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Arch Resources Inc
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Good day, and welcome to the Arch Coal Fourth Quarter 2019 Earnings Conference Call. Today’s conference is being recorded.
I would now like to turn the call over to Deck Slone, Senior Vice President of Strategy. Please go ahead, sir.
Good morning from St. Louis. Thank you for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered Forward-Looking Statements according to the Private Securities Litigation Reform Act.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by law.
I would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.
On the call this morning, we have John Eaves, Arch’s CEO; Paul Lang, Arch’s President and COO; and John Drexler, our Senior Vice President and CFO. We will begin with some brief formal remarks, and thereafter, we will be happy to take your questions. John.
Thanks, Deck and Good morning, everyone. I’m pleased to report that Arch continues to deliver on its well defined strategy for value creation and growth. Our core metallurgical portfolio excluding the transition at Mount Laurel mine turning another outstanding operational performance in the fourth quarter, with an average cost below $60 per ton and metallurgical segment margins and more than $30 per ton.
Our Leer mine, which we are in the process of replicating it Leer South had cost in the mid $40 range placing once again at the far left of the U.S. metallurgical cost curve. This is importantly, we made significant strides in reorienting Mountain Laurel to a room-and-pillar operation and expect to complete that process in the current quarter. We believe this transition sets our metallurgical segment for even greater success in the future.
As previously discussed, Mount Laurel’s recently progressed into reserves are more suitable for continuous miner than longewall development. But we expect to shift to room-and-pillar mining to translate into appreciably lower costs, enhanced product quality and more consistent operating performance going forward.
At the same time, we continue to make excellent progress on the development of Leer South which should increase the value of our metallurgical portfolio dramatically. As indicated, we are developing Leer South as a near carbon copy of the Leer mine, which continues to hit on all cylinders in steam and expanding as one of the industry's premier assets.
As a reminder, 2020 will be the biggest year of CapEx spend at Leer South with more than 200 million budget and we are comfortable and in fact enthusiastic about this level of spending. Given that it reflects a tremendous and rapid progress we are making in the build out of this world-class asset. As discussed, we expect to start up the longwall just six quarters from now on time and on budget.
The impact of Leer South on earnings and cash generation should be profound. Even at today's relatively depressing metallurgical pricing levels, we would expect Leer South to contribute an estimated $150 million in incremental EBITDA annually and substantially more than that during the other points in the cycle. That kind of step up will be transformational for Arch and its shareholder.
In short, we are retooling and upgrading our metallurgical portfolio in multiple ways. The result of these efforts should be an even more powerful cash generating profile in the future across a range of market scenarios.
As you know, since launching our capital return program in May of 2017, we have returned most of our excess cash to shareholders via buybacks and dividends. In the quarter just ended, we returned another 18 million to shareholders, bringing the total since the program has launched to $913 million. Perhaps more impressively, we have bought back 40% of our initial shares outstanding over that timeframe, which is a rare feet.
As we head into 2020, we expect to slowdown our capital return program for the time being and direct most of our excess cash to the build out of Leer South. In doing, so we expect to build an even more powerful platform for cash generation, with the potential to fuel an even stronger capital return program in the future. Should the board view such a program as desirable.
Turning now to the marketplace, seaborne more metallurgical markets appear to stabilize somewhat in recent weeks. Despite ongoing concerns about the extent and severity of the corona virus outbreak and its potential impact on the global economy.
The price of High-Vol A coal which will comprise nearly 70% of our metallurgical product mix in 2020 has rebound to 10% or so since the first of the year, and other metallurgical products is strengthening as well. In addition, metallurgical producers had now closed or idled eight million tons of production in counting, which should deliver a healthier supply and demand balance overtime.
Finally, the recent progress and global trade talks. The lifting of import restrictions in China and the continue to build out of integrated steel capacity in India and the rest of Southeast Asia all appear constructive and could ultimately translate into a stronger market environment once macroeconomic concerns begins to diminish. Most importantly, we are confident that Arch is well equipped to whether the current market downturn and just as well equipped to capitalize on the next market up cycle whenever it occurs.
In summary heading into 2020 we plan to drive forward with our efforts to reduce our metallurgical costs further, set the stage even greater, cash generation in the futures with the build out of Leer South, generate significant levels of free cash flow from our thermal portfolio, prepare those thermal assets for increasingly challenging market environments through the completion of the synergistic JV with Peabody and maintain our industry leading balance sheet strength.
With that, I will turn the call over to Paul Lang for further thoughts on our operational performance. Paul.
Thanks John and good morning everyone. As John noted, our core metallurgical franchise again executed at a high level last quarter, even as we undertook a major transition at Mount Laurel. The cost structure for the metallurgical segment excluding Mount Laurel was sub $60 per ton, which we believe is at least $20 below the median of our U.S. peer groups.
As you would expect, the Leer mine led the away with cash cost in the mid $40 per ton range. Again underscoring why we are aggressively moving forward with the build out of its sister operation Leer South. While our metallurgical segment has consistently demonstrated operational excellence. We are far from satisfied and still see significant opportunities for continued improvement.
First opportunity is the transition of Mount Laurel. While the remaining reserves at Mount Laurel are no longer suitable for longwall mining, we are enthusiastic about their potential to support an efficient and profitable room-and-pillar operation. By the end of the fourth quarter of 2019 we had four of five continuous miners operating in a room-and-pillar configuration and we expect to add the fifth unit in March.
To-date, the units that have transitioned to the new mine plan have operated well and achieved solid rates of advance. With these changes at Mount Laurel, we expect steady improvement at the operation as we progress through the year.
In total, the reconfiguration of the operation should deliver about a $10 per ton decrease in the mine's cash operating cost during 2020 as well as a meaningful improvement in coal quality and most importantly, a more consistent operating performance due to our greater ability to address the variations of geology across the reserve.
Second opportunity that should drive improvement in the metallurgical segment is the progression of our flagship Leer mine into thicker reserves. As previously discussed, we have systematically reduced costs at Leer in recent quarters and the improved geology where we are currently experiencing should continue this progress.
With a mid $40 per ton cost structure in each of the past three quarters Leer is already performing at a high level, but we remain focused on incremental improvements at the operation in coming quarters.
The third and biggest opportunity for improvement in our metallurgical segments, of course, will come with the startup of the longwall at Leer South. As indicated, we are making excellent progress in the development of this world-class asset and are well on-track to this longwall mining in the third quarter of 2021.
Just as importantly, we are maintaining our sharp focus on capital discipline and remain comfortable with our original guidance of $360 million to $390 million for the development of the mine. Within this estimate, we are netting out the cost of the replacement shields, lost at Mount Laurel against the expected insurance recovery.
In summary, we expect a step down in our metallurgical segment's cash costs in 2020 to a range a $58 to $62 per ton, and further improvement in our cash cost structure next year, with the expected volume contribution from the Leer South longwall.
We expect still further progress in 2022 with the new longwall, when the new longwall will be operational for the full-year. We believe we are unique and that we are showing a long-term decrease in our cash costs on an already U.S. industry leading base.
Moving from operations to marketing, we are also pleased with the solid progress we made to build out our 2020 contract both for the metallurgical segment during the fourth quarter. To start, we added roughly 300,000 tons of High-Vol A and High-Vol B commitments in North America, bringing our total contractor position in the U.S. and Canada to 1.8 million tons at a fixed price of around $107 per ton. We view this as a solid foundation at an attractive price, given the market conditions that prevail through the contracting season.
In addition, we increased our seaborne commitments to 2.4 million tons during the quarter with more than 90% of that at market based pricing and the remaining 10% at a fixed price for a High-Vol B product.
We believe our contracting activity to-date represents a good and healthy balance. The North American business, which we again expect to account for above 25% of our sales provides us with ratable term business and a solid fixed price.
The Seaborne business extends our market penetration into the international arena while providing exposure to potential strengthening in those markets. All told, we now have placed approximately 60% of our projected 2020 coking coal volumes and are in the midst of further negotiations with international customers.
Turning to our legacy thermal assets, our mines continue to generate significant levels of free cash, and it is helping fund our capital return program and growth in our metallurgical segment.
In 2019, our thermal assets generated over $100 million more in segment level EBITDA then they had spent it in capital. This performance brings the total on that same basis to more than $600 million of free cash generation since emergence in late 2016.
As for our thermal contracting position, overall we are nearly 82% committed at current volume guidance levels. Of these committed volumes, we have 60 million tons of Powder River Basin coal committed, of which 58 million tons are on a fixed price basis of 12.22 per ton and another two million tons were sold on an index basis. We view that position as solid in today's market environment.
Moving to the joint venture with Peabody, we continue to engage with the Federal Trade Commission as we make our way through the regulatory review process. We remain confident that this business combination will prove beneficial to all stakeholders, including our customers, employees and shareholders, by creating a long-term efficient, stable and cost competitive supply platform in an increasingly challenging energy marketplace. As you can appreciate, we cannot specifically comment on the process other than to say things are progressing as expected.
Looking ahead, we expect another strong year of operational execution in 2020 across our entire platform, we believe we are uniquely positioned to manage through and even thrive in the current market environment. At the same time, we are looking to improve on every key operating metric and plan to extend our competitive advantage further in the quarters ahead.
With that, I will now turn the call over to John Drexler, our CFO. John.
Thanks Paul and good morning everyone. As John and Paul have indicated, absent earlier than expected transition at our mountain Laurel operation, our fourth quarter results represent a continuation of our strong execution on our plan.
Since our emergence from restructuring, we have purposely maintained the foundation of a strong balance sheet and abundant liquidity. That strong foundation combined with our Tier 1, low cost long lived operations has allowed us to generate healthy cash flows even as the market cycle has weakened, but more importantly allows us to expect ongoing healthy cash flows as we work through the market cycle.
The fourth quarter is a good example of our cash flow capability, even in challenging markets. Despite the transition costs we encountered at Mount Laurel, we generated $86 million of operating cash flow and less than robust coking coal and thermal coal markets.
Our maintenance capital during the quarter was $36 million, leaving $52 million of free cash flow. That cash flow was utilized to continue the build out of the Leer South mine and to acquire the Leer North reserves to significantly extend the life of the Leer operation.
As we look ahead to 2020, we continue to expect our low cost portfolio to generate cash well in excess of our maintenance capital requirements and to utilize that free cash flow to continue to build out of our world-class Leer South operation while continuing to maintain a strong balance sheet and healthy liquidity.
Let's now focus our attention on Arch's capital allocation and liquidity position. As we signaled during the last earnings call, we have significantly reduced our capital return program during the fourth quarter given the market downturn. During the quarter, we paid our recurring quarterly dividend of $8 million and utilized $10 million to buy back 133,000 shares.
Moving forward, we are committed to the quarterly dividends with Arch's Board approving an 11% increase in the quarterly rate from $0.45 per common share to $0.50 per common share, which is scheduled to be paid on March 13th to stockholders of record at the close of business on March 3rd.
However, as we look at our capital return program in 2020, we expect that lower met-coal pricing along with the higher capital spending associated with the Leer South build-out will result in a reduction in excess cash flows available for share repurchases.
Quite frankly, that is how the Board always envisioned the program working. When excess cash flows are high and needs are modest, return capital via buybacks. Conversely, when excess cash flows are reduced, the amount of capital available for share repurchases is reduced as well.
As John indicated in his remarks, we plan to direct our excess cash flows after the quarterly dividend payment to the build out of Leer South. Once online the cash generating capability of that complex will rival that of Leer, which even in today's lower met market environment, is capable of generating $50 plus of cash margin per ton.
Regarding our liquidity, we ended the quarter with $412 million of liquidity with $289 million in cash and $113 million in borrowing capacity on our credit facilities. As indicated on previous calls. While we are comfortable with our ability to utilize existing cash flows to fund the build out of Leer South, we will continue to explore and are confident that we have the ability to raise additional modest levels of capital at attractive rates to help facilitate the construction of the project.
As Paul mentioned, the removal of the longwall at Mount Laurel proved to be more difficult than anticipated. Conditions developed during removal that precluded us from removing 123 of the longwall systems 176 shields. As you know, we are refurbishing this longwall to be utilized at Leer South.
As a result of the loss, we will replace the 123 shields which will arrive on-site well in advance of our anticipated startup date in the third quarter of 2021. We are finalizing an insurance claim for $30 million to $35 billion that will cover the amount of capital required for the new shields. Proceeds are expected prior to mid-year.
Regarding our capital spending for 2020, while we are guiding to a range of $310 million of CapEx at the midpoint, $220 million of that is for the development of Leer South, leaving $90 million for maintenance CapEx. We view that as very manageable levels of CapEx for our portfolio.
Absent Leer South, even in challenge coal markets, we would be generating significant free cash flow. Leer South offers a great return in a rapid payback in any market scenario and is where we will direct our excess cash flows.
As we wrap up 2019 and step into 2020, we are pleased with the position of the Company. Our low cost operations are designed to generate meaningful cash flows in all stages of the market cycle.
Combined with the foundation of a strong balance sheet and healthy liquidity, we are well positioned to not only withstand the bottom of the market cycle, but we continue to improve the position of Arch through the development of another world-class ultra low cost operation with Leer South.
We remain enthusiastic about our key drivers of value, the ongoing build out of Leer South, the transition of Leer to the heart of its reserve base, the transition of Mount Laurel to a lower costs and operationally more consistent room-and-pillar mine and the ultimate completion of the joint venture with Peabody.
With that, we are ready to take questions. Operator, I will turn the call back over to you.
[Operator Instructions] Our first question comes from Lucas Pipes, B. Riley FBR.
Hey good morning everyone.
Good morning Lucas.
Good morning Lucas.
I wanted to follow-up a little bit, just from that last point, John, that you were making in regards to the amount of leverage and liquidity that you could be comfortable with. Could you elaborate on that a little bit, like when you think about liquidity, when you think about leverage, where could we go if this market stays a little bit weaker for longer? Would appreciate maybe just some few numbers around that. Thank you.
So, Lucas, obviously as we have indicated during the course of the call, we continue to remain very comfortable with the cash flow generating capability of the profile that we have positioned the a Company. With an anchor asset like Leer even in very difficult markets generating meaningful amounts of cash flow, as we have indicated, we are comfortable we can continue to fund the needs of the Company and the CapEx build out at Leer South from existing cash flows.
As I also indicated in my remarks, you know we think that there are other opportunities for modest levels of additional leverage. We obviously have a very strong balance sheet. We expect to continue to maintain a very strong balance sheet and healthy liquidity as we manage through this.
But we will continue to explore that if we think there is opportunistic ways to add on some additional smart leverage, we will consider that. Absent if those avenues aren't available, but we think they are, we have remained comfortable that we can continue to build out of Leer South from existing cash flows.
Yes, that is helpful. I appreciate that. And then Just a quick follow-up on Mount Laurel. Good to see that transition occurring. Could you tell us what level of production we can or should expect from this mine going forward under the current consideration and also be curious in terms of where that mine would be shaking out on the cash cost side going forward with their continuous miners. And then just separately, I noticed there were some movements on the other thermal portfolio in regards to 2020, what changed their it look like the committed times conducted. Thank you very much.
Alright Lucas, this is Paul. I guess start with Mount Laurel. As I mentioned earlier, we currently have four to five CMs running. The fifth will start up in March and what we are targeting right now is a production level of about 1.2 million to 1.3 million tones.
But as you think about it Lucas, this mine was set up to run four million tons a year and we have a lot of opportunity to expand that. But right now we are going in at that kind of 1.2 million to 1.3 million ton rate.
On the cost side, I think Mount Laurel will probably fall right in what I would call average for the U.S. industry, you know, in that mid-80s range. If I remember your third question on the other thermal, I think what you are seeing is the impact of a Coal-Mac sale and the committed ton with Coal-Mac with the sale.
Okay, gotcha. So that is really straight forward. Well, this is all very helpful. I appreciate that and best of luck.
Thanks Lucas.
Thank you Lucas.
[Operator Instructions] Our next question comes from Daniel Scott, Clarksons.
Thanks guys. Real good quarter particularly in the met segment with all that was going on. Just want to follow-up on Lucas's question about Mount Laurel. Is that run rate you are describing, assuming you keep it there at 1.2 to 1.3, what kind of reserve life are we looking at for that piece?
Well there are 15-years, 20-years.
Okay. So that is a steady part of the balance. So then when I think about that mine drops $10 in its cost structure, you add Leer South that presumably is going to have a four handle in its cost structure. I know you said you were going to be trending down this year versus last year, next year versus this year. When you get to the point of full production from Leer South, are we talking the potential without giving hard guidance that mid-50s on average costs is not unreasonable.
I mean that is the direction we are trying to get to.
Well that would support a lot of free cash flow certainly. And then the two last ones. One was it was reported that Springfield is closing a couple of the units that are served by Viper, and then given the Cole-Mac sale is in the joint venture covering kind of everything else is Viper, you know core asset at this point.
You know I think the announcement on city of Springfield was not a surprise. Obviously we knew what they were trying to get to with their integrated resource plan. They are basically shutting down to the older units that ran what I would say best on a part time basis. The two big units especially the newer one will continue to run.
Incrementally its about 100,000 tons we think of lower production out of Viper. Viper is one of those interesting mines. It is what it is, it is a captive to the CWLP in the city of Springfield, it generates a nice little bit of EBITDA and is it core, is it not, if there was a way to create value from it by some other means, I think we would explore it.
Just to follow on there again. We do have a five-year contract in place that has been secured for the next five-years with most of the volume from Viper. So, as Paul said, we are really not subject to the open market very much at all. So we think we are well positioned certainly with that in mine for the next five- years or so.
Alright, it is a good defense there. And then I guess, lastly, longwall move schedule for Leer, any this year?
We just finished one at Leer last week. The other one will be in late Q3 early Q4.
Great, very helpful. Thanks guys. Good job.
Thank you.
Thanks.
Our next question comes from Mark Levin, Benchmark.
Great. Thanks very much guys. So a couple of quick questions. One for the U.S. thermal. How much PRB coal do you expect to sell this year versus last?
We didn't give exact guidance Mark. But I think you can imply from our thermal guidance. We look like we are going to be down anywhere from two million to five million tons versus last year.
Okay, great, perfect. And then second question is for John Drexler. John, when we are doing that kind of EBITDA to free cash flow bridge, obviously you noted CapEx and you noted cash interest expense. Is there anything else below the line, it is not captured in EBITDA that needs to be accounted for to get to that free cash number?
Yes. So, Mark of a few other items just to reference is as you know from a tax position, we are not expecting any cash taxes for the foreseeable future, so that is not a component. And so then there are some other items that provide a positive impact that we expect in 2021 that we have referenced is the PRLA settlement that gain of 39 million that was recognized in the fourth quarter. We expect the majority of that gain to be realized over the course of 2020.
We do expect an AMT tax refund somewhere to the tune of called it $17 million to $20 million flowing through in 2020, as well. And another item that we reference in our guidance, while we provide SG&A guidance, we do split that out between cash and non-cash. There is a stock-based compensation component of that that is flowing through and negatively impacting EBITDA, but won't be in a cash component that is in a range of $18 million to $20 million.
So you need to kind of add those positives back to reconcile. We don't expect any - while we are affected by working capital adjustments over the course of the year, we think a lot of those things smooth themselves out.
Got it. And I believe you guys are, there is a $52 million purchase of reserves from Blackhawk. Is that expected to hit this year and how would that be funded?
So that cash came through in the in the fourth quarter. So that is already reflected in our cash balance and affecting liquidity.
Got it. Okay, perfect. That is terrific and I think I had one more question. It is probably circling back to - broader market comment about our net market. So this morning, [Mittal] (Ph) mentioned in his press release that they are seeing signs of stabilization and improving demand in European and Brazilian steel markets, a lot of the destocking is over. I'm just curious if you guys are feeling any better about either the European or Brazilian met markets heading into 2020?
Mark, this is Paul. I will start with rewind about six weeks, it was a pretty bleak picture. I think we had a lot of concern of our customers, particularly in Europe, and South America was - I don't want to say worse, but it was pretty depressing also.
What we have seen though, is really last couple of weeks, there has been a little more positive news coming out of it, and a little more discussion over what we are going to be doing in 2020. And I think that is reflected in the index as you are seeing, we have seen a movement of about $10 on High-Vol A prices since the end of the year.
You know Mark as I made in my opening comments, we have seen eight million tons of production come out, we think that number is going to grow probably about several million tons, with a lot of the cost structure in Central App, I think at current price levels is just going to be challenging.
So, as Paul said, we have seen an uptick over the last couple weeks, there is probably a little pause right now because of the virus concerns. But, as we head into the back half of the year, we certainly could see a pickup in the market and with our cost structure and our logistics I mean we will be prepared to capitalize on that. So we feel pretty good about where we are and where we are going.
That is great color, I appreciate it. Last question, this one is actually for Deck. Any thoughts on what you think PRB consumption or demand is going to be in 2020 versus 2019, given kind of where gas is today and the inventory situation?
Yes, Mark, thanks. I guess I would say, clearly that is a hard call with gas prices in the mid-180s, that is tough. And obviously, we have had a pretty mild winter so far. I guess for us, we are going to focus more on kind of the strategy, which is we are going to take whatever is there in terms of the market, we are going to continue to generate high levels of cash to the extent we can, as we have been doing with our thermal assets, and really that continues to be our focus.
As we have indicated, since emergence, we generated about $600 million of segment level EBITDA in excess of capital expenditures. And so rather than sort of sweating, where the markets going to be, we know it is going to continue to be under some level of pressure. We are just going to continue to focus on that that harvest strategy and taking cash to fullest extent possible managing our capital in a disciplined way.
So hard for us to call exactly, as we saw in 2019, it was a pretty significant step down in terms of overall thermal consumption. 2020 could be another one still. We are not starting out great obviously, but we think we have got the right strategy for that.
Thanks. I appreciate the time and congratulations guys.
Thanks Mark.
Thank you Mark.
The next question comes from Lucas Pipes, B. Riley FBR.
Good morning again, and thanks for taking my follow-up question. I wanted to follow-up actually on some of the kind of bigger picture met-coal market questions that that just came across. And if you think about kind of the balance in the North American market is there a need for more production cuts? And if so roughly how much? Thank you very much for your prospective on that.
You know Lucas, I will let Deck jump in here. But I think, certainly with a cost structure, call it 80-ish for average, I think it is going to be challenging the current pricing for a lot of these guys to make it. You know, some of them also had pretty stressed balance sheets, which also is going to put a challenge.
But I guess, you know, we look at kind of the world and what is going on globally and you know, as we put out a number of times when we look at a very conservative demand growth over the next five years, a very conservative depletion rate. You know, we think the world is going to be under supplied over the next five years to six years.
I think the challenge of some of the guys in North America is kind of making it to that point with their cost structure. I just think it is going to be very challenging. I don’t know Deck, you got any comments?
Yes. Certainly Lucas would agree with all those comments and you know, the fact is, and as we have indicated, you know, we think this downturn is actually pretty constructive for us. We think that separating the wheat from the chaff is fairly useful here.
There is high cost production in the market that really should come out, high cost production that was kind of clinging to the rocks even in the high priced environment. And so, because of the barriers to exit for a range of reasons, so you know, this turndown is really we think healthy from a supply demand balance in the long run. Quite obviously we are, we are built to weather this, but we think several more quarters would be desirable.
The downturn really began in earnest sort of July 1, of 2019 and in just seven months, the fact that eight million times has already come out to the market kind of tells you everything you need to know. There was production that really just didn't need to continue to produce. And as we have seen, I mean, some of that quite frankly, some of those reductions happened even before the market turned down, which is significant.
And then, you know, some happened 10 minutes after it did. We have seen this steady drumbeat of additional reductions. And so we would like to see this play out for a couple of more quarters quite frankly, we are just not sure that in particular in North America that the supply side can hold up. And so what is the right level? We couldn't tell you that, but quite frankly we could say that in the U.S. there is production that that needs to dissipate.
We would also add that, we went through a three-year up cycle with very limited investment in expansion capital, which was significant development when you go through sort of $200 pricing for three years and there is very limited investment in new mining capacity. I think that speaks well to this sort of constructive nature of coal markets going forward.
This downturn probably ensure that that continues and as John said with depletion, you know as the a natural resource business that we are going to have depletion and we really think this sets up well for the next five to 10 years in terms of a healthy supply demand balance and coking coal markets globally.
And Lucas just to follow on. I mean if you think about our focus on High-Vol A, I mean you know we think that that demand is going to be strong for decades and with our cost structure and our logistics, I mean we think we are well positioned from a quality standpoint as well. There is just not a lot of people around the globe producing high quality, low cost, High-Vol A coal.
And Lucas just one more comment. It is interesting too. We are starting to see a little impact in the international arena as well. We saw a shutdown in New South Wales, it is going to be soft coal, just last week there is structuring that is going on in Mozambique and so it is not confined to the U.S., the U.S. seems to be, where, where we are going to see the biggest cuts quicker.
Very helpful perspective, maybe one quick follow-up on just on the back of this. In North America you have some coking coal assets pipeline in restructurings. Is there anything that could be of interest there, or you are pretty happy with your portfolio and to build out yourself?
You know Lucas, as you can imagine, I mean, we look at everything that becomes available and with a critical eye. But we also benchmark it against what we can do with Leer South in that reserve 200 million ton, and really quite frankly, nothing stacked up yet. From a cost standpoint, from a quality standpoint and our ability to get it to the port. So we will continue to look around, but we like our organic growth strategy very good, so.
Perfect. Great. Thank you very much for the additional color. Best of luck.
Thanks Lucas.
Thank you Lucas.
Our next question comes from Dave Gagliano, BMO Capital Markets.
Hi, thanks for taking my questions. I apologize if this has been covered already. I just wanted to come back to the - plans and thoughts there. After 2020 obviously or not obviously, but after 2020 it looks like free cash flows generation goes up quite a bit assuming market conditions hold relatively stable. So, I was just curious about the philosophy prioritizing capital allocation plans after Leer South has developed. And is there a preference for more buybacks, special dividends, that kind of thing or other uses? Thanks.
Hey Dave good question. Obviously, what is most important is the foundation that the entire company has built around which is significant cash flow generation, right. The low cost assets in any market environments are going to allow us to generate free cash flow, it is only going to be enhanced as we move forward with Leer South.
For the last several years, we have been very focused on a capital return program. Back when markets were healthier and we didn't have more significant capital needs of Leer South, it really focused on share repurchases, because we felt that that investment was an appropriate one. We have made big strides there, we have reduced the shares outstanding by 40% during the course of that program.
Obviously, we have indicated, that we will have a shift right now with a lower market environment, coal market environment and higher needs right now for bringing on significant cash generating asset. But as you referenced, as we move forward into the 2021 - post 2021 time period, this cash flow generation is going to be substantial. That is a great opportunity for us.
We will continue to evaluate longer term as a management team and with the Board on what ultimately that we will do here. But we continue to believe that and - in Arch is an investment that is appropriate and so there will be a lot more to come over that time period. And obviously, we will keep the markets informed of our directions. John.
Dave, just to follow-on. Certainly, we the investment in Leer South as a prudent business decision as I said early on, on an annual basis and incremental $150 million of additional EBITDA, even in this pricing environment is pretty compelling for our investors, we think.
So, we are going to spend that capital this year, quite frankly, as fast as we can spend it in as quick as we can get this production up in running. And I can assure you, my Board, and I talk about capital returns at every Board Meeting. So as we get into 2021, and we are generating all this cash clearly that will be a topic that we cover very early on.
Okay. Really what I was - and I appreciate those answers, thank you. And so just to clarify, really what I was trying to get to, beyond 2020 is the preference for capital returns in whatever form or is there more preference for or shift in preference for inorganic or organic opportunities.
Dave, I think that will depend on the business environments, the market environment and as I said I mean those conversations are ongoing with our Board and certainly we will make the right decision, but the management and the Board’s focus today is to get Leer South up in running as quickly as we can.
Okay. I appreciate it. Thank you.
Thank you Dave.
Our next question comes from Chris LaFemina, Jefferies.
Hey good morning. Thanks guys. Thanks for taking my question.
Hi Chris.
First on Leer South, I think you said that you expect to be able to fund that project out of existing cash flows. Does that mean that you expect free cash flow for Arch coal in 2020 to be positive? And secondly, with the development profile for Leer South, I’m assuming coal prices stay relatively stable, a little higher from here. I think Dave made a point earlier that your free cash flow should improve significantly beyond 2020. But then you also commented about looking for potentially adding on some smart leverage, but if the Leer South project is covered by cash flows in 2020 and then your free cash profile specifically improves beyond 2020. I'm just trying to reconcile what you might do to add leverage to the business when it seems like if anything, your net debt should be going down?
Yes, so Chris, this is John Drexler. I think, as we have discussed over the course of this call, we are confident that the ability of the Company to generate significant excess cash flow from all phases of the market cycle is meaningful and we have indicated over the course of the call you know given today's environment, we believe in our expectation moving forward, we can continue to fund Leer South from existing cash flows.
I think I noted in my discussion with Mark that there is some other positive cash impacting items as well. So as we look at the totality of that, clearly, we continue to believe the opportunity is there to fund Leer South from existing cash flows.
With all that said, we know markets can be volatile, we know markets can be dynamic. And so, we will continue to explore opportunities to put on very modest levels of leverage, probably designed in a way that could be paid back or paid back in accordance with getting Leer South back online.
Any type of leverage that would be brought on would the very modest, would not stress the balance sheet. And once again, as we continue to watch markets evolve, we will be prudent in evaluating all of those types of opportunities.
That is very helpful. Thank you.
Our next question comes from Michael Dudas, Vertical Research.
Thanks for squeezing me in guys. John Drexler, could you remind us how much to-date has been spent on Leer South. And what is the cadence and where is the peak kind of level spending that you anticipate whether it is this year or early into 2021? And --.
As long as we are still online. I think we got the majority of the questions related to Leer South. So from a capital expenditure standpoint, we are guiding 360 to 390. We have indicated in 2019 that we incurred $103 million of capital. And our capital guidance for 2020 which is the most significant year of capital required for the build out it is $220 million.
So then backing into what is remaining in rounded numbers, it is around $40 million to $70 million that would be remaining in 2021 in advance of the longwall starting up in the third quarter of 2021 that is essentially the cadence. So 2020 is the significant year in CapEx and once again all designed around making sure we are in a position to start the longwall up in the third quarter of 2021.
Our next question comes from Wayne Cooperman, Cobalt Capital.
So just follow-up on that last question. What is the actual CapEx number for 2021 in total and is there a number you guys are comfortable using as sort of an ongoing capital spending number beyond that? And I have one more question after this one.
So Wayne, from a capital perspective for 2021 we don't provide guidance to that other than the fact that you can back into the guidance for Leer South, right. Maintenance CapEx this year is $90 million. I think we have made indications previously that for the structure of the Company as it is today, that kind of $80 million to a $100 million range going forward is a comfortable range for the Company from a maintenance perspective.
That includes Leer South after it is up in running.
Once again we haven't provided that specific guidance for 2021 and maybe there is a modest step up in that capital for maintenance for Leer South going forward, but it wouldn't be significantly different from that range I just described.
So I just, the quarter - since you had a net income loss, the shares outstanding was like 15 million. Assuming you had an - like what was the diluted shares outstanding be on - assuming you have positive net income is 15 the right number? It seems a little bit low.
Yes, so 15 is the actual shares outstanding. If you go back to the previous quarters where we had net income, I would say the diluted effect of those shares is anywhere from 800,000 to a million and a rough range. I guess you can go back to the actual filings themselves and see that. So once again, because it was a net loss at the bottom line accounting rules require that we have not taken in the dilutive effect of the dilution of the shares. So once again, I think you can go back to the quarterly filings but it is anywhere from call it 0.5 million to a million shares that you should have access to those specific.
And if I was being conservative and you guys obviously get back to net income, 16 million give or take would be about the right number.
Not out of the range of reason.
Alright. Thanks very much.
Thanks Wayne.
Thanks Wayne.
Thanks Wayne.
And we have no further questions in the queue at this time. And I would like to hand the call back over to John Eaves.
Thank you. I want to thank everybody again for your interest in Arch and for joining the call today. As discussed, 2020 could well be a year of transition for the industry following a three year up cycle that leveled off in mid 2019. But Arch is exceptionally well-equipped ride the commodity cycle. While 2020 could start choppy, corrective forces are already underway in the marketplace, and long-term global outlook for met-coal is positive.
In closing, let me remind you of the key value drivers that we believe like Arch an attractive investment. We have some of the industry's lowest cost mines producing some of the industry's highest quality products. We have a balance sheet that will serve us well regardless of the market and we have a compelling organic growth story that we believe is unmatched in the industry. In short Arch is positioned to manage effectively through any downturn and thrive over the long-term. Thank you and we look forward to updating you in April.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.