Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2020-Q3

[Operator]

Good day and welcome to the Arch Resources, Inc. third quarter 2020 earnings conference call. Today's conference is being recorded.

At this time, I would now like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead, sir.

[Deck Slone, Senior Vice President of Strategy]

Good morning from St. Louis and thanks for joining us today. While we are conducting this morning's call from Arch's boardroom, I want to assure you that the team is widely spaced.

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 we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archrsc.com.

Also participating on this morning's call will be Paul Lang, our CEO, John Drexler, our COO and Matt Giljum, our CFO. After some formal remarks, we will be happy to take your questions.

With that, I will turn the call over to Paul.

[Paul Lang, President, Chief Executive Officer]

Thanks Deck and good morning everyone. I appreciate you taking the time today to join us on the call. Let me begin by extending my thanks to the entire Arch workforce for their continued exemplary efforts during a complex and challenging time. Through the third quarter, Arch's subsidiaries are running the COVID-19 infection rates well below the national average and we have been fortunate that none of these cases have been complex or required extensive treatment. While the virus remains a serious health risk to our workforce and society at large, we are proud of our employees' ongoing efforts to protect themselves, their coworkers and their communities from any unnecessary exposure while continuing to operate as an essential service provider.

Even as the organization has prioritized addressing the challenges of the pandemic, we have also maintained our sharp focus on every other key metric in the environmental, social and governance arena. As evidence of the team's commitment to these principles, Arch's subsidiaries were honored this past week with two Sentinels of Safety awards, the nation's highest distinction for mine safety, as well as the Department of Interior's Good Neighbor Award, the nation's highest honor for community outreach and engagement within the mining industry.

Leer captured the Sentinels of Safety award in the large underground mine category. The Black Thunder mine won the Sentinels of Safety Award in the plant category. And the Leer South mine captured the Good Neighbor Award for its outreach efforts and positive contributions to its local community. The Department of Interior's recognition is even more noteworthy because this marks the second year in a row that an Arch subsidiary has won the Good Neighbor Award, following on the heels of the Leer mine's receipt of the honor in 2019.

While we set the highest internal standards for our operations across the full range of ESG metrics and drive progress in those areas with rigorous approach to continuous improvement, it is nevertheless gratifying to receive external recognition for our achievements. With the exceptional, ongoing accomplishments of our two cornerstone operations, Leer and Leer South, we have established a strong foundation for continued excellence in this crucial area of performance for the years ahead.

Beyond our ESG-related achievements, Arch delivered exceptional results on a broad range of other fronts during the third quarter. We maintained our proven track of a strong operational execution with our core coking coal portfolio. We locked-in solid pricing on 1.7 million tons of North American coking coal business for 2021 delivery. We made great progress on the buildout of Leer South and completed a tax-exempt bond issuance at a highly competitive rate to support that development. And finally, we are moving forward aggressively with our plan to optimize the value of our thermal assets.

While, John and Matt will fill you in on the details of these various achievements momentarily, I am going to take a few minutes to discuss a final plan item, the plan for our thermal assets. Let me start by saying that we are tremendously proud of the important contributions that our thermal assets have made to the U.S. economy for decades as well as their strong contributions to Arch's growth and success.

As we have conveyed many times, our Powder River Basin and other thermal segments have generated a substantial level of free cash flow over the course of the last four years despite the ongoing decline in the thermal market environment, cash that we put to value creating use, initially through our capital return program and more recently in the buildout of Leer South. However, we are shifting into a new phase. In keeping with our ongoing pivot towards steel and coking coal markets, we are driving forward with a clear, careful and well-defined optimization plan for our thermal assets.

As previously announced, we already launched an accelerated effort to evaluate strategic alternatives for these operations. Put simply, we are exploring the sale of some or all of these assets, assuming you could find an appropriate buyer that satisfies our rigorous requirements. While we clearly understand the complexities of such sales, as evidenced by recent transactions in the Powder River Basin, we know we have ultimate control over production rates and mine closure planning and we are committed to now manage these processes in the most value enhancing fashion possible.

Given this, we are finalizing our plans to shrink the footprint of these operations with particular emphasis on our Powder River Basin mines where we are prioritizing the reduction in our asset retirement bonding and related closure obligations. As a reminder, Arch's Powder River Basin mines produced nearly 75 million tons in 2019 and we expect them to produce less than 55 million tons in 2020. We are currently evaluating plans that could reduce production levels in the basin by an additional 50% over the course of the next two to three years.

