Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2019-Q3

[Operator]

Good day, and welcome to the Arch Coal Third Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. I would now like to turn the call over to Mr. Deck Slone, Senior Vice President of Strategy. Please go ahead, sir.

[Deck Slone, Senior Vice President-Strategy]

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 file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise, except as 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 Investors section of our website at archcoal.com.

On the call this morning, we have John Eaves, Arch’s CEO; Paul Lang, Arch’s President and COO; and John Drexler, our Senior Vice President and CFO. We will begin with some brief formal remarks, and thereafter, we will be happy to take your questions. John?

[John Eaves, Chief Executive Officer]

Thanks, Deck. Good morning, everyone. I’m pleased to report that during the quarter just ended, Arch turned in another strong operating performance and generated healthy levels of cash despite the recent softening in the coking coal markets. Importantly, we maintained great momentum in our core coking coal franchise with strong volumes and excellent cost control and continued to drive ahead with our well-defined strategy for long-term value creation and growth.

Among the highlights for Q3, we achieved strong volumes and effective cost control in our Metallurgical segment despite challenging conditions in the last longwall panel at Mount Laurel. We acquired reserves adjacent to our flagship Leer mine at an effective cost of around $2.50 a ton that will extend the life of that operation to the late 2030s. We resolved a long-standing land dispute that resulted in a $39 million gain we expect to monetize in 2020.

We bought back another 1.2 million shares of stock, bringing total buyback since launching the capital return program to 10 million shares or 40% of the initial shares outstanding. We committed another 1.5 million tons of coking coal for 2020 to delivery to the North American customers at an average price of $110 per ton. We generated five times more cash at our legacy thermal assets than we invested in capital as we continue to focus on harvesting cash from those operations.

And we continue to make good progress on our transformational growth project at Leer South. In short, we showcased the strategic focus, cost structure and asset strength that we believe will deliver significant value for our shareholders over the long-term and across a wide range of market conditions. I was particularly pleased that we again returned a robust level of capital to shareholders, even as we strengthened our asset base with the ongoing progress at Leer South.

In total, we returned $98 million to shareholders in Q3, consisting of $91 million in share buybacks and $7 million in dividend payments. At the same time, we invested $26 million to build out Leer South. All told, we have now returned more than $255 million to shareholders through the first nine months of 2019, 18% more than during the same period of 2018.

To recap our progress since launching the capital return program in May of 2017, just 10 quarters ago, we have returned nearly $900 million and bought back almost 40% of our initial shares outstanding. That’s a rare achievement for any company, regardless of the industry, and we believe it underscores the powerful cash-generating capabilities of our operating platform.

Turning to metallurgical markets. Coking coal prices pulled back markedly during the quarter in the face of trade-related tensions and concerns over global economic growth as well as slowing steel demand, weakening steel prices and compressed steel margins. During Q3, the price of High-Vol A coal, our primary product, retraced to under $140 per metric ton at September 30 after averaging nearly $200 per metric ton during the year’s first half.

Of course, we’ve seen some degree of recovery in pricing this month, but prices remain well below the first half averages even now. Counterbalancing macro concerns is still complex pressures to some degree, global coking coal output and capital spending remain muted at present. In addition, several high-cost U.S. coking coal mines have idled in recent weeks in response to the lower price environment, and U.S. exports are down 11% through August with further erosion possible.

Australian output is up only modestly and continues to undershoot the level achieved in the peak year of 2016. In short, supply and demand appear only modestly out of balance at present, and corrective measures seem to be under way. With this low cost structure, Arch is well positioned to manage comp leases at current market softness, however long it lasts, while still generating solid margins.

Looking ahead, we remain highly confident in our competitive position and our clear and compelling strategy for long-term value creation and growth. We have identified four significant drivers that should elevate the company’s long-term value creation potential still further.

These drivers include: the accelerated build-out of our world-class Leer South longwall mine; the recently completed transition of Leer mine into the heart of its reserve base; the completion of the strategic joint venture with Peabody, which should unlock substantial synergies and sharpen our strategic focus still further; and our proven capital return program. In combination, these drivers should further enhance our 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 Lang, President and Chief Operating Officer]

Thanks, John, and good morning, everyone. As John noted, our core coking coal franchise continued to perform at a very high level in the third quarter. With strong volumes in our first quartile operating costs, we generated solid margins, even in a weak pricing environment. During the quarter, we shipped 1.9 million tons of coking coal, held segment costs below $65 per ton, even with challenging conditions on the longwall at Mount Laurel, and generated nearly 35% cash margin despite a decline of $49 per ton and the price of High-Vol A over the course of the quarter.

