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Arch Resources Inc
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Good day and welcome to the Arch Coal Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Deck Slone, Arch's Senior Vice President for Strategy and Public Policy. Please go ahead, sir.
Good morning everyone and thanks for joining us on this exciting day. We hope you've all seen by now the two press releases and the supplemental slide deck that we released this morning. If you have not, they can all be found on the homepage of the Arch Coal website as well as on the Investors section under featured documents.
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.
With me on the call this morning are John Eaves, Arch's CEO; Paul Lang, Arch's President and COO; and John Drexler, our Senior Vice President and CFO. We will begin with some brief formal remarks and thereafter, we'll be happy to take your questions. John?
Thanks Deck and good morning everyone. I'm pleased to report that Arch brought 2018 to a highly successful conclusion in the fourth quarter, achieving strong operating results, delivering outstanding progress on our value-creating capital return program and rolling our plans for a new world-class High-Vol A longwall mine.
To say that these are exciting times for Arch would be an understatement. We look forward to discussing all these developments with you during the course of today's call, with particular emphasis on Leer South.
I'll start with a quick overview of fourth quarter and full year operating results. During the quarter just ended, Arch reported adjusted EBITDA of nearly $123 million, an excellent result and second-best quarterly performance since emergence.
Our quarterly results benefited from another powerful contribution from our high performing coking coal portfolio, where we shipped a record 1.9 million tons of coking coal and captured near-record average margins of $47 per ton.
So planning that strong result, our Powder River Basin operations once again stepped up in a significant way, acting quickly and aggressively to capitalize on increased opportunities for spot sales and higher than anticipated railcar availability related to persistent weather impacts elsewhere in the basin.
All told, we finished 2018 with EBITDA nearly $438 million, which included a negative $9 million mark-to-market adjustment. Again, that's a very strong result and a material improvement over our already strong 2017 performance.
As previously noted, we put this impressive level of cash generation to good use, driving exceptional progress on our capital return program. During the quarter, we bought back another million shares of common stock at a total investment of nearly $89 million, our second-highest quarterly repurchased level since initiating the program in May of 2017.
That brings our total repurchases over that timeframe to 7.2 million shares, a total investment of $584 million. To look at it in another way, we repurchased nearly 29% of our shares initially outstanding in just seven quarters' time.
In addition, we've augmented our great progress in our share buyback efforts with the return of additional $56 million to shareholders via recurring quarterly dividend payments.
In total, we have to date returned nearly $640 million to shareholders via buybacks and dividends under our capital return program. We also expect based on current assumptions to have the capacity to maintain or even accelerate the rate of our capital return program in 2019 should we opt to do so. Today, the Board has authorized the expenditure of up to $750 million for share buybacks, leaving $166 million remaining under the current authorization.
Given the positive outlook for the business and continued strong free cash flow generation, the Board has chosen to further reward shareholders with a 12.5% increase in the quarterly dividend rate, upping it to $0.45 per share. Since launching the capital return program, Arch has now increased the quarterly dividend rate twice by a total of nearly 30%. Given these developments, it should be evident that the board and the management team remain sharply focused on generating value for you, our shareholders.
That brings us to Leer South, which we view as an exceptional project whose time has come. As you know, we've been talking about this tremendous potential of this High-Vol A coking coal reserve in Northern West Virginia for many years now. We're highly confident that this is the right moment to move forward aggressively with the next phase of development on this unique and hugely promising reserve base.
Let me walk you through a few of the attributes that make Leer South such a compelling investment opportunity before passing the baton to Paul for some additional thoughts. First, we expect Leer South to be among the largest lowest cost and highest margin coking coal mines in the United States. That's particularly noteworthy given the fact that after well over a century of mining in the U.S., it is a highly maturely producing region in terms of coking coal output.
In particular, we believe that U.S. coking coal reserves that are well suited from longwall mining are very, very scarce outside our Tygart Valley reserve. And when it comes to High-Vol A quality coal, such reserves may be non-existent.
Second, the addition of Leer South will cement our position as a premier global producer of High-Vol A coal. As been pointed out frequently in recent years by us and others, High-Vol A is increasingly sought after in the marketplace and increasingly scarce. As a result, as you would expect, High-Vol A coals are attracting a significant premium in the marketplace and are likely to continue to do so for a long time to come.
Third, the investment thesis for Leer South is extremely compelling. Based on the average margin we captured in 2018 at the Leer mine, which is, in effect, the proven and highly successful prototype for Leer South, we would recover investment in Leer South within two years of the longwall start-up. That's extraordinary for a mine that's expected to operate for 20 years.