We view this systematic winding down of our thermal operations in a way that allows us to continue to generate cash to fund long term closure costs at the right business solution in the event we are unable to find an appropriate buyer. As such, we believe that providing a well communicated wide path is the most responsible way forward for a range of essential stakeholders, including our employees, communities in which we operate, our long-standing customer base and many of the customers who rely on coal-based electricity. In summary, we have established a clear, compelling and Arch control strategy for long-term value creation with the sharp and singular focus on steel and metallurgical markets and we intend to pursue that strategy with the urgency expected by our stakeholders.

Let me now spend a few minutes on the state of metallurgical markets before turning the call over to John. As you will recall, steel demand and pricing started to deteriorate around the middle of last year with the expected knock-on effects on the coking coal markets. The onset of the virus only served to exacerbate the situation. However, after bottoming in the spring, steel markets were recently begun to show signs of a slow, gradual recovery which should in turn bolster metallurgical markets over time.

In North America, for instance, steel producers have restarted six of 15 previously idled blast furnaces and capacity factors at U.S. mills have marched up steadily from 51% in early May to nearly 70% today. In Europe, the story is similar. With the restart of nearly half of the 25 million tons of steelmaking capacity idled earlier this year. Asia is following suit, led by China where steel output is now exceeding 2019 levels by a wide margin. Moreover, India is showing signs of getting back on its feet as well, with recent manufacturing PMIs indicating a return to expansion levels for that up-and-coming economy. This improving demand outlook across the globe has also acted to lift steel prices with hot rolled coil prices up 30% or more in all major markets in recent months.

In addition to the improving steel dynamics, coking coal markets are also likely to benefit from widespread supply rationalization. Arch believes that more than 10 million tons of high cost U.S. coking coal production is likely to be shuttered in 2020. In addition, Australian output looks to be down by an equal amount this year in face of supply cuts and high profile operating challenges. Other regions were facing similar reductions. In short, we believe coking coal supply and demand is on its way to rebalancing in the relatively near term, which should lead to an improving price environment. In fact, coking coal prices have already gone soft due to virus driven loans even with the pullbacks in recent months, stemming from the uncertainty in Chinese import policies.

Let me close by saying how excited we are about the tremendous, value creating potential of our business going forward. We are confident that we have exceptional foundation in place, including a clear and carefully constructed strategy, a talented workforce, low-cost metallurgical assets, a high-quality product slate, proven marketing and logistics expertise, industry-leading ESG practices and a best-in-class growth project that's nearing completion. While we can't control the trajectory of the market's recovery, we can make certain that we are ready for that recovery when it does come and we are working aggressively to do just that. Moving forward, we plan to focus on our operational execution, balance sheet strength and ESG leadership, even as we forge ahead with Leer South, which we believe will set the stage for greater cash generation and value creation in the future.

With that, I will turn the call over to John for further details on our operational and marketing performance during the quarter. John?

[John Drexler, Senior Vice President, Chief Operating Officer]

Thanks Paul and good morning everyone. I would like begin by expressing my own sincere appreciation to the Arch team which continues to perform at the highest level while complying with extensive virus-related protocols. What's most impressive, in my view, is the fact that eight months into the fight, our employees remain focused and disciplined in their efforts to protect one another, their families and their communities. While these efforts are essential, they do come at a financial cost. We estimate that the productivity impacts along with the cost of health and safety-related products total $3.5 million at our metallurgical segment during the quarter and $0.5 million at our thermal operation.

As Paul noted, even as the Arch team has adapted to the realities of the virus, we have continued to execute at the highest level on every other fronts as well. In the quarter just ended, our metallurgical segment achieved average per ton cost of $60.78 per ton, again positioning Arch in the first quartile of U.S. coking coal producers. If not for the impact of COVID-19, our unit cost would have been below $60 per ton. At the same time, we capitalized on gradually improving steel market dynamics during the quarter by shipping 1.7 million tons of coking coal, a 30% increase versus Q2 when the impact of the virus on global economy were at their most sever.

I am also pleased to report that our marketing team was highly successful during the quarter in securing North American business for next year at fixed price that's well above the current market. In total, we committed 1.7 million tons for delivery to North American customers in 2021 at a net back to the mine of more than $90 per ton. For our High-Vol-A product specifically, that number was in excess of $93 per ton. While that constitutes a step down relative to 2020 North American pricing levels, there was a $20 premium to prevailing market prices at the time.

As we have stated many times in the past, we value our relationships with our North American customers and we see advantage in keeping our coking coal products in their blends. But we also know the value of our product slate and have the option of directing all of our volumes into the seaborne market, if we can't secure appropriate pricing in the North American markets. Fortunately, many of our North American customers appreciate the value and use of premium products and were willing to pay us a fair price, even in this difficult market environment.

With the vast majority of the North American business concluded, we are pleased that we achieved volume levels for 2021 that were consistent with 2020. While that business provides a solid foundation at a price to generate healthy cash margins in our portfolio, it leaves open the majority of our projected 2021 volumes to market-based pricing where we see significant upside. While we are pleased with the strong execution of our existing portfolio and the premium we captured for our high-quality products, we expect to expand those advantages further with the addition of Leer South.

During the third quarter, we continued to make excellent progress on this transformational project and the finish line is now well in sight. During Q3, we invested a total of $46 million in developing the new mine, bringing the total investment to base $256 million. That's roughly 70% at the midpoint of guidance of the total capital required for the project, which remains on time and on budget.

With the commencement of longwall production at Leer South in the third quarter of 2021, we expect our average unit cost to decline meaningfully, the percentage of premium High-Vol-A coal in our product mix increase markedly and our overall cash generating capabilities to experience a positive step change. Moreover, with the gradual improvement in the market dynamics for both steel and coking coal, we believe that the time of the start could prove opportunist with the longwall ramping into a potentially strengthening pricing environment.

Let's now turn to our legacy thermal assets, starting with our Powder River Basin operations. As Paul highlighted, we are shifting into a new phase with these assets as we explore strategic alternatives and evaluate a systematic reduction in their operational performance. Even as we do so, however, we remain focused on strong execution and cash generation and our PRB teams delivered on both those fronts during the third quarter. As you know, we had a negative cash margin in the first half of 2020 as we adapted the operations to the rapid fall-off in thermal demand.

In late Q2 and continuing throughout Q3, the efforts we had commenced in the spring to adjust our cost structure to match lower demand began to pay off. As a result, we cut our debt cost by nearly $3 per ton relative to second quarter level and achieved a similar increase in our per ton cash margin. Combined with our continued diligence in keeping maintenance CapEx at minimal level, we are again generating significant levels of free cash with these assets and expect that to continue in Q4 and beyond.

As far our thermal segment, we again experienced negative cash margins in Q3, with weak demand weighing heavily on both volume levels and profitability. We are highly focused on bringing these assets back into cash positive territory, even as we assess strategic alternatives for the longer term,

I want to take a moment to recognize the employees at our thermal operations. It is their dedication and commitment to what they do that has allowed them to continue to succeed and generate value in the face of tremendous challenges and uncertainties. They have worked for more than a decade to continuously position the operations to be competitive in a shrinking demand environment and more recently managed effectively the uncertainties of the joint venture and the ongoing pandemic. I applaud their efforts and know they will be successful as we continue to navigate the thermal operations to a smaller footprint.

Looking ahead, we expect another solid shipping and cost performance for our coking coal portfolio in the fourth quarter and we expect to again benefit from the actions we took in the PRB in the spring. In short, we expect to head into 2021 with good momentum and to maintain that momentum through the third quarter startup of Leer South, which should take the cash generating capabilities of our coking coal portfolio to the next level.

Let me close by adding my congratulations to the Leer, Leer South and Black Thunder teams for their safety and community outreach efforts. While we are proud of the efforts on safety and environmental performance of all of our operation, one remarkable item I would like to note is that the Leer Complex worked all of 2019 and a total of over two million employee hours without a reportable incident, a truly tremendous accomplishment. As always, we continue to hold ourselves to high standards in all areas of ESG with the firm conviction that operating carefully and responsibly as a prerequisite to operating productively and profitably.

With that, I will turn the call over to Matt for thoughts on our financial performance. Matt?

[Matt Giljum, Senior Vice President, Chief Financial Officer]

Thanks John and good morning everyone. I will begin with a discussion of third quarter cash flows, which despite the weak market conditions, were positive with cash increasing modestly from June 30 levels on an as-reported basis. On a pro forma basis, excluding the Leer South development capital and related financing and the JV-related expenses, cash from operations exceeded our maintenance capital needs by nearly $25 million, a good result in a challenging environment.

Operating cash flows for the quarter totaled $30 million, including $14 million from our land settlement and the deferral of FICA taxes. As you will recall, at the end of the first quarter, we identified approximately $100 million of these and other special cash flow items and we have now collected $80 million of that total. We expect an additional $10 million to $15 million from these items in the fourth quarter and the benefit from the land settlement will continue through the first half of 2021.

Capital spending for the quarter totaled $57 million with $46 million of Leer South development expenditures. Maintenance capital was just $8 million with substantially all of that related to our metallurgical segment. The remainder, nearly $4 million, was capitalized interest. While we don't consider capitalized interest to be a project cost, it has become a larger part of our reported capital spending with the additional financing activity we have undertaken this year.

Regarding the tax-exempt bond, as a reminder, we received the proceeds from the offering as qualifying expenditures are made at Leer South. We received $38 million over the course of the third quarter with $30 million at closing on July 2 and the remainder as expenditures were made during the period. We have nearly $14 million of the fund still to come, which you will see classified as restricted cash on our balance sheet. Of that total, we expect to receive slightly more than half in the fourth quarter with the remainder to be received in 2021.

Turning to liquidity. We ended the quarter with $265 million of total liquidity, including $220 million in cash and the remainder under our borrowing facilities. While cash increased modestly during the quarter, liquidity was roughly $40 million lower than June 30 levels, primarily due to increased collateral requirements for workers' compensation obligations and reclamation surety. Additionally, we are required to post $16 million of collateral after the end of the quarter associated with legacy self-insured workers' comp obligations.

While certain of our counter parties and surety partners have taken actions in response to the difficult thermal coal market conditions, we continue to work closely with those counter parties to reinforce the positive long term outlook for Arch's low cost and high-quality operations, which will only be further enhanced after the Leer South longwall startup. Also on the liquidity front, one of the key accomplishments for the quarter was the amendments of our accounts receivable securitization and our inventory credit facility. Both facilities were set to mature in August of 2021 with the amendments to extend the maturity dates to 2023.

We were also able to reduce the minimum liquidity required under the inventory facility from $175 million to $100 million. While the overall size of the receivables facility was reduced by $50 million, our liquidity will not be affected as the reduced size is still sufficient for our current and expected future borrowing base. Our liquidity position and balance sheet remain among the strongest in our industry. We believe that building additional liquidity will be prudent in light of the uncertainty in our markets and the broader economy and we will continue to explore opportunities for additional financing to support the completion of the Leer South development.

Before taking questions, I would like to address the impairment charges that were recorded during the quarter. As Paul discussed, in the event that we are unable to find a buyer for our thermal assets, we will begin systematically winding down the operations. That winding down process will take several years, but it will result in lower production and sales volumes, compressed margins and a shorter mine life than previously anticipated for the mines in our other thermal segment and with our Coal Creek mine in the Powder River Basin.

Similarly, we reevaluated the value of our investment in Knight Hawk in light of our current market conditions, including longer term coal demand and pricing and capital costs and availability. As a result, we recorded impairment charges for these assets totaling $161 million. The Black Thunder was not included in the impairment due in large part to the mine's demonstrated ability to maintain competitive cost across varied volume levels. At September 30, Black Thunder's property plant and equipment had a book value of just $160 million, relatively small in relation to the cash generating capability of the mine as demonstrated by this quarter's margins.

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

[Operator]

[Operator Instructions] We can now take our first question from Lucas Pipes from B. Riley Financial. Please go ahead.

[Lucas Pipes, B. Riley Financial]

Hi. Good morning everyone. Thanks for taking my questions.

[Paul Lang, President, Chief Executive Officer]

Good morning Lucas.

[Lucas Pipes, B. Riley Financial]

Hi. Good morning Paul. My first set of questions is on the thermal coal side and specifically on the strategic alternatives you mentioned. Other thermal generated negative EBITDA margin here per ton. I know this is always really difficult, but can you give us an update on how quickly you could possibly exit that business? And again, like I know there is still the PRB question too, but just other thermal for now.

[Paul Lang, President, Chief Executive Officer]

Yes. Lucas, I will talk about that. So other thermal is, it's two mines, it's West Elk and our Viper operation. And as you look at them, they both have a little bit different story. At Viper, with the power prices and what's going on with the economy in the last couple of months, it's basically mine-mouth and the plant it serves has been down. So Viper's currently has been disproportionately hurt for that reason in the last six months. Now, I think if things start to normalize back out, I think that Viper should get back to more normal course than we have typically seen.

West Elk is kind of the more interesting and challenging one. West Elk, as you know, has a great history of generating a lot of cash, but it also has a history of some years, especially when the export market is down, that stock struggles. And I think it will continue to do that. It's a great option, I think, into the Pacific thermal market and it's also a great product that customers in Japan particularly like because it has better quality than New Castle. So lower ash and lower sulfur coal with about the same CV value.

So I would say, the process of those two mines is probably a little different than the PRB. West Elk is probably the one that has a smaller base of people that may be interested, but at the same time, it has a great option value.

[John Drexler, Senior Vice President, Chief Operating Officer]

Lucas, from a market perspective, with the expected improvement in thermal markets as we stepped into 2021 as well, we would expect that demand for that coal, even domestically, as natural gas prices are expected to be higher than they have been over the course of the pandemic streak in 2020, there will be opportunities to give us an option to increase volume there as well, which is where we can give it to move it forward. So we feel good about where West Elk is going, working hard to make sure we get it back to a cash positive position here fairly soon.

[Lucas Pipes, B. Riley Financial]

Very helpful, thank you for that color. And on the PRB, you mentioned that potential plan for a dramatic reduction in volume over the next few years. And Matt, in your prepared remarks, you touched on this. But how should we think about cash costs in that scenario? And maybe even taking it a step further, kind of how much cash could we expect from this asset over the next few years, if that's the plan you ultimately pursue? Thank you very much.

[John Drexler, Senior Vice President, Chief Operating Officer]

So Lucas, I will step in first. I am sure others will have some thoughts as well on that. With Black Thunder, I think one of the things maybe to set kind of the baseline here is and we have referenced this in our remarks, for the last decade, demand has declined in the Powder River Basin. We have responded to that at our operations. If you look at Black Thunder and go back a decade, it was selling to essentially close to 120 million tons on an annual basis. Today, we are well under 60 million tons.

Due to the entirety of that timeframe, the mine has worked hard to reposition itself in a way that it was continuing to produce coal at cost that allowed it to generate significant amounts of cash. With the figure today and we look forward, that's our expectation as we move forward is that we are going to continue to have opportunities here to responsibly shrink the footprint that will be responsive to what we are seeing from a market demand environment and we will be responsive to our need to shrink the footprint of the operation to address a shrinking reclamation obligation as we move forward. And so we have high hopes for Black Thunder for them we continue to generating meaningful cash as they have over a very long period of time in our history.

You look to next year and you look to what we just disclosed from a committed level from a volume perspective in the PRB and we feel good about where we stand today, approaching 46 million tons in a nice market environment. But we are going to be very careful as we move forward from there as we evaluate our opportunities.

[Paul Lang, President, Chief Executive Officer]

The only other thing I would add, Lucas is, as you think about it, one thing that's continuing to shrink the footprint with this is, even the minor maintenance CapEx we have there, look, we are just going to keep rolling what we have got and when that stops, we are not going to replace it. It's becoming a shrinking asset.

[John Drexler, Senior Vice President, Chief Operating Officer]

Lucas, we do believe we can simultaneously generate cash. Cash that we could use for some sort of self-funding mechanism ultimately for final closure. So simultaneously generate cash and shrink the footprint. And so that will be the focus. So how do you balance that, to what degree do you develop resources, to shrinking that footprint versus generating the cash that ultimately you can use sort of on those long-term closure costs, we think we can do both simultaneously. And so that's really the plan we are hammering out right now.

[Paul Lang, President, Chief Executive Officer]

And, Lucas, I think this quarter is a perfect example where there was an enormous demand shock to the system here earlier in the year with the global pandemic and the mine took appropriate steps to reposition itself to make sure that it was responsive to that significant decrease in demand and we have returned that operation to generating meaningful cash here in the third quarter.

[Lucas Pipes, B. Riley Financial]

Yes. Good, very good. Very good job on the cost side in the third quarter. And I will sneak one last one in. There were some requirements for additional collateral and you noted that in the fourth quarter, certain workers' compensation obligations would also require additional collateral. Is this just kind of it? I know this is difficult to say. But would you say you are kind of like really it's been here at the low point in the cycle and maybe you had some of these conversations here or we should say this is kind of it? Or is this something that could continue here as we look into 2021? Thank you very much.

[Matt Giljum, Senior Vice President, Chief Financial Officer]

Yes. Lucas, this is Matt. I guess, first of all, I am a little cautious in saying this is it, because obviously some of the demand for collateral are outside of our control and we have got surety partners and others who are looking and adjusting to the new normal in the thermal markets and frankly, maybe a little wide eyed at what they are seeing in terms of how quickly it's deteriorated.

The flip side to that is, as you mentioned, we are starting to see improved market pricing clearly on the met side. We have stepped up a little bit from where we were in Q3. And for Arch, specifically, we are that much closer to the Leer South startup. And frankly, as we think about from a surety's perspective, what they want to see is the counterparty that's able to fund these costs when they come due. We think given the profile, the low cost, the high quality, what our operations are going to look like post Leer South, we think that there we are a counterparty that sureties frankly shouldn't need a lot more collateral than what they have today.

So, obviously, that's not all within our control. But what we can control is the quality of what we are doing. The cash flow will begin to generate meaningfully in the back half of next year. And we think those are things that hopefully reduce any additional collateral requirements.

[Paul Lang, President, Chief Executive Officer]

The other thing I would add is, I think it's a distinction with us, particularly this quarter. As Matt pointed out in his remarks, in Q3 we were cash positive by about $25 million when we sell throughout the JV and the Leer South development costs. I think we are going to be one of the few that can make that type of result come true.

[Lucas Pipes, B. Riley Financial]

Yes. That's very impressive. And I want to appreciate the information and best of luck and look forward to speaking again soon

[John Drexler, Senior Vice President, Chief Operating Officer]

Thanks Lucas.

[Paul Lang, President, Chief Executive Officer]

Thank you Lucas.

[Operator]

[Operator Instructions] Your next question comes from Mark Levin from The Benchmark Company. Please go ahead.

[Mark Levin, The Benchmark Company]

Okay. Great. Thanks very much. So a couple of quick questions. One, as it relates to the model and then the other more big picture. On the modeling side, when you kind of look out to 4Q and you think about PRB volumes and also met volumes, any reason why they would deteriorate quarter-over-quarter? Should they accelerate? What's kind of the sequential thought process with volume?

[John Drexler, Senior Vice President, Chief Operating Officer]

So Mark, I think as we look to the fourth quarter and you look at the 1.7 million tons that we shipped during the third quarter, you look at our committed volumes in the met segment and we are actually running our operations, especially the High-Vol-A operations hard. It would imply essentially commitments on the met side of an additional 1.7 million tons for Q4 as well. So that is, essentially, we would expect to be flat to Q3. Maybe we will work real hard with the market opportunities we see out there to see that increase a little bit. But that's probably a good modeling place to be.

On the PRB side, once again, if you just look at our committed volumes and project that out to the rest of the year, you get a run rate that's essentially equivalent, maybe a little bit higher than the Q3 levels in the PRB. We have had some challenges with rail. We did take some advantages of some pushback with some of the PRB coal that we talked about in the last quarter, but converted that into significant additional volumes into 2021 and beyond. So I think a run rate, the PRB kind of equivalent to the Q3 will probably take modeling in place to be as well.

[Mark Levin, The Benchmark Company]

And Mark,

[John Drexler, Senior Vice President, Chief Operating Officer]

And Mark, we would also expect costs to be, once again, well-controlled, should be another solid margin quarter. We did a lot of work in the first half to adjust the production rates and are in good place as we head into Q4 on the cost side as well with PRB.

[Mark Levin, The Benchmark Company]

Okay. Got it. and I don't want to get into guidance, but just from, because obviously the net price is changing quite a bit, but if it sounds like volumes are roughly similar and costs will still be controlled, it's really the net price that will be the determinant as to what the sequential EBITDA would look like in Q4 to Q3, is that right?

[Paul Lang, President, Chief Executive Officer]

That's it, in a nutshell.

[Mark Levin, The Benchmark Company]

Okay. Got it. Perfect. And then when you think about 2021, you guys disclosed some pretty impressive pricing, particularly, in the PRB. If you are to go out and contract additional tons in the PRB for 2021, are the prices that you guys were showing this morning, is that what you would assume for 2021? I think when we look at coal rags, we see kind of the forward price around $12. But you guys were well ahead of that in terms of what you disclosed this morning.

[John Drexler, Senior Vice President, Chief Operating Officer]

So Mark, on the market front of the PRB, I mean, I think we are very pleased. I am very proud of what the marketing team has continued to do in a challenging environment to secure volumes at prices that, quite frankly, are attractive. The 45 million tons of commitments, 43 million of that price have been committed over various time periods. So that's an accumulation of all of those transactions. I think what you are seeing out in trade rags probably is a little bit more reflective of what the current market is for 2021 volumes, especially as we sit here today and look at where the core markets are at.

Things can change, right. We see improvement in gas pricing. There is an expectation out there that we are going to see electricity generation from thermal coal increase. So we will continue to evaluate what's happening here. Once again, making sure we are taking advantage of the market but being responsible how we are going to be managing the PRB operations as we move forward.

[Paul Lang, President, Chief Executive Officer]

Look Mark, I will just weigh in a little bit, I will just be frank. By what we are doing, we are obviously not under a greater pressure to go out and chase volume. We have got a good volume locked-in and we have got good prices locked-in. If the pricing keeps dropping, we can clearly survive and we will do well next year particularly. We are where we are. We are not going to do what we have done in the past.

[Mark Levin, The Benchmark Company]

Looking down, related to the PRB, Paul and without trying to get too specific, but when you handicap the likelihood that these are, what we call maybe a wind down scenario in the PRB versus an outright sale, how would you give the CapEx and I know surety bonds you guys have already kind of alluded to that, would you guys sell the asset if it required you guys propose to cash or provide cash to a buyer in order for them to post surety bonds just to get out of the PRB?

[Paul Lang, President, Chief Executive Officer]

Look, I will just start by saying, I think I was pretty careful in my words in my opening script about talking about an appropriate buyer. What I mean by an appropriate buyer, I would loosely define as someone who will take care of the people and probably more and just as importantly, they have the ability to replace the bonds and the permits and step into the leases. What we do not want to do and I don't think our shareholders want is to get into a situation where we lose control of the asset that has some potential future liabilities.

We have seen that play out in the Powder River Basin and we are not going to do that. And I think there are buyers out there. It's kind of hard to handicap. As you stand back and look at the basin, there have been some non-traditional players come in. They have come in in different ways. But it's kind of interesting to see how this process plays out over the next couple of months.

[Mark Levin, The Benchmark Company]

Okay. Great. And then this question is for Matt and it goes back to Lukas' original question. Is there a way to provide what the maximum collateral exposure could be, if in fact, surety providers got more nervous or the market deteriorates, whatever the case may be, what's the sort of the maximum amount of exposure Arch would have?

[Matt Giljum, Senior Vice President, Chief Financial Officer]

So I mean in theory, Mark, the maximum exposure is the amount of the surety bonds, but clearly that's not something that either we or the sureties I think whatever envision. Our approach has always been to work with the sureties as closely as we can to get them out to our operations to see how we operate, how we take care of the property and ultimately move towards reclamation and get them comfortable that the assets they are underwriting for us are ones that don't give them a long term exposure that they are going to have to step into. So that's going to continue to be our approach. As we went through that in our history going through the restructuring, the collateral needs were something much smaller than the total surety bond amount and we would expect that to be the case now. But it's really hard to say this is a much different environment...

[Mark Levin, The Benchmark Company]

What is the surety bond amount right now, Matt?

[Matt Giljum, Senior Vice President, Chief Financial Officer]

The total for reclamation, its about $550 million.

[Mark Levin, The Benchmark Company]

Okay. Got it. Okay.

[John Drexler, Senior Vice President, Chief Operating Officer]

That's across the whole.

[John Drexler, Senior Vice President, Chief Operating Officer]

Mark, that's versus an asset retirement obligation of more like $240 million.

[Mark Levin, The Benchmark Company]

$40 million, okay.

[John Drexler, Senior Vice President, Chief Operating Officer]

So that is clearly very inflated relative to what the long term obligation is likely to be.

[Mark Levin, The Benchmark Company]

Absolutely. Okay. I got it. I was just curious as I wanted to have a better handle on that. And then just a final question. Obviously, on your net prices have, you are taking it on the churn, I guest for the last few weeks as the Chinese sort of even though change there import policy with regard to Australian imports. I am curious if you are seeing Australian exporters discount into traditionally Atlantic basin markets as they try to move coal? Or how would you kind of characterize the Seaborne market given the recent change in circumstances? What are you guys seeing in the market? And what are your expectations going forward?

[John Drexler, Senior Vice President, Chief Operating Officer]

So Mark, clearly you are correct. We have seen prices here over the last several weeks with some of the policies that once again hard to interpret what those policies are in China. But we have seen pressure in the markets here recently. I think while we have seen those pressures and there may be some reselling of some cargoes into the market, what I will share and what we see playing out kind of on the physical side of things is we continue to see ongoing interest. We see customers booking vessels for Q4, booking vessels for Q1. We see customers requesting acceleration of cargoes that they have got locked-in in Q1 and the Q4. These are all things that we see today right now as we see pressure on these markets.

So we think the Chinese issues will play themselves out. We think what was transpiring before the Chinese issues came into play, which was a strengthening market with demand returning, with supply being rationalized we think around the world is going to continue and we expect to see strength as we move forward. As we indicated, we believe the opening of Leer South here in the third quarter is going to give us tremendous opportunity here and what we think will be a strengthening market.

[Deck Slone, Senior Vice President of Strategy]

And Mark, it's Deck. Really there hasn't been a lot of time for that, for those tons to make their way into the Atlantic basin. And quite frankly, when you look at the SGX, when look at the future strip, it's certainly indicating that the market believes that those Chinese policies that are restricting Australian imports potentially right now or imports generally are going to be short-lived. So certainly there, I think, the expectation is that this is going to be a matter of a couple of months before we see a reset.

Quite frankly, that clearly is the economic benefit of the Chinese and the Chinese buyers given that the spread between the Xiangxi premium and the Seaborne price, landed price is about $65. So in the end, our expectation is that that will sort itself out. We don't know. We certainly can't compete. As you would imagine, we can compete very effectively into Europe. And so if we need to compete with the Australians in volumes that overflow into Europe, that's fine. But we, at the same time, will be seeing new opportunities into Asia. And the end result, we think that all will sort itself.

We are also encouraged by the way in which the World Steel Association and others are expecting a spring back in steel demand in 2021. Obviously, China is already ripping and has fully recovered and is well ahead of last year's pace. But with the rest of the market expecting to sort of pick up, we could see a nice bump in demand in 2021. It's certainly interesting to think about the fact that we have had supply rationalized to meet the step down in demand, Once we reach sort of a balanced market, which we think we are approaching that now. Then from here for 2021, 2022, sort of the upside demand growth could be more attractive than it would have been otherwise. So we do see some positives out there and are encouraged by what we see.

[Mark Levin, The Benchmark Company]

Great. Thanks very much for all of your answers.

[Paul Lang, President, Chief Executive Officer]

Mark, thank you.

[John Drexler, Senior Vice President, Chief Operating Officer]

Thanks, Mark.

[Operator]

And we have one more question from Wayne Cooperman from Cobalt Capital. Please go ahead.

[Wayne Cooperman, Cobalt Capital]

Hi guys. So I missed this, sorry. But could you talk a little bit about kind of the pros and cons of continuing to run the thermal business at kind on the current rate and making some amounts of money versus having to fund the liabilities when you shut them down and what the differences are on a cash flow basis?

[Paul Lang, President, Chief Executive Officer]

Wayne, you stand back and the way you described it, you almost have to presume that the market is static. Market is obviously declining and we are certainly trying to control how that decline occurs. And look, I think we are better off taking it that way where we work to continually reduce the liability with the cash flows from the operation and do it in a very systematic and logical fashion.

[Wayne Cooperman, Cobalt Capital]

Was that and maybe did you say it was going to cost $500 million though to shut down all the mines? Or did I misinterpret what you said?

[Matt Giljum, Senior Vice President, Chief Financial Officer]

It certainly won't cost $500 million. That's the bonding amount related to all of our mines and those bond amounts are set irrespective in some cases of what the actual obligations are. As Deck mentioned, our view of the actual dollars we will have to spend to reclaim based on the arrow on our books is something closer to $250 million. So a significant disconnect between those two. But obviously, we have got to manage the amount we are going to spend, irrespective of what the regulators say the bond needs to be.

[John Drexler, Senior Vice President, Chief Operating Officer]

And Wayne, this is John Drexler. One thing I will point back to for those on the call is, we went through this a little bit when we were shrinking the existing portfolio of Black Thunder a while back and we configured how we were looking at it would mine into the future and kind of reposition what we thought would be a shrinking footprint. And if you remember, we reduced our reclamation liability by $100 million in 2018. So as we move forward here today, those are the things we are going to be continuing to look at as we reposition and shrink the footprint over time, hopefully once again reducing that obligation as we move forward.

[Wayne Cooperman, Cobalt Capital]

Does that include like pension and other liabilities? Or that's just the pure reclamation number?

[Matt Giljum, Senior Vice President, Chief Financial Officer]

That's a reclamation number. In terms of thermal assets, the other liabilities that are associated with those are relatively minor.

[Wayne Cooperman, Cobalt Capital]

Okay. Great. Thanks.

[Paul Lang, President, Chief Executive Officer]

Thank you, Wayne.

[Operator]

I would now like to turn the call back to Paul Lang for any additional or closing remarks.

[Paul Lang, President, Chief Executive Officer]

I would again like to thank everyone for their interest in Arch to taking the time today to participate in our quarterly call. Prior to this spring, the industry was going through a transformation that is now being accelerated by the global health crisis. Arch is going to embracing these new realities as opposed to fighting them by continuing our pivot towards coking coal markets and pursuing a reduction and exposure to our thermal assets. In this, we plan to focus on the items we can control to achieve our vision of a socially responsible producer of low-cost, high-quality products to the global steel industry.

With that, operator, we will conclude the call and I look forward to reporting to the group in February. Stay safe and healthy everyone. Thank you.

[Operator]

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