Our flagship Leer mine, in particular, turned in an exceptional performance with cash costs below $45 per ton. While we’re pleased with the segment’s performance, we also see significant potential to improve in the coming quarters. Among the drivers for incremental improvement are Leer mine’s transition to thicker coal at the start of the fourth quarter; the start-up of Leer South longwall, which is now less than two years away; and the transition of Mount Laurel to a room-and-pillar operation in 2020, which should lead to a better and more consistent performance as well as improved product quality.

In addition to our strong operating performance, we strengthened our coking coal asset base during Q3 with the acquisition of additional Lower Kittanning reserves. As noted in the press release, this block of coal is accessible underground by the Leer longwall operation and could be developed without significant incremental capital. The 20 million tons secured in the transaction, along with another 4 million tons that can now be incorporated into the mine plan, will extend Leer’s mine life by approximately six years.

In short, we’re investing capital of about $2.50 per ton for incremental reserves at an operation that has captured a cash margin of more than $65 per ton year-to-date. Moreover, we were effectively able to counterbalance the outflow of cash for this acquisition with the resolution of a long-standing dispute with the United States Department of Interior related to a property in New Mexico.

Settlement of this dispute should deliver about $39 million of incremental cash in 2020. The addition of the reserves, I would add, should support longwall mining at the Leer operation until the late 2030s. This is significant because it means that the Leer and Leer South longwalls will be operating in tandem for almost two decades and we stated in the past, we see other opportunities for further expansion on the Leer reserve base during that time frame.

The acquisition will also support a stream of low-risk, world-class coking coal projects that should deliver increasing levels of earning and cash flow well into the future. In time, we would envision the Leer complex to have a total of three or even four longwalls operating simultaneously within the reserves we control, all with a first quartile cost structure.

Turning to our marketing efforts. We’re pleased with the progress we’ve made in Q3. For the North American markets, we placed 1.5 million tons of coking coal for 2020 delivery at an average price of $110 per ton. While the North American market represents a minority of our overall sales book, generally on the order of 25% over the last several years, we see good value in maintaining a meaningful presence in both the United States and Canada.

Complementing this positioning, Arch has established a strong, diverse and growing international customer base with steel mills that have tested our products and see the value and use in their blends. Moreover, our strong balance sheet gives us the financial flexibility to enter into the kinds of market-based pricing structures that our international customers tend to favor.

Consequently, we’re confident in our ability to move the balance of our coking coal products into the international market next year in a manner that will create significant value for both our customers and for Arch. To-date, we’ve entered into agreements to place 1.6 billion tons into the seaborne market using index-based pricing. All told, we now have about 45% of our 2020 coking coal volumes placed, assuming a run rate similar to this year.

Supplementing our coking coal franchise, Arch again generated significant amounts of cash from our thermal assets during the quarter. Both of our thermal assets turned in solid margins and continued to demonstrate great capital spending discipline in keeping with our harvesting strategy of generating high levels of free cash in those segments.

All told, last quarter, our thermal operation has generated a combined segment-level adjusted EBITDA of $67 million while expending just $12 million in capital. This harvesting strategy of our thermal assets is even more striking when you look back to October 2016. Since then, we generated $662 million of EBITDA and only spent $79 million in capital. As in recent quarters, we put that excess cash to good use in both our capital return program and the ongoing build-out of the Leer South longwall mine, which remains on track for a Q3 2021 start-up.

Moving to the joint venture with Peabody, we continue to engage with the Federal Trade Commission as we make our way through the regulatory review process. We remain confident that this business combination will prove beneficial to all stakeholders, including our customers, employees and shareholders, by creating a long-term efficient, stable and cost competitive supply platform in an increasingly challenging thermal marketplace.

As you can appreciate, we cannot specifically comment on the process other than to say things are progressing as expected. In summary, we continued to demonstrate excellent momentum across our operating platform, and we’re laying the foundation for further improvements in the coming quarters. While lower realizations for our coking coal franchise and reduced volume projections for our thermal segment will dampen our fourth quarter results as compared to last quarter, we still believe we’re in a highly desirable position. With this, we fully expect to continue to deliver strong cash flows and excellent value for our shareholders.

With that, I’ll turn the call over to John Drexler, our CFO. John?