Finally, we believe the market wants and can easily absorb these incremental High-Vol A tons. We have been rationalizing sales of Leer brand products, even the value of existing customers, and there are many more potential customers out there that simply we haven't had the volume to serve.
Moreover, the global marketplace as a whole is undersupplied and there's very little capital being invested in new mine capacity in the U.S., Australia and anywhere else in the world.
Based on the work of industry consultants and our own internal assessments, the global coking coal market will need to add between 70 and 80 million tons of new productive capacity by 2025 in order to meet the new demand and offset depletion. That investment simply isn't happening at present, which creates a compelling opportunity.
In short, we're extremely excited about the prospects for our next world-class High-Vol A coking coal mine and equally excited about Arch's prospects in 2019 and beyond for strong free cash flow generation, continued robust progress in our capital return program, and exceptional value creation for our shareholders.
With that, I will now turn the call over to Paul for further commentary on Leer South and as well as for some color on expectations for 2019. Paul?
Thanks John and good morning everyone. As John noted, we view Leer South as a truly compelling growth opportunity, one that promises to further enhance our already top-tier coking coal portfolio.
As indicated, Leer South will be similar in virtually every respect to our flagship mine, Leer, which, as you know, is a premier global coking coal asset. We're confident we can achieve the same level of success at Leer South, delivering an identical product at a comparable and exceptionally competitive cost structure with great access to seaborne markets. All told, we project investing between $360 million and $390 million over the next three years to complete this exciting project.
As compared to the acquisitions we studied recently, that is a highly capital efficient price tag for a 3 million ton per year mine with a Tier 1 cost structure, producing a High-Vol A coal with a 20-year life.
Capital efficiency, of course, is a high priority for us, so we've taken numerous steps to ensure the strongest possible return in the fastest possible payback. Of particular note, we pared the new mine's capital requirements by around $35 million via the decision to repurpose our existing Mountain Leer -- or Mountain Laurel longwall system.
In addition, we plan to expand and significantly upgrade the existing preparation plant rail load-out in other facilities that are set into operation rather than build a new complex from scratch. Again, this was all done with an eye towards minimizing upfront capital costs and decreasing development time.
It's worth underscoring that the longwall equipment we plan to transfer from Mountain Laurel to Leer South is almost completely interchangeable with the longwall equipment at Leer, which is just 11 miles away. That should drive compelling operating synergies between the two mines related to maintenance, training, spare parts, and the overall management of the complex.
Of course, we're sharply focused on ensuring that our coking coal portfolio maintains a highly competitive cost structure and Leer South promises to average down our costs. Once the longwall is up and running, which is slated to occur in the fourth quarter of 2021, Leer South should boast a cost structure very comparable to that of the Leer mine.
This is notable because Leer's cost structure -- or Leer's costs are comfortably in the first quartile of the U.S. cost curve. Moreover, as indicated in our release, based on this cost structure, coupled with current prices in the seaborne market, it would infer Leer South to capture a cash margin of around $90 per ton for its coking coal product.
I would also point out that Leer South will actually be operating in a slightly thicker coal scene than we've experienced at the Leer mine to-date. In addition, Leer South will have the advantage of roughly 35% longer panels, which should translate into fewer longwall moves and lower panel development costs on a unit basis.
Perhaps most importantly, Leer South will benefit from many lessons we've learned over the course of the past five years in successfully operating the Leer longwall in the same work having seen at the Tygart reserve block.
In short, we're experiencing the geology and operating conditions of the Leer South reserves. We've honed our operating skills in that area through years of experience with the Leer mine. We're able to leverage and optimize our existing mining preparation and transportation infrastructure.
And finally, we've cultivated a large and geographically diverse customer base that understands and appreciates the value of Leer-branded product as long as it could be in their coke plants for years to come. Frankly, it's hard to imagine a situation for a producer any better than embarking on a new mine project this stature.
While we're excited about Leer South, we're also pleased with the new mine plan developed for Mountain Laurel. As indicated, we plan to transition Mountain Laurel to a room and pillar operation at the end of 2019 and redeploy the longwall equipment to Leer South at that time, following a major refurbishment. Clearly, there are real advantages for the Leer South project in this transition, but there's also real advantages for Mountain Laurel as well.
To begin with, Mountain Laurel is increasingly well suited to room-and-pillar mining at this point in its lifecycle. While Mountain Laurel still has extensive reserves, we believe transitioning to continuous miners will significantly enhance the mine's operational flexibility. That's important given the variability of the geology going forward.
