 8 where stair stepping towards District 2 and so far, really progressing very well in terms of production in Leer South. So lots of positives. So we do feel confident that, A, the coal will be there; and then B, the rail will be there to sort of move it and of course, feel very confident about this eternal side of the equation as well.

[John Drexler, executive]

And Nate, as I hit on it. We started Panel 8 and he described stair stepping to District 2. Panel 8 is with close our relative proximity starting in the end of direction of where we're going for District 2. We started in that panel. At the beginning of the quarter, the ramp was great and production here have several weeks in that panel at Leer South has continued to be very positive. So once again, it's just giving us further confidence that as we get into the District 2 in Q4, we're going to see that step up in the opportunity and production levels at Leer South as we go through.

[Nathan Martin, analyst]

I appreciate that guys. Any thoughts on the cadence of shipments in 3Q versus 4Q? Any remnants of issues with the port that would slow things down in 3Q versus 4Q or anything to consider there?

[John Drexler, executive]

Yes. No, I think the recovery from the port has been good. I think there's no real significant material or remnant carryovers, if any. So I think that cadence that we said 2.4 million ton level by quarter would be a heavy focus for us as we go forward.

[Nathan Martin, analyst]

Okay. And then Matt, you made some comments in your prepared remarks on the severance rebate. Maybe if we could just get a little more color there. What's kind of the potential dollar amount there over time? Maybe what time period do you expect those rebates to occur? And I think you said some of it will depend upon market conditions?

[Matthew Giljum, executive]

Yes. Nate, in terms of the rebate, first, I think I want to reiterate a couple of things I mentioned in my comments about this being a win-win for both Arch in the state. Obviously, the benefits for us are pretty clear today with the rebate that we've gotten and with Leer South online. For the state, our severance tax levels, if you look at what we paid since the time that Leer South came up, the longwall came up there, we paid nearly $200 million in severance taxes over that time. That's about a -- for our mine portfolio. Today, that's about a 70% increase on an annual average compared to what we were paying back in 2019.

So clearly, we think this has been a good thing for both sides. There is a lot of work that goes into this, and I want to commend the folks in our operations in our tax department for what they've done to bring us to where we are today. So with all of that said, as we look ahead, I think the good news is we've taken, I think, the largest part of the benefit already what we have coming in the future will likely end up being overall smaller than what we've gotten so far. Obviously, that makes some sense. We had to qualify expenditures going back several years. So the first bite was going to be the biggest.

As we look at the rest of this year, we think there's probably an opportunity for something along the lines of roughly half of what we got in Q2. And then as we look at next year, clearly, things like what the market price is and what the ultimate level of severance tax we pay is going to weigh into this. But as we sit here today, looking like something in the, call it, $5 million to $10 million range for next year. And then, again, depending on how markets progress, there could be some additional amounts to trail into 2026 as well.

[Nathan Martin, analyst]

Okay. And then I also wanted to just ask about the CapEx reduction. Matt, what kind of drove that?

[Matthew Giljum, executive]

So really just looking at what we've experienced for the first half of the year, clearly from where we set our guidance at the beginning of the year where pricing was at the beginning of the year, our results haven't been what we plan quite frankly. And we're doing everything we can to defer costs in capital in order to sort of rightsized the cash flows as much as possible. So really just taking things that we thought we would be spending this year and trying to defer those to future periods wherever we can.

[Operator]

The next conference comes from Katja Jancic from BMO Capital Markets.

[Katja Jancic, analyst]

Maybe starting off on the thermal side. The expectation is that the contribution from the thermal side is going to improve in the second half versus the first half. Can you maybe provide a little more color how much of an improvement we could see?

[John Drexler, executive]

Katja, I guess I'll start out here, and we can have others weigh in as well. I guess we've already talked about West Elk and even in this challenged environment, that they have -- they're generating EBITDA. And we've indicated that we see the lion's share in the improvement occurring with where we're at in the PRB. We've done a lot of work over the first half of the year. Really the first 3, 4 months of the year where we saw the significant step down in demand. We came into the year kind of targeting 55 million tons of shipments. We already had 50 million tons committed, but that was the challenging winter, low in natural gas prices, we -- and the rest of the basin we see just a tremendous amount of pressure.

The team at Black Thunder did a great job. They've done a great job of reducing the head count aggressively. They're doing that through attrition and furloughs. Their parking equipment of optimizing maintenance with the parked equipment. But what we did see is we get higher production and stripping that we had in shipments and so we saw a build in pit inventory.

That pit inventory, we've incurred the cost to uncover that coal. We have probably twice as much as we would typically have -- we're at 8 million tons. We probably typically would run normally around 4 million tons. So as we get into the back half of the year, what we expect to see is an improvement in shipments compared to our production levels. But as a result, we're going to get the benefit of having incurred the cost to uncover that coal that we incurred in the first half of the year, we'll get that benefit to reduce costs in the back half of the year.

So with all that said, I think if you look at our thermal segment, we expect it to recover all the losses that had to be modestly cash positive as we step into the back half of the year.

[Matthew Giljum, executive]

Yes, Katja, I mean, 1 of the things we've said is, look, at West Elk, the [ dive ] is kind of cash, we kind of, for the most part, have good visibility there. And if you're looking at sort of high single-digit EBITDA contributions from West Elk each quarter, that continues. But the very thing that was the headwind of PRB, which was stripping and inducing or incurring more costs than we otherwise would have because we were stripping more times than we were actually shipping becomes a tailwind in the back half.

So suddenly, you've got the high single digits coming from West Elk and then on top of that, we should have a meaningfully positive contribution from the PRB. So while that's not a lot of clarity, I would say this that it is a meaningful contribution in the back half the simple fact of shipping 2 million to 4 million additional tons that we incurred the lion's share of the cost in the back half will be very significant for PRB margins. So the 2 together means that once again, we'll be generating some pretty meaningful cash contributions from the thermal segment.

[Paul Lang, executive]

I did -- I have a lot of say in the comfort in that [ whirlwind ] -- they've become very good at reacting to changes in the market on a very short-term basis. And I think what they've done in the last 2 months has set them up very well for the second half of the year. We'll have the money right sized. We'll have the effects of the tailwinds from the inventory change. And we will be done well when that's addressed. Whether that means [indiscernible] or whatever we have committed to cut costs. Converting the reclamation or all those other things that we've done well in the last couple of years, and we'll do in the [ end ]. I still feel pretty good about what's going on in the team in Colorado.

[Katja Jancic, analyst]

And maybe quickly on Leer South with now -- with the mine entering District 2 and the production or [ the steel ] being thicker heading into next year, is it fair to assume 3.5 million tons plus is where Leer South could shake up?

[John Drexler, executive]

Katja, I think we're not providing specific guidance. But once again, with a meaningful improvement in that coal scene business, 15% to 20% improvement since -- from what we've incurred in District 1, we have high expectations for Leer South and what you're describing, absolutely, from my perspective, without having provided any formal guidance yet is absolutely within the range of expectations.

[Matthew Giljum, executive]

And the guidance we did provide, Katja, as you'll recall, is kind of 3 million tons this year sort of on a -- or at least a 3 million-ton run rate. So look, if we go from a 3 million-ton run rate, so 750,000 tons per quarter, and we get the higher yields that we anticipate to District 2 and obviously, it implies a meaningful step-up from that 3 million-ton level. But again, as John said, no formal guidance at this point.

[Operator]

The next question comes from Michael Dudas from Vertical Research.

[Michael Dudas, analyst]

John, maybe you could share a little bit how Baltimore and DTA, how operations are, how the activity has been? Is it back to a more normalized level? There still fits and starts? How do you assess that? given all the tremendous work that's been done and all the logistical issues that everybody needed to overcome?

[John Drexler, executive]

Yes, Michael, good question. I think we commented a little bit on it to expand further. I think post that bridge collapse, post the closure of the Port of Baltimore for practical purpose, that was a significant event, clearly. We talked about it, logistics team working with our logistics partners has been a fabulous job of reacting and responding to that event, keeping the call flowing, adjusting the call flows.

Our partner, DTA, with 35% ownership in that stepped up well. The CSX stepped up well. And so we're really proud of what we were able to achieve in the second quarter despite the significant challenges. With all that said, that port opened the [ prong ] without restriction, essentially June 10. Since that time, I would say everything has really kind of gone back to the traditional flows. And so I don't see any residual impact going forward. And so we'll work to optimize on the condition of close. The experience that the team gained through the process, I think makes them stronger going forward as well. And so we'll take this, put it behind us. As Paul indicated in his discussion is and move forward and move forward positively. So no residual effects.

[Matthew Giljum, executive]

And Mike, maybe add to the fact that look, DTA performed really well during the challenging times too. And in fact, probably we have a different appreciation from what's achievable there in terms of throughput that we can probably achieve higher levels than we thought we could because, again, there was a really highly efficient movement out of DTA and an impressive performance by the team there. So we sorted a fair number of things and actually believe that there may be more throughput capacity at both facilities going forward.

[Paul Lang, executive]

I mean in the end, Michael, I don't normally say a lot of good things about the railroad, but uncertainly, but CSX did an amazing job. We ended up having quite having a whole -- I don't know the exact numbers, but roughly 1 million tons from Baltimore down to DTA, that's an extra 300 miles of the railroad or else we're not set up to do and they reacted very quickly and doing the major job. Nothing but compliments for people at Curtis Bay, core of engineers that resolve the problems and solve the tragedy as well with the railroad.

[Operator]

The next question comes from Alex Hacking from Citi.

[Alexander Hacking, analyst]

I just wanted to ask on the industry outages that we saw. Unfortunately, there were a couple of outages in the quarter due to fires. I think [indiscernible] is fairly well understood, but -- what's your perspective on the Longview fire? Like how much capacity has that taken out and for how long? And does that have any impact on your end markets?

[Paul Lang, executive]

All those events are very tough, and I see both of the management teams and the employees, there are difficult [ plans to grow ]. I think you touched on the [ longwall ] it's pretty well known. The issues that Longview or the mine, which is about 10 miles south of Leer South, they had fire also. As we understand it, the fire is still active. And as you think about that mine, it's a longwall mine, somewhat the [indiscernible] size and capacity of a river near South that mine the long wall came on in December.

We were expecting it to do, call it, round number 3 million tons in 2024. Those tons are effectively out of the market [ world ] forever. I think as you look at my comments earlier, what we think we'll see is about 2% to 3% reduction in seaborne [indiscernible] but it's hard to guess for either of these mines, how long these outages are occur. But my rule of the thumb on mine fires in the U.S., it's a minimum of 90 days, maybe 180 days just to get it back. That's if there's no equipment damage or residual problems. So tough situation for those guys. I wish them all in the best, but it's going to be -- it's going to take some volume out of the market.

[Deck Slone, executive]

Alex, look, pulling back a little further. Obviously, as Paul said, those outages are unfortunate, we talked a fair amount about kind of the subdued nature of the market. right now. But we would say this, look, the market doesn't feel if it's imbalance, it's not imbalanced by a significant amount. If you look at hot metal production year-to-date, the world excluding China, which is what we tend to track, it's up 1.4%. That's obviously a positive. India continues to click along despite the fact that they're in the middle of sort of monsoon right now up 2.7% year-to-date.

The Chinese seaboard imports are on track to be up 10 million tons. And while 1/3 of that or so is sort of lower-quality volume from Russia and they're being opportunistic, 2/3 of that is higher quality seaborne. So that's a positive -- on the supply side, you've got Australia, the U.S. and Canada in aggregate, which is, of course, where all the high-quality coal comes from the seaborne market, up only about 1 million tons.

So again, that's supportive. We talked about the mine outages 2% to 3%, which are really going to hit lower sort of back half of the year. So look, the reality is that there are a lot of positives here. In fact, we start to see demand reassert itself we could indeed see a pretty quick move in the markets. Now if they stay down for longer, we're really saying what about that, right? We've talked about where we are in the cost curve.

A little pressure, a little rationalization of high-cost supply is good for any market environment. So that's great if it plays out that way. But we are looking at an environment that feels relatively well trying to calibrate it right now would reiterate again that we have had great interest -- continue to have great interest from Asian buyers. We talked a lot about Vietnam, Indonesia, we're now looking at a major buyer in Malaysia, and that is progressing well in addition. So there are a lot of positives out there.

I will finally say this. And while the market might be a bit subdued, we're getting no pushback on volume, which I think is always indicative of the fact the market is relatively well balanced. It's really -- everyone wants their coal -- is taking their coal, they're just not buying with their agency. So we feel pretty good about what we're seeing out there in the market road.

[Alexander Hacking, analyst]

And, I guess, just a follow up on those comments deck, like the logical conclusion would be that the Asian mills are just destocking, right? Because China imports are up, India steel production is running strong, growing is out. But the met coal price has been falling fairly consistently now for a few weeks, are we effectively in a destocking moment?

[Deck Slone, executive]

I think that's right, Alex. So again, it doesn't mean that this can't persist for a while. Again, I think the Asian buyers aren't buying with great urgency because they've seen what's transpiring elsewhere. Obviously, Europe has been pretty slow and continues to be capacity factors there are low. We had the level of interest from Asian buyers and new Asian buyers, they look longer term continues to grow. And we talked about the 3 Southeast Asian countries where we're seeing a lot of introspect. Really in China as well. If you go back 3 years or so ago, we were mainly just selling the brokers there, 2 years ago, we started to sell to sort of mid-sized producers on a spot basis.

A year ago, we started return business with those Chinese buyers. And now we're really talking to the largest steel makers in the world in China who wants more volume and really we can agree that to provide to them because we've got to balance out our customer base sell. That does all feel positive, and I don't want to suggest that there's not this sort of subdued tone in the market there absolutely is. But it feels like if the market is oversupplied, its oversupplied very modestly and I agreed that would have destocking could be a component of that.

[Paul Lang, executive]

Yes, Alex, 1 little piece of color I would add to what Deck said. And it's something that I have worry about and watched very carefully, that if prices are down and no question destocking have occurred. But 1 thing we're not seeing is push back, customers have taken their bond. As long as customers pay per volume, I don't like where the pricing [ problem ] particularly, but at the same time, I get nervous very quickly when customers start pushing back. We're not seeing that so. I think as Deck and I want to be overly optimistic, but I don't think what's going on is bad.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Lang for any closing remarks.

[Paul Lang, executive]

Thank you really for the interest in Arch. I hope you agree that the challenges in the past few months, have served to underscore the key aspects of our value proposition, including our low-cost asset base, our exceptionally strong balance sheet and our ability to act quickly and ever ready to changing circumstances particularly the marketing and logistics in range.

I would like to end and commend the Arch team for rising in the challenge in Q2. Going forward, we plan to build on this positive momentum and maintain our focus on continuous improvement in the operations, while simultaneously driving costs over the entire platform. I have great faith in our team and we fully expect that the current period of market softness will set the stage for even stronger future.

With that, operator, we'll conclude the call, and we look forward to reporting to the group in October. Stay safe and healthy.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.