[John Drexler]

Thanks, Paul, and good morning, everyone. As John and Paul have indicated, our third quarter results represented a continuation of our strong execution on our plan. That includes generating significant cash flows from our low-cost operations, independent of where the coal market cycle goes; returning meaningful amounts of capital to you, our shareholder; investing in and accelerating the start-up of the high-return Leer South project, all of this while maintaining a strong balance sheet and liquidity position for inevitable market downturns.

We expect continued progress on these efforts as we move forward. First, a brief update on our cash flows, capital allocation and liquidity position. Despite the metallurgical market downturn, our low cost operating position allowed us to continue to generate significant cash flows during the quarter with operating cash flows of approximately $108 million. Capital spending for the quarter was $49 million, which includes $26 million of development capital for Leer South and $23 million for maintenance capital.

Capital invested in Leer South now stands at $63 million. Total capital for the full year at Leer South is on target to be approximately $100 million. Leer South continues to be on plan and on budget. During the quarter, we continued with our plan of using excess cash to return capital to shareholders.

During the third quarter, we bought back 1.2 million shares of stock or approximately 5% of our initial shares outstanding for $91 million. To-date, we have spent a total of $817 million buying back 10 million shares or almost 40% of our initial shares outstanding in just 10 quarters. That’s a rare achievement and a testament to the cash and value-generating capability of the portfolio and execution of our plan.

Also during the quarter, we paid our normal recurring dividend of $7 million, bringing our total dividends paid since we initiated the quarterly dividend program in the first quarter of 2017 to $78 million. Arch’s Board has approved the next quarterly cash dividend payment of $0.45 per common share, which is scheduled to be paid on December 13 to stockholders of record at the close of business on November 29.

Regarding our liquidity, we ended the quarter with $351 million in cash, and when combined with the borrowing capacity on our credit facilities, $465 million of liquidity. We continue to be in a net cash position with cash exceeding debt by $41 million. We feel this is ample liquidity at any stage of the market cycle and has us well positioned to execute on our upcoming capital projects with these liquidity levels.

Let’s look now at the remainder of the year. As noted, we will pay $52.5 million for the incremental reserves at Leer during the fourth quarter and don’t expect to receive the majority of the cash associated with the $39 million PRLA gain until 2020. As a result, combined with the impact of lower pricing, we expect our liquidity at year-end to trend to the lower end, if not below our liquidity range of $400 million to $500 million.

We are comfortable with these lower ranges of liquidity given the low-cost position of our assets, which allow us to generate cash flow across a wide range of coal price conditions. Additionally, we benefit from a strong balance sheet that ensures we are well positioned to manage the cyclical nature of coking coal markets. As we look at our capital return program in the fourth quarter, we plan to be disciplined in our approach to ensure sustainable long-term return to our shareholders.

We remain committed to returning excess cash flows to shareholders and plan to do so in a manner that allows us to maintain our strong balance sheet with sufficient liquidity to support our operational and financial objectives. Given lower met pricing, as well as higher capital spending associated with the Leer South build-out and the Leer reserve acquisition, we currently expect a moderation in repurchases in coming quarters, absent a further rebound in coking coal prices.

We will continue to work with the Board to determine the appropriate level of ongoing capital return going forward to ensure we are generating long-term sustainable returns for our shareholders. In summary, we are pleased with the continued execution of our plan and believe firmly in our ability to execute as we move forward.

Our platform is designed to generate cash and value to the full market cycle. We remain enthusiastic about our key drivers of value: the build-out of Leer South, the transition of Leer to the heart of its reserve base, the ultimate completion of the joint venture with Peabody and the continued execution of our capital return program.

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

[Operator]

Thank you. [Operator Instructions] We have a question from Mark Levin, Seaport Global.

[Mark Levin, Seaport Global]

Very much and congratulations on another good quarter of execution. First question has to do with met coal realizations. Just noticed during the quarter that as a percentage of the benchmark, it seemed to be a lower realization than what has been going on the last couple of quarters. I get that in a falling market, it can be that way. It’s competitive. But I’m just trying to think about how to model the met coal realization in Q4. I assume you’re going to pick up some benefit from lower rail rates. Maybe you can talk a little bit about how transportation rates would change but also how to think in general about how to model that Q4 met coal realization.