Moreover, we believe we can affect this transition away from the longwall while achieving a modest reduction in the average cash cost and a meaningful improvement in product quality.
Beyond 2019, we expect coking coal volumes at Mountain Laurel to average around 1.3 million tons per year. While this is lower than our 2018 output by around 20%, it still provides us with a significant and value-creating presence in the High-Vol B market and affords us the ability to provide a broad slate of products to our global customer base.
In summary, we believe there's great things in store for Arch in the intermediate term as we add Leer South to our portfolio and a very positive picture in the near-term as well, which brings me to our 2019 guidance.
In the Metallurgical segment, we're guiding our sales volume to a range of 6.6 million to 7 million tons of coking coal output in 2019, which at the midpoint represents a modest year-over-year increase. In addition, we expect the segment cash cost to average in the range of $61 to $66 per ton, which at the midpoint represents about a 5% decrease relative to our average cost per ton in 2018.
And to the quarterly cadence of our coking coal shipments during 2019, it's important to point out that we expect our first quarter volumes to be as much as one-third lower than the fourth quarter of 2018.
This change in the quarter-over-quarter volume is due to having two scheduled longwall moves during the period, the extra shipments we made in the fourth quarter of 2018 and the impact of the normal winter time closure of Great Lakes shipping channels for some of our North American customers.
Of course, lower volumes generally translate into higher average unit costs and the first quarter will be no exception. In fact, we expect our segment costs in the first quarter of 2019 to be generally comparable to those we experienced last quarter. To reiterate, however, we expect costs to come in line with our annual guidance as we move through the year.
On the thermal front, we expect our mines to ship between 80 million and 85 million tons in 2019. Within this, our Powder River Basin volumes should be down slightly, ranging from 70 million to 80 million tons.
And our full year cash costs are projected to increase slightly in the range from $10.70 to $11.00 per ton. This change in cost year-over-year is due to a greater percentage of high quality Black Thunder coal in the sales mix as well as assumed diesel price increases.
In the Other Thermal segment, we're guiding the costs of $29 to $33 per ton for 2019. However, we anticipate margins in that segment to be significantly compressed in the first quarter of 2019 due to lower anticipated West Elk production, and correspondingly, a smaller percentage of high-margin West Elk coal in the mix.
As for capital expenditures, we expect the whole maintenance capital at roughly 2018 levels or around $90 million at the midpoint. As already noted, we run a very tight ship when it comes to capital spending and we view this as a disciplined but an adequate CapEx level for our existing operations.
On top of that, we expect to invest around $90 million of growth capital at Leer South. The good news, as John has already pointed out, is that we believe we can do this while still maintain very substantial levels of cash for our capital return program.
Finally, I'd be remiss if I didn't mention the strong safety and environmental performance achieved by our mining operations and exceptional employees during 2018. Our mines won the top safety award in each of our four operating states. We are honored with the prestigious Sentinels of Safety Award for the seventh time in eight years. We had a lost time incident rate nearly three times better than the national average. And our environmental compliance record again set the standard among large integrated coal companies.
These are exciting times for Arch. Our mines are running well. We've been able to reward our shareholders with a successful capital return program and at the same time, we're building towards a powerful future.
With that, I'll turn the call over to John Drexler. John?
Thanks Paul and good morning everyone. Allow me to echo the excitement already expressed by John and Paul regarding the Leer South project. During the course of my remarks, I will share with you our plans for utilizing our strong balance sheet and existing low cost cash generating platform to maintain ample liquidity, while at the same time, meeting our sustaining capital needs, progressing the Leer South project and driving forward with our highly successful capital return program. I believe you will see that we can, in fact, do it all and do it all very effectively.
Let me begin with a brief recap of our capital return program and liquidity position. During the fourth quarter, Arch continued to execute on its capital return program, spending $89 million to buy back 1 million shares of stock or 4% of our initial shares outstanding.
Across the full year, we spent a total of $282 million or 80% of our free cash flow to buy back 3.2 million shares or 13% of the company's initial shares outstanding. As John indicated, we have repurchased 7.2 million shares of stock for $584 million in just seven quarters. That's nearly 30% of our initial shares outstanding at an average price of $87 per share.
We view that as a significant and value-creating change in our capital structure in the course of a very short span of time. Moreover, we have $166 million of capacity remaining under our current $750 million authorization. In addition, we paid our normal recurring dividends during the quarter, bringing total dividends paid under the capital return program to $56 million. Between our share repurchases and dividends, we have returned a total of $640 million of capital to our shareholders, essentially all of our free cash flow over that timeframe.
