Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and thank you for standing by. Welcome to the Arch Resources Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded.

And I would now like to hand the conference over to your first speaker today, Deck Slone, Senior Vice President, Strategy at Arch Resources. Please go ahead.

[Deck Slone, SVP, Strategy]

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 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’d 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 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 formal remarks, we will be happy to take your questions.

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

[Paul Lang, CEO]

Thanks, Deck. And good morning, everyone. We appreciate your interest in Arch and are glad you could join us on the call this morning. I'm pleased to the Arch team delivered a strong operating performance in Q3, generating a total of $454 million in operating cash flow while managing through rail disruptions in the West, isolated geologic challenges and inflation related cost pressures. We view this record setting achievement as clear evidence of one of Arch's most significant strengths, our substantial cash generating capabilities.

In addition, our record cash flow performance served to showcase yet another one of Arch's core strengths are powerful and value creating capital return program. As you know, the board relaunched the capital return program in February, after a two-year hiatus during the build out a Leer South and it now stands as a centerpiece of our value proposition.

Arch's capital return program is governed by a simple but carefully considered allocation formula that calls for the return to shareholders of 50% of the discretionary cash flow via a dividend and the deployment of the remaining 50%. principally through share repurchases, and or the settlement of potentially dilutive securities.

With a $454 million in operating cash flow netted against just $41 million in capital spending, we generated a total of $413 million in discretionary cash flow during the quarter. That level of cash generation translates quite clearly into strong value driving returns for our shareholders when we run through our capital return formula. In keeping with the tenants of this formula, the board has just declared a dividend of $206.4 million, or $10.75 per share payable on December 15. Complementing this dividend, we also expect to deploy a significant amount of cash associated with the other 50% of our capital return program in Q4.

And while we've delineated several options for the use of this second 50%, we continue to view share repurchases as an attractive investment opportunity, as well as an effective means of returning capital.

In addition to the progress we made in generating discretionary cash in Q3, we also made great progress during the quarter and deploying discretionary cash, while simultaneously managing our liquidity in a prudent fashion. During the third quarter Arch deployed approximately $76.8 million to repurchase nearly 429,000 shares, or approximately 2.3% of our shares outstanding and June 30. Along with this, we'll use cash to settle and incremental portion of our convertible debt, thus avoiding an additional 100,000 shares of dilution. In short, we've already delivered in a significant way on the value creating potential of the capital return program that was put in place just eight months ago.

As we look ahead, we expect to continue that momentum through ongoing returns, as well as our sharp focus on generating additional discretionary cash and to continually recharge the program. While the capital return program is the culmination of carefully crafted multi-year strategy, it is worthwhile to recap the team significant efforts so far in 2022 that got us to this point. And sum since the start of the year, we've generated more than $1 billion in operating cash flows.

We've fortified the balance sheet through the reduction of $427 million, or 71% of our total indebtedness contributed $110 million to our industry first thermal mine reclamation fund, which brought it up to its targeted level of $130 million and grown our net cash position by $588 million, giving us a $323 million net cash position at the end of the quarter.

In turn, these efforts have afforded us the ability to deploy a total of $678 million inclusive of the December dividend under our capital return program, which again was just rolled out in February. This is a great deal of progress in a short period of time, and a strong indication that we're committed to delivering on our clear, consistent and actual plan for value creation.

Before turning the call over to John, I'd like to spend a few minutes talking about the current market dynamics, starting with our core coking coal business. Even after the step down from historic levels achieved earlier in the year, coking coal prices remain at constructive and profitable levels. This is impressive given the recessionary pressures that continue to build around the world. And more impressive still, when you consider the knock-on effect these pressures have had on global steel production, which is down around 4%. We believe this resilience of the metallurgical markets is largely attributable to the profound underinvestment in coking coal supply in recent years.

Despite strong coking coal prices for the better part of the last six years, global coal, global coking coal supply in the major producing regions continues to languish. In Australia, which is the source of over 50% of the seaborne metallurgical supply, coking coal exports are down nearly 7% year-to-date, even when compared to last year's already weakened levels. In the United States and Canada, exports are up modestly versus 2021, but continue to dramatically lag pre pandemic levels. At the same time, the outlook for Russian supply continues to dip in face of import bans in many countries, logistical challenges, and an increasingly negative investment climate.

While coking coal markets have come under pressure global thermal markets remain at near historic highs. Importantly, these strong market dynamics are helping to buttress coking coal prices, while simultaneously creating attractive seaborne opportunities for Arch's legacy thermal products. The price for thermal coal out of Australia currently stands at nearly $387 per metric ton, and the price for thermal coal into Northern Europe stands at nearly $269 per metric ton. Arch's sold over 200,000 tons of coking coal to thermal customers for delivery in the fourth quarter of 2022. And we're actively exploring other such opportunities where it makes sense.

On the legacy thermal side of the business, Arch has continued to deliver on its dual objectives of driving forward with an accelerated reclamation plans while simultaneously harvesting cash from these assets. By employing this logical wind down strategy we're delivering -- we believe we're delivering the greatest long-term value for our shareholders, while at the same time providing an appropriate transition period for all of our stakeholders, including our employees, our customers, and the communities in which we operate.