[Paul Lang, President and Chief Operating Officer]

Yes, Mark, this is Paul. As you kind of look at Q3 and I look at it pretty hard, I – what I like to do, Mark, is take the average for the quarter, use our rail rates. And if you look at it, I think we missed the average net price by about 1% or 2% if – on a theoretical basis. And given how the prices were dropping through the quarter, I felt that – all told, I thought the guys did a really good job, basically capturing the market as it was. And as you correctly point out, our rail rates are basically in arrears to the pricing. So we should see a benefit in Q4 of the drop in pricing in Q3. And it’s not exactly proportional to the drop in the index prices, but it’s pretty close. So if you think that prices are off 10% or 12%, take a couple of percent off that, and that’s what the rail rates will go down.

[Mark Levin, Seaport Global]

That’s great. Good to hear. Second question, Paul, for you on Mount Laurel. I think you referenced some more geological issues. I’m just wondering when you think about the long term, and I know that the plan, as it stands right now and as you reiterated on the call, is to use continuous miners there and, you believe the quality will go up and the cost, maybe even counterintuitively, will come down. But I’m just curious, given the fall in met prices and some of these sort of ongoing issues, is there ever a thought about either idling the mine or idling the production? Just curious also, is there incremental capital that needs to be spent on the asset as you do that transition?

[Paul Lang, President and Chief Operating Officer]

Yes. Good question, Mark. I think as I look at Mount Laurel in Q3, I guess, in some ways, it still surprised. When we first talked about pulling the longwall from the mine, I had a lot of concerns, obviously. And I’ll say at the end of the day, they were founded. This last panel has been a bear. We’ve had a lot of trouble getting out. I’ll just be frank. We had costs that were triple digit at the mine in Q3. However, the one thing, I think, that’s masked by this is that we actually have three of the units in room-and-pillar mining at the operation, and we actually had a pretty good run on those sections.

I know it’s masked by the problems we have at the longwall, but here we are. If we have to, we’ll pull the longwall out early. I could see doing it anytime from about here to the end of the year. And I’ll just keep it as a day-to-day thing and keep watching it. And if you look at our open position, Mark, what it is, is the coal out of Mount Laurel, we’re just being careful about selling it.

[Mark Levin, Seaport Global]

Yes. No. That makes perfect sense. And one last question for me has to do with the PRB. Obviously, you guys had a – I mean, at least relative to my estimate, that’s where the beat was, really strong volumes and lower costs, and you gave the guidance. But when you think about 2020 right now in a $2.25 gas environment and where the power prices are, etcetera, maybe I want to ask specifically what you think you will produce in 2020. But maybe just in general, when you look at the 2020 demand environment for PRB, how do you think it sits if gas kind of hangs where it is right now?

[Paul Lang, President and Chief Operating Officer]

Look, I’ll – I think first and foremost, what we’re competing against in the PRB is natural gas or renewables. And the natural gas, those $2.25 rates, the PRB is going to continue to drop in volume. And as you’ve seen in the past, we’ll make whatever adjustments we need to make.

[Mark Levin, Seaport Global]

Perfect. Well. Congratulations and best of luck. Thank you.

[Paul Lang, President and Chief Operating Officer]

Thank you, Mark.

[Operator]

Our next question comes from the Lucas Pipes, B. Riley FBR.

[Lucas Pipes, B. Riley FBR]

Good morning everyone and congratulations on another very solid quarter despite the tough pricing environment. My first question is with regards to the 20 million reserve acquisition. You mentioned that there is incremental capital needed, not much incremental capital needed to access those reserves. So I’m curious directionally what magnitude should we be thinking about, and then I have a follow-up question on that as well. Thank you.

[Paul Lang, President and Chief Operating Officer]

So look, it’s the – what I’d characterize it as particularly is the typical things you have in new sections or new longwall districts, which is generally shaft work or ventilation boreholes. And frankly, that’s – those are costs that we’re not going to incur for another five or six years. So this is costs that are way out there.

[Lucas Pipes, B. Riley FBR]

Got it. And just curious, when should be mining those 20 million tons approximately? Is that five years from now, 10 years from now? Just kind of curious when would those come into the mine plan?

[Paul Lang, President and Chief Operating Officer]

I kind of – right now, we’re sitting there thinking it will be mid to past mid of 2020.

[Lucas Pipes, B. Riley FBR]

Oh, so that soon?

[Paul Lang, President and Chief Operating Officer]

Excuse me, 2025.

[Lucas Pipes, B. Riley FBR]

Got it. Got it. That’s helpful.

[Paul Lang, President and Chief Operating Officer]

Thank you.

[Lucas Pipes, B. Riley FBR]

No, that’s helpful. And then just the last question here for me for Mr. Drexler. John, how should we – you mentioned you’ll be a little bit slower in returning capital here in light of weaker pricing and the development in – of Leer South. But can you give us a sense of magnitude on capital returns over the next couple of quarters? Would very much appreciate your perspective on that. Thank you.