Further illustrating our strong commitment to rewarding our shareholders in light of the company's strong and ongoing financial performance, the board has approved a 12.5% increase in the quarterly dividend to $0.45 per common share. That dividend is payable on March 15th to stockholders of record as of the close of business on March 5th.
Turning to our liquidity, we successfully amended our inventory-only asset-backed lending facility during the fourth quarter, increasing the size of the facility from $40 million to $50 million, extending the term to 2021 and reducing our borrowing cost.
When combined with the amendment to our accounts receivable securitization facility during the third quarter, we have now increased our unused borrowing capacity under the facilities to nearly $65 million at December 31st. Including our cash balance of $428 million, total liquidity at the end of the year was nearly $500 million.
Subsequent to the end of the year, we were successful in replacing a $60 million letter of credit associated with self-insurance obligations with surety bonds, freeing up still more borrowing capacity.
As we look at our liquidity for 2019, we would expect to have availability under our borrowing facilities in the range of $80 million to $120 million based on our current -- based on current market conditions.
As we have stated, we like to maintain our liquidity in the range of $400 million to $500 million, with an important component of that being cash. However, in light of the steps we've taken to increase borrowing capacity, we are comfortable allowing our cash levels to drop to $350 million at various times during the course of the year.
I would now like to turn our attention to the Leer South opportunity. In short, we are in an excellent position to build the new Leer South mine, which should create value for Arch shareholders for decades to come while driving ahead on our path of returning cash to shareholders.
We have posted a slide deck to our website that provides additional detail on the Leer South opportunity, and I would like to walk through a couple of slides that demonstrate the truly remarkable cash-generating capacity of the platform.
On slide 20, you will see on the left side our projected sources of cash and cash availability in 2019. As indicated, we ended the year with $428 million of cash on hand. Consensus EBITDA for 2019, which we will use as a proxy for cash flow, is $423 million.
And during 2019, we expect to receive AMT refunds for a large percentage of the tax benefit we recognized in 2018, estimated here at $50 million. That puts us at approximately $900 million of cash availability for 2019.
On the right side of the slide, with our enhanced borrowing capacity under our credit facilities, we are comfortable targeting a lower level of cash at $350 million, leaving $550 million to fund our capital needs and debt service.
Turning to slide 21, after taking into account our guidance of $90 million of maintenance capital, $90 million of capital for the first year of the Leer South development and a modest amount of debt service, our cash available for capital return and other needs is $350 million.
As a reminder, we have spent an average of $320 million on our capital return program in each of 2017 and 2018. Obviously then, we have tremendous firepower to continue the program.
Looking beyond 2019, we will be prudent and opportunistic in funding Leer South. There are scenarios which we might elect to fund all our Leer South needs through internally generated cash and scenarios in which we might choose to take on modest responsible leverage to achieve a similar outcome. I assure you that we will weigh these options carefully when the time comes and act in a manner that we believe will optimize long-term value for our shareholders.
To conclude, we are thrilled to announce the Leer South project. We believe that this new mine, combined with our existing Leer complex, will define our company for the foreseeable future.
Our strong cash-generating platform will allow us to fund our 2019 maintenance capital needs and the Leer South development project while still affording us the capability to drive forward rapidly and aggressively on our capital return program should we so choose.
With that, we are ready to take questions. Operator, I'll turn the call back over to you.
Thank you very much. At this time, we would like to open the floor for questions. [Operator Instructions]
Our first question will come from Mark Levin, Seaport Global.
Hey gentlemen congratulations on the announcement. Just a couple of quick questions. First, if I go to slide 18, I just want to make sure that I'm thinking about this correctly mathematically. You present a number of different met price scenarios and payback periods. And just to make sure that I'm clear on how you get to the payback period.
If you were to take the, let's just say, the $200 met price, which is where we are today, and multiply that by 0.9 and do a short ton, you get roughly $180. I'm going to assume you're using a rail rate like $30, $35 to get down to $145.
And I think in the past you guys have talked about cash cost at Leer 1 in the $50 to $55 range. So, if I subtract that to $52, I get a $93 margin times the 3 million tons to get EBITDA of roughly $280 million. Am I thinking about this correctly or wrong in any way?
Yes, hey Mark, it's Deck. And you certainly are -- that's exactly the right way to look at it. We actually also put in a little bit of maintenance CapEx -- ongoing maintenance CapEx to the existing facility. But that is the calculation. And as you can see, what you end up with is a payback of less than 18 months.
Okay, perfect. Just want to make sure that was right. Second question has to do with Sentinel. Gotten some questions recently about the reserve life at Sentinel being relatively short. How does Sentinel fit into the production profile? I know you guys talk about going from 6 million to 8 million this year to ultimately 9 million. Is Sentinel part of that mix? And then when you get past 2022 where you're at 9 million tons and you look at the reserve life of the first Leer and Sentinel, how do we think about the production profile after that point as well?
Mark, this is Paul. Let me take a shot at that. Short answer is that Sentinel will become part of Leer South. And in many respects, we'll manage all of the mining operations on the Tygart reserve effectively as a single complex going forward. And as you think about it, Mark, there's -- it's the same equipment operating in the same scene, using the same rail and port facility going to the same customers.
So, in 2022, if you think about it, between Leer and the combined Leer South-Sentinel property, we expect production to approach about 7 million tons. That's versus about 4 million today produced at Leer and Sentinel.
So, Sentinel won't go away in name until 2022 by any means. We'll still continue to produce coal with continuous miners and as well as the longwall and we'll be using the surface facilities, the mining equipment, of course, the exceptional workforce. But it'll be basically consumed by Leer South.
And as you talk about further down the line, we expect to produce about 1.3 million tons at Mount Laurel. So that -- there's opportunity there also for some low capital expansion simply because those facilities were built with about a 4 million ton capacity.
But then you add in about 1 million tons of Beckley, that's where you get to about our 9 million ton level in 2022. So, I guess another way to look at it is the met addition will approach 2 million to 2.5 million tons relative to 2018.
Got it. And then one final question as it relates to Mountain Laurel and some of the comments that you were making about reducing production. When you think about the production profile, let's say, in 2020 after you, I believe, move the longwall to Leer South, what does that mean in terms of mix in 2020 and cost?
I think you referenced, typically, when you think about going from a longwall to a continuous miner, you would expect maybe cost to go up, not down. But I think you referenced costs coming down. Maybe you can provide some more color on how Mountain Laurel will look over the next few years.
Yes. I mean, if you think about it, I think I was pretty open about this about a year ago. The operation is a good mine, but it's not what it used to be. And although we have a very good remaining reserve base at Mountain Laurel, what's remaining, as you think about it, is kind of the outskirts of the heart of the reserve.
We've been mining there for about 15 years and what we got left tend to be what I'd call more uneven in terms of quality and coal thickness. So, the transition of Mount Laurel will start this year and we mine out the remaining three panels of the Cedar Grove, which should happen in December. But as you think about it, with the reinvention of the mine, I think we have a lot better and stronger operation.
First and foremost, we'll be able to selectively mine the remaining reserve base and improve the quality and overall recovery. I think one of the most startling numbers out there is our plant recovery in 2018 was about 24.8%.
As you look at switching this mine to a room-and-pillar operation, we'll jump up to about 40% or 45%. And that's because we can stay and assume, we can select where we mine and we can very carefully just avoid the bad areas.
So, the only thing we're going to end up doing there is we're going to downsize the underground footprint, simplify the operation. It'll be a smaller mine to maintain and ventilate.
I think you add all of these things together, it is a little bit counterintuitive, but I think this is definitely the right way to go to Mountain Laurel. And I think, frankly, it's going to really help the portfolio down the road.
And the cost you say will be down as a function of this? So, are we talking like $1 or $2 or something even more?
Yes. I think -- I say they're down marginally. I expect plus or minus $1, which is about as good as I believe we are at guessing.
Great, sounds good. Well, congratulations on this big day for the company.
Thanks Mark.
Thank you, Mark.
Thank you. Our next question will come from Jeremy Sussman, Clarksons.
Hi, thanks very much for taking my questions and I guess, congratulations on another strong quarter and it's great to see you guys reinvesting in the business.
Thanks Jeremy.
If I -- anyway, despite the additional $90 million or so in spend for Leer South in 2019, you noted in your opening remarks that capital returned to shareholders this year could be similar or even above kind of the robust 2018 levels that we saw. So, clearly, that's great to see.
And maybe with that said, do you expect to be able to continue returning cash to shareholders, let's say, in 2020 or 2021 when Leer spend is obviously going to be a little bit higher? Obviously, I know market conditions matter, but let's just, for argument's sake, say the forward curve is reasonable.
So Jeremy, I think as we've discussed, our focus right now is that we're in a tremendous position to be able to fund the initial capital required for Leer South. And that is we've demonstrated be in a position throughout the course of 2019 to move forward aggressively if we so choose on that capital return program. And as you've seen, it has been this management team's and Board's commitment to executing on that. We would expect that as we move forward.
As you move beyond 2019 and you move into 2020 and 2021, you are correct, capital does step up. And I think in my discussion, we did talk about the fact that we'll continue to evaluate a wide variety of scenarios: market conditions, cash flow for the company, et cetera. And there are scenarios where we'd be willing to take on some modest responsible leverage as we move forward and evaluate opportunities to continue in the capital return program.
So, I can't speak to 2020 and 2021 from a Board management perspective. But clearly, we're focused on that now. We've been focused on it over the last several years. We're focused on it while we are developing Leer South. And so I think that does lend itself to where our mindset could be as we move forward into 2020 and 2021.
Jeremy, this is John. Listen, when I talk to my board about our capital return program, when we started the discussions a couple of years ago, we didn't go into this short term. I mean, we want to have a dividend that was in place, that was sustainable, and you saw we increased that twice. The share buyback, obviously, has been a big part of this capital return program.
So, I think the interesting thing about this is we actually can do both. I mean, we can fund Leer South. We can return shareholder capital, and we would expect to do that post 2019, too. So, I can tell you, from a Board perspective, we look at this capital return program long-term.
That's -- no, that's super helpful and great to hear. And then maybe just as my follow-up, sort of more mechanical. But you've now bought back almost a third of the float, which obviously, again, in the short time span is quite impressive. But as you sort of look towards the future, I mean, I think your stock's trading about $20 million today plus or minus. Is there a tipping point where maybe you'd be more inclined to ratchet up dividend? I know you just raised it again, but more so at the expense of buybacks? Or how does the Board think of the balancing act there?
Jeremy, as we sit here today, I think we've clearly indicated the direction we intend to head as we sit here on this call and as we move forward. Those were things -- are things that will be under constant evaluation. But I think we've been clear in our intent right now as we move forward.
Got you. Thanks very much and good luck guys.
Thanks Jeremy.
Thanks Jeremy.
Thank you very much. [Operator Instructions]
Our next question will come from Lucas Pipes, B. Riley FBR.
Hey good morning gentlemen and I would like to add my congratulations. Very exciting to see this reinvestment in the industry, especially about such an attractive growth project.
Thanks Lucas.
Gentlemen, I wanted to ask a little bit about the target market for this product. Is this more Europe, is it Asia? Where do you envision this coal-to-coal? Thank you.
Well, look, it's all -- this is Paul. I'll start with that and let John pick up on it. But you look at Leer; it's been very well-received worldwide. We have customer base in Europe, South America and all over Southeast Asia, Japan, Korea. But the fact is, we're almost rationing our sales product to the various customers if we have more demand than we have the ability to fulfill it.
Now, some of those customers place a lot more value on it in their mix, and those are obviously the customers that we target. So, as we look going forward and increasing our volume of High-Vol A, it's pretty much going to be the same basic game plan. We've got a good product out there. It's known by the steel producers, and they're happy with it.
But I think the real value they see in it is that this is a product that's coming from basically one mine. That's a homogeneous scene. And they can keep this in their blend for effectively a generation. So, beyond its attributes, it's also kind of a long-term tactical play for them.
Hey Luke, this is John. I mean, if you think about Arch, we think we're pretty unique. I mean, in 2017, 50% of our mix was domestic, 50% was international. We evaluate the markets every year and try to go where we can create most value for our investors.
In 2018, we had to be 80-20. So each year, we'll look at that. But if you look at our logistics and our cost structure, we have the ability to pivot and go where the market creates the most value
That's helpful. Thank you. Thank you for that. And then my second question is kind of taking a look at slide 17, where you showed the decision tree for your capital allocation and highlight in green kind of what you're currently pursuing, special dividend sounds like, not at this time.
And then M&A is also grayed out. And I wondered, could -- you obviously studied Leer South very carefully. I'm sure you've studied the M&A market out there. But when you kind of put Leer versus M&A, can you give us more flavor for some of the metrics you were looking at? What was lacking on the M&A side that you decided to pursue this organic growth project? Thank you for any elaboration.
Yes. Thanks Lucas. Yes, as you can imagine, over the last couple of years, we've looked at about every external opportunity from an M&A standpoint that's out there. And again, we always benchmark that against what we have in the Tygart Valley and really hadn't found anything that we thought was strategic to what we were doing, created the synergistic value that we thought we needed to have.
I think we have the ability to continue to look at external M&A. But again, even after Leer South, we've got 150 million tons in that Tygart Valley that we own and fee. So, we actually can replicate Leer South again a couple of times. So, we'll continue to look, but the fact that we're producing a High-Vol A met coal in a cost structure that will travel all over the world, we think, puts Arch in a very unique position.
And as we look around the globe -- and we studied this pretty hard from a supply and demand standpoint, there's less than 25 million tons of High-Vol A being produced around the world. Arch is going to be producing almost 25% of that. We think that's a good place to be given the fact that High-Vol A continues to get a premium in the marketplace.
So, we like the way we're positioned. We will continue to look at M&A, but I will tell you, this management team is laser focused on making sure that we get Leer South execution right.
I mean, Paul and his team have done Mountain Laurel in the past. They've done Leer in the past. We've learned a lot. We think we can take those lessons forward to Leer South and create a powerful product for the market.
That's excellent. Great. Thank you. And maybe I'll sneak one last one in. Any sense you can give us on the capital expenditures by year? I think earlier you didn't quite go this far, but just for modeling purposes, this would be very helpful.
Lucas, are you talking about Leer South or just in general?
Right, specifically Leer South.
Yes. So, if we do just kind of round numbers of the total project, call it, the midpoint of $375 million. You take $90 million out of that; you're $280 million or $285 million. It's not quiet even those last two years. There's a slight uptick in 2020. And there's actually some that's spilled into 2022. So, for modeling, you may just want to divide it by two.
Perfect. Thank you very much and best of luck. It's great to hear.
Thanks Lucas.
Thank you very much. [Operator Instructions]
Our next question will come from Rob Chavez, OppenheimerFunds.
Hey guys. Good morning. You guys already commented on your seam thickness for Leer South versus Leer. But could you provide some comments on what your seam thickness looks like at Leer for 2019 versus 2018 and perhaps what 2020 looks like? Just to get a sense of what your longwall moves look like.
Yes. The -- just, I guess, on seam thickness, and I may have this a little off, but we're going from about 4.1 to about 5 or 5.1 feet in 2019 versus 2018. As far as longwall moves, right now, we have two scheduled at Leer. One has already occurred. There's going to be one in the second quarter.
If we keep running as well as we are, we could have a third longwall move in the fourth quarter. At Mountain Laurel, we'll have a longwall move starting here in about two weeks. We'll have another one in the second quarter. And if it keeps operating as it is, it'll mine out in December.
West Elk, which is our third longwall, currently, we have no longwall moves scheduled. But if we run slightly ahead, there's one planned in January of 2020. So, if we produce ahead of schedule, we could have a longwall move at West Elk in December.
And Rob, this is Deck. So, in 2019 at Leer, we do get into thicker coal; in 2020, thicker still. And in fact, if you look at 2020 forward, we actually will be in about a foot thicker coal than we were -- than we have been at Leer up to this point.
So, average seam thickness goes from 62 inches to this point to 72 inches for the rest of the life of the mine. So, clearly, that's a really positive story from a geologic perspective at Leer going forward.
Great. Thanks.
Thank you.
Thank you. Our next question will come from Jessica [Indiscernible].
Good morning Jessica.
Hello. My name is Jessica [Indiscernible].
Morning.
Congratulations on a really successful quarter. I was just hoping you guys could talk a bit about what we're seeing in the export market right now and what you expect to see in 2019. Like how much did you ship? And how much do you expect to ship moving forward given the state of the global market?
Yes, Jessica. I think, in general, what we're expecting is both the thermal and met export market to be generally comparable to 2018, maybe arguably a million tons plus or minus either way.
Obviously, there's been a pretty sharp pullback in API-2 in Newcastle. But -- and I think most people have those hedged forward for the year. So, I think taking that all into account, that's where we come up with a relatively flat year-over-year period. And we think we'll be down, call it, about a million tons from our, round numbers, 12 million to about 11 million.
And how much have you contracted so far and -- for the year? And how much of that is going -- I mean, for thermal and for met coal? And how much of that is going overseas?
Well, Jessica, that's in our earnings table on the -- or in our guidance table. So, on the met side; we're going to be pretty heavily again on the seaborne market. On the thermal side is where we'll pull back about 1 million tons versus 2018.
Thank you very much. Our next question will come from David Gagliano, BMO Capital Markets.
Hi great. Thank you so much for taking my questions.
Good morning Dave.
Hi good morning. Congrats, by the way, on the next met coal workhorse. And also, really thought of 2019 outlook, also thank you for the detailed information about both. A lot of my questions have been answered at this point, but I just have a couple of questions.