A major part of this responsible approach is our industry first cash thermal mine reclamation fund, which ensures that we'll be an appropriate level of funding on hand to complete final reclamation work at these operations when the time comes to shut them down. Following this strategy, Arch's legacy thermal operations delivered $97 million in segment level adjusted EBITDA during the third quarter, while expanding less than $5 million in capital. That brings the total amount of the EBITDA generated by the thermal segment over the past six years to just under $1.2 billion while investing only $123 million of capital.

While, that's an impressive figure. We believe the stage is set for more of the same in Q4. What's more, given our significant book of contracted domestic verbal business, and continued strength and metallurgical thermal pricing, we're becoming increasingly optimistic about our ability to replicate this year strong thermal segment contribution again in 2023.

In closing, let me reiterate the 2022 has been a period of great ongoing progress at Arch. Even with the typical mining challenges noted earlier, our expanded and upgraded coking coal portfolio continues to generate robust levels of cash. In addition, we believe the medium term outlook for significant and complimentary contributions from our derisk legacy thermal segment continues to strengthen as well. In short, we believe the stage is set for continued success, ongoing value creation, and most significantly, substantial shareholder returns.

With that, I'll now turn the call over to John Drexler for some additional comments on our two three operating performance, John.

[John Drexler, COO]

Thanks, Paul. And good morning, everyone. As Paul just discussed, the Arch team delivered record operating cash flow and drove exceptional ongoing progress on our strategic plan during the quarter, even as we navigated through logistical challenges, inflationary pressures, and localized geologic issues.

Most importantly, the team executed at the highest level in the most critical areas of performance, safety, environmental stewardship, and other key ESG metrics. On behalf of the entire management team. I want to thank the Arch workforce for their continued dedication to the highest environmental, social, and governance principles.

Let's begin with the key drivers of our Q3 performance. As indicated, our core metallurgical segment generated robust levels of cash during the quarter, even as we address the isolated geologic challenges at Leer South that acted to suppress the segment sales volumes and pressure its unit costs. The good news is that as anticipated, we advanced through that area of tough cutting in early September, and have been achieving much improved advanced rates and productivity levels ever since.

Looking ahead, we fully expect productivity levels to continue to march upward as we progress through the first five panel districts. And based on what we have experienced in our ongoing development work. Believe the conditions in district two should be better still. Again, we're pleased with the trajectory we are achieving at Leer South. We're off to a good start in October, and we fully expect meaningful improvements in both metallurgical segment productivity levels and unit costs in Q4, followed by further improvements in 2023.

Before proceeding, let's talk about what to expect for coking coal volumes in Q4. As you may have noticed, we are now projecting based on the midpoint of our revised annual guidance, an increase of around 15% in our coking coal shipments during Q4. That step up reflects the continuing progress we are making at Leer South and also underscores the fact that we expect still further improvements in productivity in 2023 as we move towards our expected normalized run-rate.

It's also worth noting that again, given our full year cost guidance for the metallurgical segment, we are also anticipating a 10% or so reduction in average costs in Q4 when compared to Q3. Well, that represents significant progress. I want to stress here that we would expect still further improvements on the cost front in 2023.

As Paul mentioned and embedded in our projected coking coal volume guidance for Q4, we anticipate shipping more than 200,000 tons of coking coal into thermal markets in Q4 as prices generally consistent with current East Coast coking coal marks. As we have stated in the past, we remain staunchly committed to serving the metallurgical needs of our longstanding steel customers, but we are also happy to redirect tons to thermal customers in the absence of more value creating alternatives in the steel arena. In fact, we continue to work hard to identify additional crossover opportunities and believe our Q4 shipments could serve to garner further thermal market interest in our high BTUs coking coal products.

During the quarter we also entered into value creating fixed price agreements with North American customers for a small percentage of our projected 2023 coking coal output. In total, we locked in approximately 1 million tons of business for delivery next year at an average net back of nearly $190 per ton. Given our anticipated cost structure for 2023, this business should equate to a substantial contribution to next year's cash flows, despite constituting only 10% or so of our projected 2023 metallurgical output.

As we have stated many times in the past, our primary focus remains the 300 million ton plus per year seaborne market, where we can compete very effectively, and where we have established an expansive marketing presence and an excellent reputation.

Transitioning now to the legacy thermal side of the business. I'm pleased to say that we continue to deliver on the plan for the thermal segment by generating substantial amounts of operating cash flow while managing CapEx tightly. Fortunately, we are confident we can accomplish this even while continuing to manage through significant rail service issues, specifically in the PRB. As Paul noted, the thermal segment has generated nearly 10 times more segment level EBITDA than it has invested in capital over the past six years, and the thermal team delivered more of the same in Q3. To reiterate the thermal operations generated $97 million of EBITDA during the quarter against less than $5 million in capital.

Moreover, we believe we are exceptionally well positioned to maintain that impressive ratio of cash generated to capital expended in 2023.

In terms of top-line considerations, we have a very profitable book of business already in place for our thermal operations for both 2023 as well as for several years into the future, along with the logistical network and throughput agreements needed to move a limited, but highly leveraging volume of thermal coal into extremely tight seaborne thermal markets.

As for the PRB, we are now more than 90% committed for 2023 when measured against projected 2022 shipping levels, at average realizations that should drive another very strong contribution to cashflow next year. In addition, our West Elk operation is essentially sold out for next year at a capacity of 4.5 million tons.

Given the high percentage of our sales committed at fixed price, fixed pricing combined with the opportunity for incremental export volumes against a very favorable 2023 futures curve, we believe that the thermal segments prospects for replicating its projected 2022 cash generation are strong and improving. We will provide a complete update on 2023 guidance at the fourth quarter earnings call.

Before turning the call over to Matt, let me conclude with a few words about our Q3 performance in the ESG arena where we continue to build on our already industry leading execution. Through the first nine months of 2022 Arch's subsidiary operations have achieved an aggregate lost time incident rate of approximately 3.5 times better than the industry average over the same period. In addition, our subsidiary operations recorded no environmental violations during the third quarter, while extending their string of zero water quality exceedances to 31 months.

Finally, the Coal Creek Mine where the Arch team is completed roughly 75% of final reclamation work over the course of the past 21 months, was honored by the state of Wyoming with the 2022 Excellence in Mining Reclamation award. In short, it was another impressive performance by the team which remains committed to raising the bar even higher in this critical area of performance.

With that, I will now turn the call over to Matt for further discussion on our financial performance and results. Matt?

[Matt Giljum, CFO]

Thanks, John. And good morning, everyone. I'll begin by providing additional detail about third quarter cash flows, which as Paul noted were highlighted by record operating cash flow of $454 million. To put that into perspective, that amount exceeds any full year total that Arch is generated in the last 10 years. In addition to solid underlying operating earnings, we've benefited from favorable changes in working capital, with the decline in our accounts receivable contributing $247 million to the quarters total. While this trend was expected after the significant working capital increase in the second quarter, the actual amount was a good deal higher than anticipated.

On the other hand, operating cash flows were adversely affected by a $30 million contribution to our thermal reclamation fund with the accelerated payments into that fund now complete.

Turning to the investing and financing cash flows, we spent $41 million for capital expenditures in the quarter, while utilizing $186 million in the capital return program with nearly $110 million in dividend payments, $57 million invested for share repurchases and $19 million used to retire additional convertible bonds. Discretionary cash flow for the third quarter was $413 million and under our capital return formula, our board has declared a dividend of 50% of that amount, or $10.75 per share. The dividend will be paid on December 15, to stockholders of record on November 30.

We ended the quarter with cash on hand to $501 million and total liquidity of $593 million, including availability under our credit facilities. The timing of customer collections late in the quarter, including some payments that were made prior to their due date, push cash and liquidity to levels that were well above our target. As I stated last quarter, our goal is to end each quarter with minimum liquidity of $250 million to $300 million, supplemented by enough additional cash to cover a substantial portion of the following quarters dividend.

Before moving on, I wanted to note one additional liquidity highlight from the quarter. In August, we finalized the amendment and extension of both our accounts receivable securitization facility and our inventory credit facility. The term of both facilities now extends to August 2025 and the size of the securitization facility was increased from $110 million to $150 million. These facilities continue to enhance our liquidity and provide necessary letter of credit capacity. We are appreciative of our long-term bank partners and their continued support of the company.

Looking forward to the fourth quarter, while we expect improved operating performance, discretionary cash flow is likely to decline from third quarter levels. The favorable changes in working capital in Q3 are clearly not repeatable. And in fact, we would expect to see a working capital increase. Accounts receivable at the end of September were at much lower levels than normal as compared to our revenues and we expect that relationship to revert to historical norms over the course of the fourth quarter.

From a capital return perspective, we would expect larger cash outflows in Q4, both the dividend as we've already discussed in in the amounts deployed in the second 50% of the program as well. As to the ladder the amount we were able to deploy in any given quarter will likely vary greatly depending on the timing of cash flows, especially in relation to normal blackout periods. While, that worked against us in the third quarter, we are starting the fourth quarter with sufficient capacity, even given our liquidity and cash targets to nearly double Q3 spending levels on the second 50%.

In terms of our priorities for that part of the capital return program, the third quarter activity provides a good roadmap. Our primary focus will likely be share buybacks, but we will continue to look for attractive opportunities to repurchase the remaining convertible bonds. At the end of September, our remaining authorization for share repurchases was more than $442 million.

Regarding the bonds, we have now settled a repurchased approximately $130 million of the original principal value, leaving just $25 million outstanding. Assuming a share price of $140 and settlement using cash and shares, those bonds would represent potential dilution of approximately 625,000 shares. As a reminder, the cap call that we purchased at the time the bonds were issued remains outstanding.

The cap call is deeply in the money with an intrinsic value of approximately $62 million that would be paid as expiration in November of 2025. At that same $140 share price, the intrinsic value of the cap call represents an offset of roughly 450,000 shares, or more than two thirds of that dilution. As a reminder, the accounting rules do not allow for the value of the cap call to be reflected in the fully diluted share count or as an asset on the company's balance sheet.

Before turning the call over for questions, I wanted to address one item that will have a positive material impact on our reported income for the fourth quarter. As we have disclosed in our SEC filings, Arch has substantial deferred tax assets, including well over $1 billion of net operating loss carryforwards as of the beginning of this year.

We have maintained a full valuation allowance against those tax assets as a result of uncertainty about the ability to utilize them fully before they expire. Given our taxable income in 2021 and thus far in 2022, along with expectations for continued profitability, we expect to release the valuation allowance in the fourth quarter. This along with expected adjustments to our FIN 48 reserves will result in a onetime nine cash income tax benefit of approximately $225 million to $250 million.

As a reminder, we continue to expect to pay no cash taxes in 2022. If coal market conditions remain favorable, we would expect to begin to pay cash Texas next year with an effective rate of up to 5% of pretax earnings.

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

Okay, thank you very much. At this time, we will conduct a question-and-answer session. [Operator Instructions] Okay, our first question. Our first question comes from the line of Dave Gagliano from BMO. Dave, your line is now open.

[Dave Gagliano, BMO Capital Markets]

Alright, thanks for taking my questions. I have actually a number of follow up questions. So bear with me on this, I'll try and be quick. I'm just -- first of all, on the 200,000 tons of crossover for the fourth quarter sold into the thermal market. What was the price for that 200,000?

[John Drexler, COO]

Dave, I think as we indicated the prices approximating what we're seeing kind of the netbacks if with the existing met markets that we're seeing today.

[Dave Gagliano, BMO Capital Markets]

Okay, that's actually my remember date giving pricing. Sorry.

[Deck Slone, SVP, Strategy]

Hey, David, it's Deck. And remember that some of those times were committed earlier in the quarter at times when prices were lower. So we actually got a premium on some of those volumes. But today, they're fairly reflective of kind of where the markets are today. If you're looking at pricing today, that's accurate comment from that.

[Dave Gagliano, BMO Capital Markets]

Okay, well, that actually is my -- I mean, we get published indices for Atlantic basin high volume prices, but I'm, what is the market today for High-Vol A, for your coal?

[Matt Giljum, CFO]

It's above 280 right now, Dave. So the 283 sort of arrange for that FOB U.S. East Coast.

[Dave Gagliano, BMO Capital Markets]

Okay, thank you. And then --

[Matt Giljum, CFO]

And to get that number to get that net back, you would simply take that and then work it back to the mine the way that we typically do -- do the net back calculation.

[Dave Gagliano, BMO Capital Markets]

Okay, helpful. Thank you. And then switching over thermal, it's been 17 million to 19 million tons per quarter roughly. Is that a reasonable range on a quarterly basis for 2023?

[John Drexler, COO]

Yeah, if you look at the midpoint of our guidance, that would kind of imply kind of in that 18 million plus ton range to achieve that. We've been challenged with a lot of rail issues in the PRB, we talked about it in prepared remarks. We've reduced the midpoint of that thermal guidance by 2 million tons, if you remember, last quarter, we dropped that by 5 million tons. Those are committed times that are going to get carried over into next year at attractive pricing. So we haven't lost that volume, but you are correct. We're going to need that kind of that 18 million plus run-rate, and we're working hard to achieve that.

[Deck Slone, SVP, Strategy]

Dave, I think your question was also our way I understood it was '23. And I think if you look at '22, I think it's a good place to start our '23 volumes.

[Dave Gagliano, BMO Capital Markets]

Okay, and then on the domestic met sales for 2023. I think you said $190 per ton was the average price?

[Matt Giljum, CFO]

That's right.

[Dave Gagliano, BMO Capital Markets]

That's right. Okay, how does I just don't have in front of me? How does that compare to the 2022 contract price, average price?

[Matt Giljum, CFO]

It's slightly lower. I think it's definitely if you -- as we follow the trade rags and where everything's out there, we're very pleased with what we were able to achieve kind of with where the forward curve in the market was and feel real good about putting in those million tons fixed value fixed commitment, steady train service. So we're very pleased to achieve that lock those cash flows in. But still provide a lot of exposure for the remaining book and as we describe the market that over time we feel is going to be attractive for us.

[Deck Slone, SVP, Strategy]

And Dave, that's a very small discount just kind of where the marks are today. And as we just discussed, and I just looked at in fact $286 today for High-Vol A where it's a very small discount to that actually reflected the marks at the time the deals were done, in fact a little bit of a premium. So we feel good about what we put the bad and getting that fixed cost, fixed prices is done.

[Dave Gagliano, BMO Capital Markets]

And are there plans to do any more or is that it for the domestic for '23 for met?

[John Drexler, COO]

I think here again, Dave, this is it, we're fine with that. Our focus is the seaborne market. And I think we're set up. Let's see, if it's a parallel this year, we'll see dribs and drabs come in. We're sitting about 10% of our coal state in North America. And that's where we could end up next year.

[Dave Gagliano, BMO Capital Markets]

Okay. Two more real quick, what's the average price of the 90% of thermal that was locked in for 2023 -- or that is locked in for 2023? Just an average overall.

[Deck Slone, SVP, Strategy]

So Dave, it's Deck. So we haven't discussed that as yet. And I think we've indicated that look, this year's realizations in the PRB were particularly strong. This is going to be 2023 will be another very strong year relative to historic values. We may not quite be to the level we see for 2022, but it will be another strong year creating another very solid margin in the PRB. And then we do have some fixed price business that we have done out of West Elk that is obviously at very attractive prices given current international seaborne markets. And we'll continue to explore opportunities to sort of fix additional volumes there and to a feel really strong current futures curve. But as I said, right now, it looks like it could be a small step down relative to 2022.

Now, having said that, there are other things that counterbalance and one point I would certainly emphasize is that, we made $110 million contribution this year to the thermal mine reclamation fund. Next year, that contribution will be de-minimis. So, in reality, the thermal segment we would expect to generate even more cash for availability to the capital return program.

[Dave Gagliano, BMO Capital Markets]

Okay, thank you. And then my last question, I heard the commentary, but I didn't catch it all regarding the cash flow movements in the fourth quarter. I thought I heard at the end there during that commentary that there was the net result with working capital changes as a cash outflow, which to me implies no variable dividend. Did I hear that correctly?

[Matt Giljum, CFO]

The working capital peace, I think would be a reduction in the cash flow in Q4, as opposed to an increase that we saw in Q3. But overall, if you look at quarter over quarter, we should if you work through our guidance, we're guiding to what should be a stronger operating performance in Q4 as compared to Q3. So with that as the starting point, instead of getting a working capital tailwind, we're going to get a working capital headwind. And, as we sit here, generally, our receivables are typically about 100% of a monthly sales amount, at the end of any quarter in September, that was down below two thirds of the sales. And want to make sure that we acknowledge the great work that our contract admin and billing groups did, and being able to get that and pull some of that cash forward. But, we don't plan on that every quarter and assume we're going to see an increase. If we go back to those normal levels, our working capital increase could be as much as $100 million, that would offset the those operating earnings as we look at Q4 cashflow. Still should be positive, but not nearly as robust as they were in Q3.

[Deck Slone, SVP, Strategy]

And Dave, as Matt pointed out though, in the fourth quarter for the quote -- other the second 50% in terms of the capital we expect to deploy in that area, that can be as much as twice what it was in Q3. So, somewhat of a counterbalance to, what could be that negative move on the working capital front?

[Dave Gagliano, BMO Capital Markets]

Okay, that's helpful. Thank you for answering all the questions.

[Deck Slone, SVP, Strategy]

Thanks, Dave.

[Operator]

Okay, our -- we have -- our next caller is Lucas Pipes from B. Riley. Lucas, your line is now open.

[Lucas Pipes, B. Riley]

Thank you very much. Operator. Good morning, everyone.

[Deck Slone, SVP, Strategy]

Good morning, Lucas.

[Lucas Pipes, B. Riley]

So I wanted to touch a little bit on the 2023 met coal outlook. And I think you mentioned you have 1 million tons contracted into the domestic market, and that's going to be about 10% of your total sales. So that implies 10 million tons of net coal next year, up pretty nicely from this year. And then first if you could confirm that, but then secondly, there were these isolated geologic incidents this year and obviously you can't change geology. I think you did a good job working through it, but you can you can anticipate it.

And you mentioned you the development work, gives you increased visibility of what's coming. And I wondered if you could elaborate on that, and if in fact, you've maybe done a little bit more development work to have more confidence in the 10 million tons for next year. Thank you very much.

[John Drexler, COO]

Thanks, Lucas. And talk about Leer South we talked about it last quarter. We encountered sandstone, in the current panel we're in, as a reminder, we had completed mining and the ramp up of Leer South and panel one. And a successful longwall move in the May timeframe came out of that move and actually saw a very healthy ramp in the beginning of panel two, when we encountered very difficult cutting conditions related to sandstone.

As we indicated, as we continue to move further east in the first district, that first district has five longwall panels. As we continue to move east to each panel, all of the geology says that the conditions should improve, we should see less of the impact of those types of issues that were that we experienced during the quarter.

And as we are developing those new panels, we have continuous miners out there, developing the head gates, we are experiencing better conditions, it's what's giving us confidence is as we move forward, that we're going to see improved productivities. Probably, more importantly, as we're now developing down into district two, once again, where the overall geology should show improvement, we're experiencing that as well, as we have continuous miners down there.

So that's why as we're continuing to progress here. Our confidence and the level of productivity continues to get stronger. And so we expect that improvement to continue to play itself out. As we look forward to next year, you're exactly right. And as we've indicated before, if everything is running as expected across our platform, we should see the opportunity to produce up to 10 million tons on an annual basis. So we haven't provided specific guidance on all that yet. We'll do that at the fourth quarter earnings release. However, once again, we've talked about this before with each of our operations, as we look at all their productivities we are comfortable that that 10 million ton arena is around where we should see the capability to produce.

[Lucas Pipes, B. Riley]

That's very helpful. Very good to hear. Thank you for that. My second question, and I may have missed this but the cadence of have any buybacks from here? How should we think about that, considering the movements of working capital, your minimum cash targets, the dividend that's payable in a little over a month? How should investors approach the level of buybacks between now and here? Thank you very much.

[Matt Giljum, CFO]

Lucas, this is Matt, and really probably the best way to look at it, we clearly came out of Q3 with a little more cash on our balance sheet than we wanted to quite a strong collection performance in the last couple of weeks of the quarter, which as you know, is a blackout period around earnings. So that really limited how much of that cash we could deploy in Q3, but puts us in a very good position, as I mentioned in my remarks, as we head into Q4. So as I indicated in those remarks, we think we can as much as double what we spent in Q3 on the second 50% of the program. And as we said, that's likely going to be buybacks. Just to put that in perspective, we did buyback over 400,000 shares nearly 450,000 shares in Q3. And so if we're able to hit that, that doubling level of that, depending on the share price, we can buyback as much as a million shares, or maybe even slightly more, slightly more as we go through Q4.

[Deck Slone, SVP, Strategy]

Lucas, I think one of the surprises for all of us, we put a lot of thought into the capital return program and the allocation method. What -- all the modeling we did I think what surprised us was how lumpy cash flow can be at the end of the day. Matt was kind of generous, but I think the last day of the month, we received almost $100 million or receivable. It's a great story, but it really kind of makes the numbers a little distorted.

And we've had quarters where people didn't pay on time. This is one of those weird quarters where people paid ahead of time. So unfortunately, I think the capital return can be a little lumpy, but I think the bottom line is the intent is the same that is 50% of discretionary cash flow is going to go to the variable dividend and the second 50% will ultimately end up as share buybacks or the buy down of convertible debt.

[Lucas Pipes, B. Riley]

Very interesting. Well, maybe at current inflation rates, people just can't wait to get rid of their cash. So I really appreciate the -- I really appreciate the perspective and continued best of luck.

[Deck Slone, SVP, Strategy]

Thank you, Lucas.

[Operator]

[Operator Instructions] Okay, our next question comes from the line of Nathan Martin from The Benchmark Company. Nathan, your, line is now open.

[Deck Slone, SVP, Strategy]

Good morning, Nate.

[Nathan Martin, The Benchmark Company]

Yeah. Thanks for taking my questions. Maybe I'll start off, just touching on 3Q coking coal realizations, possibly a little lower than some had thought just based on some of my prior conversations. Obviously, we saw a lot of volatility in the price during the quarter. Maybe can you get a little more color on that result? And then, I guess really what I'm trying to get at as well, just looking forward to the fourth quarter is, let's just say we assume, for example, benchmark stays flattish quarter-over-quarter in the fourth quarter, which I think it's actually averaging pretty close to that right now.

But given the fact that prices have been notably more stable than they were in the third quarter, is it unreasonable to expect new realizations to be up in the fourth quarter? Thanks.

[Matt Giljum, CFO]

So Nate, just kind of reviewing the performance for the third quarter, if you just take the benchmark for High-Vol A, I think it average for the quarter around 274, convert that to short, and then back out about $60 of transportation costs associated to get it from the mine to the port. And you're kind of back into that, mid-180s $185-$187 a ton. Obviously, across our portfolio, we're shipping to a lot of different places around the world so you're affected by a lot of different benchmarks. But at the end of the day, that's kind of the big driver, that High-Vol A price and kind of netting back, using that type of methodology.

So I think, from our perspective, we feel that we the achievement of the price was kind of where we expected it to be for the quarter as we move forward. Once again, kind of name where that price is going to be for the quarter. And it's going to be a big driver, as far as what the final outcome will be. But as we sit here today, we would expect, if things were to stay relatively flat from where they are now, we would expect this essentially a modest uptick, but it would be very modest, once again, depending on what you're showing as your coking coal price today at -- across our portfolio as we move into the fourth quarter.

[Deck Slone, SVP, Strategy]

So Nate, just to connect that final dots, remember that the number we reported for our realization, average utilization on the coking coal side was 189.50 [ph]. So we view that as actually a premium and having outperformed where the market was through the quarter and then remember two, you also have some local volumes that were a bit low or high volumes that were a bit lower. So actually, on a realization basis, fairly strong in Q3 relative to the benchmark numbers.

[Nathan Martin, The Benchmark Company]

Got it? Thanks for that commentary, guys. And then, I guess, not surprising to see full year coking coal shipping guidance come down, maybe a little bit lower than expected. So maybe can you guys talk about what gets you to the high-end versus the low end of that revised guidance? Is it still mainly logistics base felt like productions improving just any color there would be great, thank you.

[Matt Giljum, CFO]

Yeah, Nate I think the issue that we continue to work through is how well is that ramp at Leer South outposts, all the sandstone is going to continue, as we move forward, that's a big driver here as we work to the end of the year. And you have to look at the flexibility of all of our operations and where they're at.

The other item that kind of impacts what we're looking for in the fourth quarter, given the timing of how we're continuing to mine at our two longwalls, both in Leer South. We actually will have both operations, we expect both of them to be in longwall moves prior to the end of the year. Typically, you don't see too long wall moves falling in the same quarter. But we're going to experience that here. And so that's just giving us a little more conservatism around the number that we're looking at here.

Longwall moves are nothing of any significance for us. They're kind of part of the routine operation of a mine. We get them done very efficiently, very effectively, typically in the east in a 10 to 12-day timeframe. But having two of them fall in the same quarter. It's kind of giving us a little more caution as far as what we're looking at from a guidance perspective.

[Deck Slone, SVP, Strategy]

And Nate, some of those numbers in terms of guidance, look we're assuming that logistics continues to be a bit a bit challenging, particularly as you look at vessel shipments. And so we'd expect to end the year with healthy inventories, not excessive but healthy inventories. So look, we could certainly outperform at midpoint number, but we think that it's prudent to sort of guide the levels we're guiding to, and we'll see where it goes. And if we don't ship in q4, we could be shipping additional volumes in Q1. So we'll see how it all plays out.

[Nathan Martin, The Benchmark Company]

And Deck, that's a good question. Can you remind me if you guys had 1.1 million tons of inventory at the end of the first half, kind of where does that stand today?

[John Drexler, COO]

Yeah, I think we're right at around 900,000 to 1 million tons right in that arena right there. So essentially flattish over the course of the quarter.

[Nathan Martin, The Benchmark Company]

Got it. Thanks, John. And then maybe kind of shifting gears to the cost side. And John, you just alluded to, I guess, too longwall on Leer South in the fourth quarter, may be contributing to a little bit of the increase in full year net coal segment cost guidance. How would you expect that to kind of trend heading into '23? I think maybe in the prepared remarks there are some carry around every aspect that they're going through, but any additional colors there would be great.

[John Drexler, COO]

Yeah. Nate, I think, you know, clearly we're operating as an industry in an environment where there are a lot of inflationary pressures. It's affected us all. It's affecting us also, but the biggest driver for us and the biggest thing that we'll move forward from are or some of the challenges that we had from a production standpoint, and volume related.

So as we move forward with the improvement in volumes we're seeing in Q4, and despite the inflationary pressures, once again, we see a 10% drop in fourth quarter unit costs. As we step into 2023, we expect that in improvement to continue. We haven't provided guidance yet. But, a modest improvement from the levels that we've seen in '22, just from the expectation of improved volume performance in '23 is what we're expecting. And we'll provide a full update in the fourth quarter earnings call on our projections.

[Deck Slone, SVP, Strategy]

So night again, just to do the math and connect the dots. So if our cost had been around $100, and 10% stepped down puts us at around $90. And as John said, if we see another market step down from there, we certainly believe that that will put us very, very easily and nicely into the first quartile in terms of costs, and really well to the left on that cost curve. So we feel good about the trend. Obviously, we want to take it as low as we can go, but some prudency and some and some caution here, given just an intense inflationary environment.

[Nathan Martin, The Benchmark Company]

Got it. Very helpful guys. I'll leave it there. Thanks for the time and best of luck to the end of the year.

[Deck Slone, SVP, Strategy]

Hey, Nate. Thanks for the call.

[Operator]

[Operator Instructions] Okay, our next question comes from the line of Alex Hacking from Citi. Alex, your line is now open.

[Alex Hacking, Citi]

Hey, good morning. How are you? I'll just ask maybe a quick one of the coming to the end of the hour. On the met coal shipments, it sounds like at the moment the mine is maybe the bottleneck. Earlier in the year, it was the logistics. I mean, I guess as we head into 2023, I think you've discussed that you're hopeful that the mine Leer South can support run-rate close to 10 million tons a year.

But do you think that the U.S. rail import logistics can support 10 million ton a year next year? And also, do you think that the market can support 10 million tons next year given all the closures that we've seen in European blast furnaces? I guess maybe you could discuss the current market conditions and whether or not you're having challenge, any challenges placed in the coal? Thank you.

[Paul Lang, CEO]

Alex, I'll start with this, and maybe Deck jump in here. But, as you look going into fourth quarter into 2023, I got to tell you, the Eastern railroads, I think are doing a pretty good job of getting back on track with things. And we really have no complaints about what they've done the last couple of months. And I think we're getting really good messaging on 2023. And obviously, the one big thing that will help us is Curtis Bay, coming back fully online sometime this quarter. So we're expecting to head into 2023, in pretty good shape all around.

Of the virtue one second requested [ph] here, the West is particularly with the PRB, we've had one of the railroads just have terrible performance. And unfortunately, we're heavily weighted to that railroad. And it's been difficult, and it's cost us a lot of money this year. But back to the broader question on the market we're cautious about what's going on in Europe. And I think, frankly, that's why you're seeing us put a lot more emphasis on Asia, and particularly India. And that's where we see our market ultimately growing towards, and that's what our plan is. Deck, anything?

[Deck Slone, SVP, Strategy]

Yeah, no, no, I think Paul is excellent. I think, you know, just to add to that despite some of the challenges that we're seeing with economic conditions with kind of the concern around closures, we continue to see on the supply side a lot of challenges, even despite the significant and healthy price, you've seen a lot of challenges in in Australia, and that was even before they had some of the issues with whether you have the threat of industrial action with BHP in Australia, there's been a lot of noise around. There's just a lot of concerns are specifically just our mind issues across the world. So, there continues to be a lot of support in the markets that we see out there that we continue to take advantage of.

[Alex Hacking, Citi]

Thanks, I appreciate the color.

[Paul Lang, CEO]

Thank you, Alex. Operator, are you there?

[Operator]

Our next question comes from Michael Dudas from Vertical Research. Michael, your line is open.

[Michael Dudas, Vertical Research]

Thanks, guys. Good morning, everybody. As you, Paul or John, as you budget -- that you're in the budgeting process for 2023. Is it prudent to look at your input costs, labor, et cetera to keep it flat from where it is today up a significant plus to say, 5%? Or do you see any indications that there may be some moderation and from these high levels, you see some maybe help that could have could have come about in 2023?

[John Drexler, COO]

Yep. Mike, it's a great question and kind of one of those crystal ball type questions. But I think you're hitting on an interesting point, right, is the industry has worked through this year, we've all encountered, you know, significant, very healthy inflationary impacts. You've seen significant increases in steel input costs. Fuel costs have skyrocketed from last year. Those are areas where maybe there's a flattening or moderation that it can occur. But as -- and once again, we'll update with full expectation at the next call. As we look forward, it's kind of hard pressed to see a significant decline in those types of inflationary pressures. But at the same time, hopefully, we're not seeing the same things that affected all of us over the course of this year as we move forward. So maybe there's maybe more of a return to to modest inflation.

But, we can all debate where the economy is ultimately going to go here. And but I think, once again, from a modeling perspective, some modest uptick from ongoing inflation might be prudent here from where we are today.

[Michael Dudas, Vertical Research]

Right, I think you make a great point. The industry and you guys have absorbed all this amazing input, and cost and in labor, et cetera. So I think that can be helpful going forward. Just one quick follow up. Looking at the PRB and looking at your expectations for next year, shipments midpoint and looking forward. If your costs, and you've set up some longer term contracts that you indicate in your costs, looking longer term is, is the acceleration of the output from those from [Indiscernible], I guess how long versus when you put out the plan meal was a two or three years ago, what the fall off might be in production? How does that look today, given the market demand price, and what you've done with your fund so far?

[Paul Lang, CEO]

Look, I'll start and maybe, Deck I'm sure will jump on this. But I don't think really anything has changed the PRB. And, we can all argue the public policy side of this, but I look at it from a pretty pragmatic point of view. Less coal-powered power plant was built 10 years ago in the United States. And the average age is creeping up 47-48 years. This trend is continuing, I think we'll see slowdowns and retirements over the next two or three years. But yeah, this thing is heading towards a pretty fast decline rate. And, I think as we look at what we're doing, we're taking into account that ultimate glide path on thermal coal consumption in the U.S., and we're tailoring our Black Thunder operation towards it.

And I think we can have in the industry can have on the thermal side, a very profitable, period of time where this coal is going to be needed, and will do very well. But what we're not going to do is invest anything to increase production. If anything, we're just going to continue to follow the market. And I think the industry will do well, if that's kind of the pack that's taken.

[Deck Slone, SVP, Strategy]

Mike, we were at about a billion, 1.1 billion tons of of thermal coal consumption in the U.S. in 2008. Last year, that was about 520 million tons, this year, around 490 million tons. So the reality is that --

[Paul Lang, CEO]

Progress for the company.

[Deck Slone, SVP, Strategy]

And we're seeing retirements, we could see some extensions. In fact, we've seen about 15 gigawatts of extensions announced here in the recent months, which is certainly helpful. We'd have about 500 million tons of reserves still in the PRB that are permitted, and that we fully intend to mine that would allow us to produce these sorts of levels for the next several years and generate a lot of cash there.

But in the end, we do believe that the fleets can age out because we aren't building any new coal plants, as Paul said, we are getting age on these plants. So our view hasn't changed, but we certainly believe there's an opportunity to generate a lot of cash, you know, over the next five to seven years from these assets. And we built a really strong book of business we plan to leverage. The fact is that that book is not just strong for 2023, but we've got a lot of length on it as well. We've got strong commitments for '24, '25, '26.

So feel good about what we can do there. But we don't we have -- our view of where thermal coal consumption is going in the U.S. hasn't changed.

I guess one final point, this year, coal conservation has been a significant part of the step down in consumption, our utilities just aren't able to get the time. So, I would say that we are seeing a little stabilization likely could have seen generation and coal demand for power generation roughly equivalent to 2021 levels. This year, but utilities can't get the coal. So, the fact is that demand has stabilized here a bit, and that could persist.

[Paul Lang, CEO]

And, Michael, I want to wrap up real quick, we have swift kind of final comment on that the teams that are at our operations in Wyoming and Colorado, they're doing an incredible job, you know, with this very challenged kind of environment that you see out there. There's plenty of opportunity. We've worked real hard, they've worked real hard to make sure that we've are all in a position where these windows of opportunity are created.

We're going to --we're going to make a lot of hay while the sun shining. And that's what they're doing. They're doing an incredible job. And as Deck indicated, we believe there's a lot of length there, we need to stay in the right point of the cost curve in the operations are regions that we're operating in and take advantage of these market opportunities. And the teams there have done a wonderful job.

[Michael Dudas, Vertical Research]

I really appreciate those folks. Excellent job, guys. Thank you.

[Paul Lang, CEO]

Thank you, sir.

[Operator]

Okay, I would now like to turn it back to Paul Lang, President and Chief Executive Officer for closing remarks, Paul?

[Paul Lang, CEO]

I want to thank you again, for your interest in arch. As I've mentioned earlier, 2022 has been a period of great ongoing progress for the company. We've completed the hard work and take the necessary steps to build a compelling cash generating model. Our focus now is to continue to refine our operating platform and to wring out additional efficiencies in all aspects of the business. Along with this, we believe it's entirely appropriate. And we fully intend to continue to reward our shareholders for their investment and trust over the last several years.

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

[Operator]

Very good. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Thank you.