[John Drexler]

Yes, Lucas. Regarding the question, I think we feel real good about the capital return program and the accomplishments that we’ve had so far. By design, it’s been built around a model to return excess cash flows to investors, and we’ve continued to do that because we think an investment in our shares has been a good investment. We continue to believe that, and we plan to move the capital return program forward. With the meaningful move-down in met pricing and with some of the step-up that we’ll have associated with the Leer South project, along with the capital that’s deployed for Leer north, we do expect a moderation in the amount of share repurchases that we are doing, but it will still be built around the model of excess cash flows.

So that’s an ongoing conversation with our Board. You can rest assured that this company is committed to that capital return program. We’ll have that conversation as we move forward over the next several quarters. But once again, just given the meaningful move in met pricing from $200 a ton down into the $150s, it’s reasonable to expect a moderation.

[John Eaves, Chief Executive Officer]

And Lucas, this is John. Let me reiterate what John said. I mean, we certainly are committed to the capital return program. Obviously, with the move in met prices, that has to be something that will throttle up and down. But clearly, conversations with the Board on a regular basis are something we’re going to do. We do have the dividend, which is part of the capital return program that we think is sustainable in any period of market cycle.

So given the fact that we’re spending the $52 million, we still got some capital this year on Leer South, 2020 will probably be the biggest year in terms of Leer South capital. I think it’s safe to expect that, that buyback may move down a little bit. But clearly, when Leer South is on, with the cash it’s throwing off, clearly, we’re going to be generating a lot of cash that we can return to our investors.

[Lucas Pipes, B. Riley FBR]

That’s very helpful. I appreciate all the color and best of luck. Thank you.

[Operator]

Our next question comes from Dave Gagliano, BMO Capital Markets.

[Dave Gagliano, BMO Capital Markets]

Hi, thanks for taking my questions. I have just one near-term and one follow-up on the Leer reserve block acquisition. First, on the near term. Clearly, entering the sweet spot here at the Leer mine, you flagged it again for activity improvements, 20% expected. You did say in the commentary, expectations for Leer to maintain and potentially improve versus recent results. I just wanted to ask about that maintain comment. Are there any offsets that we should be thinking about here, should lead you to say maintain instead of just improve?

[Paul Lang, President and Chief Operating Officer]

David, as you know me, I’m just being hopefully a little bit on the conservative side. Look, I have pretty good expectations for Leer. The only thing that I’ve been bitten by, really, in the last year has been Mount Laurel. And as you look at it across the entire segment costs, that’s why I’ve been a little cautious.

[John Eaves, Chief Executive Officer]

But Dave, this is John. I mean, you’ve got to expect as we move into the thicker part of the seam, it’s 20 inches thicker than what we were mining. I mean – so you have to think we’re probably going to get improved volume and lower costs moving forward.

[Dave Gagliano, BMO Capital Markets]

Okay, just wanted to double check. And then on the – follow-up on the Leer reserve block acquisition, $52 million for 20 million tons of reserves. Just two quick questions. Are there any royalties or anything else that we need to be thinking about, other than the CapEx commentary that you mentioned a minute ago, and who was the seller?

[Paul Lang, President and Chief Operating Officer]

The seller was Blackhawk. They had a press release today. So the 20 million tons is bought in fee. If we recover more than 20 million tons, which we think on their property could be an additional 2 million, we’ll pay about a 7% royalty. The remaining balance that makes up the 24 million is coal that we control.

[Dave Gagliano, BMO Capital Markets]

Okay, okay. That’s helpful. And then just the last follow-up tied to that. I thought in your comments, you mentioned that it extended the life by six years, I thought is what you said. Is that correct? Now obviously, that – I mean doesn’t that imply 4 million tons per year of volume? Or am I doing my math wrong?

[Paul Lang, President and Chief Operating Officer]

Pretty well said. If you look at it, that is correct.

[Dave Gagliano, BMO Capital Markets]

So isn’t Leer now running at 3 million? Is there – so what I’m trying to get to is where is that incremental 1 million coming from?

[Paul Lang, President and Chief Operating Officer]

No. Leer is running about 4 million, David.

[Dave Gagliano, BMO Capital Markets]

Okay, perfect. No. Thanks, that’s all I had.

[Paul Lang, President and Chief Operating Officer]

Thanks, David.

[Operator]

The next question comes from Michael Dudas, Vertical Research.