First, I do want to follow-up on Mark's questions earlier about a longer term production profile. Can you talk a little bit about the cadence of 2023 and beyond met volumes in total, particularly with regards to the existing Leer mine? I didn't hear a commentary on Mount Laurel, Sentinel. I didn't hear much so on the existing Leer mine beyond 2022. That's my first question.
Mark -- or excuse me, David. Leer, I think, on paper has 10 years. I think what's always difficult for people is the 10-year reserve is one solid block of coal and it's always interesting as the engineers at the operations kind of draw the lines where one mine starts, the other one mine stops.
So, based on the reserves that we've put forth, there's about 10 years of sighing to Mount -- or excuse me, into Leer. Beyond that, we have some options. As John said, we could either continue on in Leer for some period of time or there could be a point where it's more economic to start another operation. This Leer -- or this Tygart reserve development, we were in Phase 2 of 4 possible phases. And we've got a pipeline out there that I think is unmatched in the industry in the U.S.
Okay. So, question specifically, is 9 million tons per year a reasonable assumption 2023 to 2028? Or--
Yes. I mean, if you think about it and just use that next couple of years, Leer South and Leer just kind of continue on. Mountain Laurel sits there, 1 to 1.3, 1.4, and that Beckley sits there about 1. So, it's just kind of an unexciting quiet period for us.
That's what we like. And then just a second question. Just shifting over to the thermal business. I realize it's relatively small to the overall story these days, but you do have, I think, about 20 million tons remaining to price in the PRB for 2019 delivery.
I'm just wondering if you can talk about the current pricing environment for that 20 million tons left. Looks like fourth quarter prices were locked in, in the mid-$11 per ton range. Is that a reasonable assumption for that remaining 20 million tons or so left to price?
Yes. I think, David, your math's close. I think our average price in Q4 -- we contract for 2019 was about $11.65, $11.70. I think what we've seen heading into this quarter and we've placed quite a bit of business in January, those numbers are starting to move up. We're seeing actually closer to have about a $12 handle on all this.
All right, that's very helpful. Thank you very much.
Thanks David.
Thank you, David.
Thank you. [Operator Instructions]
Our next question comes from John Bridges, JP Morgan.
Hi good morning everybody. Just wondering on from Dave's question on the PRB, what can we expect from Coal Creek? Obviously, pricing for the 840 product's weak. You got some contracts there that keep you going for a while. But once those contracts are gone, will you be putting Coal Creek out to pasture or do you think you may be able to roll those contracts over? Thank you.
Hi John, this is Paul. Look, hey, I'll just be pretty open. As we were heading into the end of last year, we saw prices on the 8400 coal take a hell of a drop. The difference between 8,400 to 8,800 up -- opened up. I think the published numbers were about $4. But I think the physical numbers were actually closer to $4.5.
And we frankly decided that we weren't going to play in that game. We have the flexibility. We operate two mines basically as one. We just shifted the people around. So, we expect Coal Creek to operate what I'd call a 2 million to 3 million ton a year level this year.
Longer term, we're going to do what we have to do. I tell people I closed Coal Creek in 1999. And if we had to, we'd do it again. But right now, I think it's in a good place. We'll see how this plays out in the 8400 market. Frankly, the prices that are out there and the spread between the two products is not sustainable.
Right, right. But presuming the utilities are going to have to pay your cost at least, otherwise, they're just not going to get the coal they need.
I mean, at some point, mines have to generate cash.
Absolutely. One other thing. My Bloomberg stream showed PRB prices jumping in last month or two of 2018. I'm guessing that was some spot effect because the teams seems different to what you were -- report that you were getting for 2019.
Yes, John. I -- what I'd say about the OTC in the screen prices is they're directional. The OTC is not what it used to be in the PRB. The last thing I saw, it represents about 1% of the sales in the PRB. I think the prices tend to be very directional in prompt month and prompt quarter.
But you get beyond that, their value kind of diminishes. But at the same time, it's the only real public view of pricing in the basin. So, I think what you're seeing is directionally correct.
Okay, okay. Well, let's hope that continues. Congratulations on the results and best of luck with Leer South. Thank you.
Thanks John.
Thank you, John.
Thank you. Speakers, at this time, we have no further questions in the queue.
I want to thank everybody for their interest in Arch Coal. We certainly, as you can tell, are excited about Leer South as well as 2019. We look forward to updating you on our first quarter results and Leer South in April. So, thank you very much for your interest.
Thank you very much. Ladies and gentlemen, at this time, we would like to conclude today's conference. Please disconnect your phone lines and have a great rest of the week. Thank you.