[Michael Dudas, Vertical Research]

Good morning, gentlemen. My first – two questions. First – my first question is excellent job on contracting on the met side, especially in the U.S. and your diversity nationally. Is the market kind of taking a pause right now? Are – is there any sense that the – especially from your High-Vol A product, that this might be a pretty good price, a pretty good opportunity to lock in? Or is it just that the budgeting cycle for your customers is maybe a little bit more uncertain relative to what 2020 looks like?

[Paul Lang, President and Chief Operating Officer]

Yes. On the domestic sales, Michael, it pretty well puts us where we are this year, 20% or 25% North American. And as I looked at that pricing, it equates back to about an average index price of about roughly $160 a ton, which I think was a pretty reasonable number for where we were, particularly when we did those deals, which was early in this quarter – or excuse me, early – yes, early in October. I’m just saying it was late in the third quarter we did those when the market was pretty well near the bottom.

[Michael Dudas, Vertical Research]

Understood. And my follow-up for John. Maybe some perspective from the last downturn that we all painfully went through several years ago, given the set up of the marketplace in the U.S. and where met markets are internationally, is – could be more difficult for some of these coal mines that have been impacted recently and shut down to kind of make it through? Is there more maybe permanence in some of the issues here given the secular pressures miners are seeing, especially in the U.S.?

[John Eaves, Chief Executive Officer]

Michael, yes, I think you’re right. I mean if you look at the recent pullbacks, we’ve seen a couple of announcements. Mostly High-Vol A did a pullback, And we previously said that we saw kind of industry average cost at about $75 a ton. We actually think that’s gravitated up closer to $80 and that people are going to continue to struggle. When you see those prices drop $130, $140, I think you’re going to see volume come out pretty quick. As you can imagine, when we were looking at investment for Leer South, we looked at domestic global markets for car.

And what we found is that around the globe, even a conservative demand growth number, conservative depletion number that we think you need about 75 million tons over the next five to six years just to meet demand. And we think given where we are with Leer South, future projects down the road that with that quality cost structure, we’re about as well positioned as you can be. So the quality, the cost structure that we have for the domestic and international markets we think is pretty attractive.

So I think you’re going to see more cutbacks. Because if you think about it, we had the $50, $60 softening in price in third quarter but first half of the year, prices were $200, and you still had volume going down. I mean we’re down 11% year-to-date on exports, and we expect that number to go down further between now and the end of the year. So we really like the way Arch is positioned with our quality and our cost structure and our balance sheet.

[John Drexler]

And Michael, to add one thing to that, this is John Drexler. Capital is difficult for the industry and especially for high-cost challenged operations. So as these get shut down, even if the market does come back, capital to reopen those is going to be difficult. And we’re seeing that across the industry and so that, we think, sets up well, especially with how we’re positioned.

[Deck Slone, Senior Vice President-Strategy]

Hey, Mike. It’s Deck. Just since the downturn in June, we’ve already seen 2 million tons in the U.S. come offline so that’s really quite rapid. You’re right that’s different than in the past when production seemed to be stickier. This is coming off really quite quickly. In addition, there’s 4 million tons that are still in the hands of an entity that’s gone through bankruptcy, and it’s not clear how much of those 4 million tons are going to come back. And as John pointed out, we’re already down appreciably in really quite a rapid sort of timeframe.

And if you go back to 2011 in the last down cycle, we probably, at one point, had – the market was probably 40 million tons oversupplied, so it took a long time to dig out from underneath that 40 million tons of excess supply. And if you look at it today, the market might be slightly out of balance because demand has come down, and that’s sort of why we’ve seen the prices pull back. But it’s really pretty modest, and these corrective measures are happening at kind of lightning speed.

We wouldn’t mind seeing the market stay down for a bit, quite frankly, because it does tend to separate the wheat from the chaff, sort of drives out the higher cost production, perhaps chases away some of these marginal projects that shouldn’t be looking at coming into the market. But we’re not sure that these prices are going to stay down for very long given how quickly you’re seeing the supply response.

[Michael Dudas, Vertical Research]

Yes. It really supports your financial profile going into this downturn. Very well said, gentlemen. Thanks for your thoughts. Appreciate it.

[Operator]

And we have no further questions in queue at this time.

[John Eaves, Chief Executive Officer]

Want to thank you guys for your interest in Arch. Let me tell you the management team continues to focus on creating long-term value for our shareholders. We look forward to updating you on further progress in February. Thank you.

[Operator]

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect.