Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2021-Q4

[Operator]

Good day. And welcome to the Arch Resources, Incorporated Fourth Quarter 2021 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.

[Deck Slone, SVP of 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 our formal remarks, we'll be happy to take questions.

With that, I'll now turn the call over to Paul. Paul?

[Paul Lang, CEO and President]

Thanks, Deck, and good morning, everyone. We appreciate your interest in Arch and glad you could join us on the call this morning.

I'm pleased to report that overall, Arch finished 2021 in a strong fashion, making tremendous progress on nearly every one of our key strategic priorities despite some of the potential challenges we experienced in the last three months of the year.

During the fourth quarter, we delivered a record gross margin in our core metallurgical segment, ramped up to near normal production levels at Leer South, generated high levels of cash in our legacy thermal segment, drove ahead with our efforts to reduce and the fees the long-term closure liabilities at those thermal assets and restored the balance sheet to pre-pandemic strength. In keeping with this significant progress and given the board's great confidence in the company's business outlook, we are today announcing the resumption of a robust multifaceted capital return program that we believe will drive significant incremental value for our stockholders.

As you may recall, during the initial phase of our capital return program from May 2017 through March 2020, we returned more than $900 million to stockholders through a recurring quarterly dividend and the repurchase of approximately 40% of our shares outstanding. We paused that program in Q1 of 2020 in the early stages of the pandemic to preserve capital and to facilitate the ongoing build-out of Leer South.

We viewed that decision is a relatively easy one, given the transformational nature of the Leer South project and its tremendous potential to elevate our future cash-generating and capital return capabilities. But we also expressed our resolute expectation that we would resume our capital return program once Leer South was up and running, our balance sheet was restored to its pre-pandemic strength, and we've mapped out a plan to address the closure liabilities of the thermal assets.

With Leer South now approaching normalized production levels, the balance sheet effectively in a net debt neutral position and the thermal mine reclamation fund established and systematically increasing, we have arrived at that moment. The board views this as an entirely appropriate time to launch the capital return program and is deploying a new allocation model that we view as balanced, durable and well aligned with stockholder interests and preferences.

This new allocation model has two complementary tracks for allocating our future discretionary cash flow, which we define as cash flow from operations minus CapEx and minus contributions to the newly created thermal mine reclamation fund.

We plan to return the first 50% of our discretionary cash flow to stockholders through our existing fixed quarterly cash dividend, along with a new variable quarterly cash dividend. We intend to use the remaining 50% of the discretionary cash flow for possible share buybacks, special dividends, the repurchase of potentially dilutive securities and/or capital preservation. This last component, capital preservation is worth highlighting because it not only helps ensure our ongoing financial flexibility, but also enhances the opportunity for potential buybacks at points throughout the full market cycle.

As indicated, we plan to deploy this new capital return model in the second quarter of 2022, based on the first quarter's discretionary cash generation. We intend to pay our new variable quarterly cash dividend along with our continuing fixed quarterly cash dividend simultaneously and on the same schedule we pay our recurring quarterly cash dividend.

We're confident that this new capital return model will drive significant value for our stockholders in future periods and look forward to reporting on these capital returns as we proceed through the year.

Moving to Arch's ongoing strategic pivot towards steel and metallurgical coal markets, we remain focused on our clear and unwavered strategy for achieving this objective. As previously noted, the centerpiece of this pivot, the development of a world-class coking coal portfolio is nearing completion with the ramp towards full production at Leer South. But we're still moving forward with other components of this transition of becoming a pure-play coking coal producer as we harvest the remaining and still significant value of our legacy thermal assets, continue to shrink their operational footprint and drive forward with prefunding of their final closure costs.

Over the course of 2021, we reduced our asset retirement obligation in the Powder River Basin by roughly 20%. Completed final reclamation work on the vast majority of the disturbed area at the Coal Creek mine, preparing that operation for final closure and made an additional investment in a new thermal mine reclamation fund that we believe could approach fully funded status by the end of 2022.

In addition, we acted further to pare down our thermal operating exposure through the sale of our equity interest in Knight Hawk Holdings for $38 million. As you know, Knight Hawk is a thermal coal producer in the Illinois Basin. We believe that these complementary steps, coupled with our recent success in building out a substantial and profitable book of contract business for our thermal assets, positions us well to either pursue the monetization of the thermal assets on the one hand or to continue to wind them down in a value-creating and response manner on the other.

Now I'd like to share a few thoughts on coking coal markets before passing the call to John. Coking coal markets remained tight at present with Arch's primary metallurgical product, High Vol A coal currently assessed at $390 per metric ton on the U.S. East Coast. While we clearly don't expect these elevated prices to last forever, we continue to view the overall coking coal markets as well supported.

Here at the outset of 2022, global steel output remains strong, almost everywhere apart from China. And even there, we see indications that Chinese steel sector could be shifting back into an expansion mode in the not too distant future. In addition, Indian steel producers are reinitiating their pre-pandemic expansion projects and India's coking coal imports have resumed their strong upward trajectory. Just as significantly, global coking coal supplies remained under pressure.

Australian coal exports fell by roughly 4 million tons in 2021 when compared to a weak 2020 and were down nearly 10% when compared to the pre-pandemic year of 2019. While U.S. coking coal production bounced back meaningfully after a challenging 2020, it also continues to undershoot pre-pandemic levels by a wide margin. Finally, Canadian export levels were relatively flat in 2021 on a year-over-year basis against what was quite obviously an already depressed level.

In short, we believe 2022 is shaping up to be another strong year in coking coal markets. We expect countries around the world to resume and steadily accelerate efforts to build out new fuel-intensive low-carbon economies. With our world-class metallurgical asset base, premium High-Vol A product slate, industry-leading ESG performance and top-tier marketing and logistics expertise, we are confident in our ability to capitalize on these developments and trends, both in the near and long-term and to generate substantial value for our stockholders and other key stakeholders in the process.

With that, I'll now turn the call over to John Drexler for further details on our operational and marketing performance. John?

[John Drexler, COO]

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team rose to the occasion yet again in Q4, delivering excellent progress on the corporation's key strategic objectives. And while our operational execution during the quarter was dampened by the continuing ramp at Leer South, we ended the year with good upward momentum across all of our operations. As I've stated many times in the past, Arch is truly fortunate to have such a high-performing workforce, and I fully believe that the team's tremendous dedication and commitment to excellence in every facet of performance sets the stage for even greater success in 2022.

Let me begin my remarks with a quick recap of our ESG execution. As most of you know well, Arch's corporate culture is deeply rooted in a commitment to excellence in safety, environmental stewardship, community engagement and business ethics. And that fact was again on display in 2021, particularly in the environmental arena.

We completed the year with a perfect zero in environmental compliance across our entire coking coal and legacy thermal coal platforms, which is to say that we had zero environmental violations and zero water quality exceedances company wide. We believe this is an unparalleled performance for the U.S. coal industry.

The water quality compliance numbers are most impressive. During 2021, we conducted 134,000 water quality measurements at 600 water discharge points across our operations and didn't record even one minor exceedance. It goes without saying that it's impossible to achieve that level of performance without highly effective environmental management systems in place across the organization and without a highly skilled team that brings tremendous focus, precision and rigor to every single task every single day.

Let's turn now to our operating performance. As I noted at the outset, Q4 was not our finest operating performance in our metallurgical segment from a production and unit cost perspective, but it was a quarter of significant progress nonetheless. Our average cost for our coking coal segment was $86.38 per ton, reflecting the ongoing ramp at Leer South, inflationary impacts, COVID impacts and localized geologic variability at our other mines that fall into the category of just mining.

It also reflects the impact of the right kind of cost pressure, the kind that stems from higher sales-sensitive costs caused by higher pricing. But I am pleased to report that we are seeing efficiency improvements across the portfolio in Q1 and that the Leer South ramp is approaching rates we have been expecting. In fact, over the last two weeks, Leer South has been achieving operating rates that are in line with our full year expectations for that new world-class asset. Of course, we remain sharply focused on ensuring that we maintain that pace and are equally focused on finding ways to ratchet up the mine's performance still further as we progress through the first quarter and the balance of 2022.

While we are indeed pleased with the operating momentum we are building in our core coking coal portfolio, we nevertheless expect some level of continued upward pressure on our costs in coming quarters. Those pressures stem principally from two factors.

The first is cost inflation. As we progress into 2022, we expect to experience higher labor costs due to intensifying competition for skilled workers both inside and outside the natural resource space. In addition, we expect to pay more for key materials, including steel, which has implications for our underground mine roof control plan and the bolts, plates, mesh and other steel consumables comprising it. Overall, we expect general inflationary pressures to be somewhere in the 5% to 10% range.

The second major cost driver is increased sales sensitive costs stemming from higher average sales realizations. As you know our mines pay a 5% severance tax to the State of West Virginia based on the average selling price of their products. And we also pay royalties on certain leased reserves. Although I would add that we are fortunate to own most of our reserves in fee and consequently pay no royalties on those reserves.

As a result of those two potentially significant cost drivers, we are guiding to costs of between $68 and $78 per ton with the wide range indicative of the uncertainty inherent in the macroeconomic environment as well as the coking coal pricing environment. Regardless of where our costs ultimately fall out, we remain highly confident that we will continue to be one of the lowest cost coking coal producers, if not the lowest cost coking coal producer in the United States.

I would also be remiss if I didn't flag another pressure point on our coking coal franchise in early 2022, which is rail service. Rail service has been inadequate to meet our needs since 2022 began, particularly due as we understand it to system wide COVID-related staffing shortages and the disruption stemming from the Curtis Bay terminal late December explosion.

But we continue to have good and constructive discussions with the rail carrier, who we believe is highly focused on working with us to address their staffing issues as well as our growing need for trains. So while the repairs of Curtis Bay may take several more months to complete its partial operating status, along with other alternative outlets for our production, including our 35% owned DTA facility in Newport News, Virginia gives us confidence that the issue is manageable moving forward.

While there still is work to do, we believe we have a good collaborative plan in place with the railroad and are cautiously optimistic that we will see steadily improving rail performance as we approach the final weeks of the quarter and as we progress into April. But the challenges in January and February are likely to result in Q1 coking coal shipments that could be down by as much as 25% quarter-over-quarter. It is also why we have chosen to provide a very wide guidance range of 9 million tons to 9.8 million tons for our 2022 coking coal sales volumes.

In all instances we hope we are being conservative, but we're also pleased that even with these challenges, 2022 appears to be shaping up as another exceptionally strong year in terms of our projected financial performance.

On the legacy thermal front, we again made excellent progress on our dual objectives for that segment by first, skinning down and defusing our long-term mine closure liabilities; and second, harvesting substantial amounts of cash from those assets. In addition, with the strength in the thermal markets that developed late in the third quarter and carried into the fourth quarter, the marketing team was successful in layering in a book of thermal business across multiple years that set a record in terms of both volume secured and pricing achieved.

On the objective of skinning down our long-term mine closure liabilities. We trimmed our Powder River Basin asset retirement obligation by a total of $40 million or around 20% over the course of 2021 principally via our accelerated efforts to complete final mine reclamation work at the Coal Creek mine.

On the harvesting of cash objective, we generated more than $68 million of segment level EBITDA from our thermal assets during Q4. That brings the total EBITDA we've generated from our thermal segment since Q4 2016 to $904 million, which stands in stark contrast to the $110 million of CapEx we've invested at our thermal operations over that same time frame.

Moreover, we have in recent weeks added to our Powder River Basin sales book for 2022 and out years and now stand at approximately 76 million tons of thermal coal committed in the Powder River Basin at a projected average selling price of $16.30 per ton, which is easily a record for our Powder River Basin mines. With those sales, we are effectively sold out in the Powder River Basin and at our West Elk mine in Colorado where we are targeting production of nearly 5 million tons in 2022.

With this progress, we are guiding to 72 million to 78 million tons of thermal coal shipments in 2022, again, opting to provide a wide range, given somewhat erratic rail service in the West as well.

Before closing, let me provide some context around our CapEx guidance for 2022. As indicated, we are projecting capital spending of $150 million to $160 million in 2022 with roughly $110 million of that total going towards sustaining CapEx in our metallurgical segment. Approximately $25 million being expended on a new filter press at the Leer mine that should bolster production by 150,000 tons at a de minimis operating cost and around $15 million supporting the legacy thermal assets.

I might add here that the capital spend in each instance is higher than once expected due to inflationary pressures. I would also note that even with these pressures, the payback on the filter press at the Leer mine will be approximately 7 months at current price levels. In summary, we are achieving steady and significant improvements in our operating performance at Leer South and across the entire portfolio, but remain concerned about near-term rail service.

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

[Matt Giljum, CFO]

Thanks, John. And good morning, everyone. It's worth noting that Q4 marked a record quarter in the history of the company with record metallurgical segment margins, net income, earnings per share and EBITDA, despite the fact that it was a lackluster performance from an operational execution perspective. We view that fact as further evidence that our pivot towards steel and metallurgical markets is driving significant value today and has the potential to drive still greater value in the future.

Let's now turn to the fourth quarter cash flows and year-end liquidity. As expected, fourth quarter cash flows increased significantly from Q3 levels despite another large increase in working capital. Operating cash flows totaled $147 million, Arch's highest level in the last three years, even as trade receivables grew by nearly $100 million. Capital spending fell to $33 million as we returned to maintenance levels across our operating portfolio.

As we discussed in the third quarter earnings call, fourth quarter cash flows were primarily used to rebuild liquidity with both cash and liquidity increasing by more than $100 million from third quarter levels. We finished the quarter with unrestricted cash of $340 million and total liquidity of $390 million.

While our priority was building liquidity in the quarter, we also took steps in addressing two other objectives, paying down debt and defusing our thermal reclamation obligations. On the debt side, starting late in the fourth quarter, we began making open market repurchases of our term loan. And we ultimately repurchased over $86 million of the loan at a small discount to par.

Of that total, $5 million settled in the fourth quarter and the remainder settled early in 2022. Additionally, cash flows to date this year have been strong, allowing us to prepay $190 million of the loan, leaving approximately $10 million still outstanding. Given the interplay between the term loan and other elements of our debt structure, we plan to leave the remainder outstanding at this time.

With respect to the thermal reclamation obligations, we made an initial deposit in the fourth quarter of $20 million into our fund to de-fease those liabilities. And we'll make additional deposits quarterly throughout this year.

In light of our strong committed thermal sales position, continued positive market conditions and the clearly stated preference of our surety partners, we plan to build the fund on an accelerated basis. Given current projections, we would expect that total contributions this year could reach $100 million. At that level of funding, our net asset retirement obligation for Powder River Basin mines would be less than $30 million by the end of 2022.

To summarize, over the last several months we have bolstered our liquidity significantly, paid down nearly half of our outstanding debt and have put in place a plan to substantially prefund our thermal reclamation obligations.

In doing so, we have mitigated two substantial risks, refinancing risk for our nearest and largest debt maturity and the risk of unplanned collateral calls and have returned our balance sheet to a nearly net debt neutral position. As Paul described, these actions have put us in a position to resume a robust capital return program in today's strong market environment and, just as importantly, protect our shareholders in the event of a future market downturn.

Turning back to the fourth quarter financial results. I want to comment on one item that falls outside of the operational results that John just discussed. SG&A expense for the quarter was $25.6 million, which was the highest quarterly amount of 2021. Included in that total was nearly $7 million of stock-based compensation expense, which was higher than the $4 million quarterly run rate for the first three quarters of the year. Our long-term incentive plans include financial targets and the strong results in Q4 necessitated increased accruals under those plans.

Next, I'd like to highlight a change in the accounting guidance for convertible debt that we are required to adopt in 2022. The new rules have several impacts on our financial statements. On the balance sheet, the principal amount of the convertibles will no longer be bifurcated between debt and equity, but will now be entirely classified as debt. On the income statement, 2022 interest expense will be reduced by $6 million compared to 2021 levels as the noncash interest amortization is no longer recorded.

Lastly, the new guidance changes the rules for how the convertibles are treated in the fully diluted earnings per share calculation, going from an assumption of net settlement to on a full share settlement. The result is that the entire 4.2 million shares that underlie the convertible notes will be included in the diluted share count. As a point of comparison, diluted shares outstanding for the fourth quarter, which assumed net settlement included just 2.4 million shares related to the convertibles. Of course, this is one of those areas where the accounting rules do not reflect our intent as we do not envision that we will prepay the notes solely with shares.

Finally, Paul has already covered the new capital return framework, which will begin in the second quarter. In advance of that, the board has approved a fixed dividend for the first quarter. That dividend will be $0.25 per share and will be paid on March 15 to stockholders of record on February 28.

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

[Operator]

Thank you, sir. [Operator Instructions] We'll take our first question from Alex Hacking of Citi. Please go ahead. Your line is now open.

[Alex Hacking, Citigroup]

Yeah, good morning. And thanks for the call. I just wanted to clarify on the met coal volume guidance. I think you mentioned in the comments that 1Q could be down as much as 25% quarter-on-quarter, which would be about 1.4 million tons. But then in order to reach the bottom of the range -- the annual range, 9 million, you would need to be doing 2.5 million plus a quarter for the rest of the year. Like I understand, obviously, the mine is capable of doing that, but what gives you the confidence that those rail issues would be fully resolved for the rest of the year? Thanks.

[Paul Lang, CEO and President]

Hey, Alex. Thanks for the question. And yes, you're correct in the way you're looking at it and then how we would view the cadence of volumes then throughout the remainder of the year. Clearly, we've been disappointed so far to date with the performance of the rails here as we've kicked off 2022 and have been in constant and close dialogue with them. Clearly, the issues they've had have been well reported across their network from logistical issues and challenges with the improving economy. And then more recently and probably more concerning has been just the impact of COVID on crew shortages.

So as we move forward, as we are working with the rail world, we're beginning to see that improvement. We're beginning to see the commitment to the sets that we need to support our book as we move forward and have high confidence that we'll see that improve as we move forward. They're clearly very much aligned with us to get that volume moved into the markets that we need them to move. And we've had a lot of direct conversations with them and feel that things are heading in the right direction.

Once again, this is more of an impact, I think, of what we saw kind of in the January, very late-December and January time frame with the Omicron variant and what it did to the crews and the logistics on their network. And we've seen improvement and expect that to continue as we move forward.

[Matt Giljum, CFO]

Alex, we've been preparing them for a long time in stack. We've been preparing them for a long time for that step-up in volume that you indicated. So you're right, that 2.5 million or higher in Q2-Q3-Q4 is a significant step up, but not news the railroad. So while the COVID situation has clearly impeded their ability to respond, and there have been congestion issues, we do believe they are gearing up to move those sorts of volumes from our operations.

So we feel reasonably confident in their ability to do so, but of course, cautiously. So we do need to see continued improvement.

[Alex Hacking, Citigroup]

Okay, thanks. And then just a follow-up on the domestic net sales. You have 0.5 million tons committed this year versus, I think close to 2 million tons this time last year. Should we assume from that, that you're going to only sell about 0.5 million tons domestically this year? Or is there a potential for further -- and the rest would go seaborne or is there a potential that, that domestic number increases through the year? Thank you.

[John Drexler, COO]

Yeah, Alex. I think when we talked about this a little bit on the last call as well. We've got a wonderful product slate that's highly sought after in the markets. As we look at the opportunity to participate in those markets, we're always going to take and participate where we think we're going to create the most value for those products that we're selling.

And as we discussed a little bit on the last call and then kind of what's played out here is that we're going to see reduced volumes into those domestic markets with kind of where everything came through. But once again, that was an election by us where we didn't like where we saw some of the pricing and therefore, participated and kept that call to go into the international markets.

As we sit here today with where markets are currently at and our views moving forward as we work through the rest of the year, we're quite pleased with this portfolio and the value that it will generate as we move forward over the course of the year. So yes, you are correct that domestic kind of North American footprint at 0.5 million tons, representing a little around 5% or more of our expected sales is in that right kind of framework.

[Deck Slone, SVP of Strategy]

And Alex, Deck, again. So for the most part, we believe that the vast majority of North American business has been done. We have seen in past years North American buyers come back into the market, looking to shore up positions because of underperformance or quality issues. So we certainly could see adding to that modestly, if, in fact, we have the volumes, and we are always trying to be of assistance. But of course, we will require the kind of pricing we're seeing in the seaborne market to be willing to do that. So we'll see. But for the most part, that business is done. And our focus is, as John said entirely sort of on the seaborne market at this point.

[Alex Hacking, Citigroup]

Okay. Thank you so much.

[Operator]

We'll move on to our next question from David Gagliano from BMO Capital Markets. Please go ahead. Your line is open.

[David Gagliano, BMO Capital Markets]

Hey, great. Thanks for taking the questions. And congrats on the clear capital return program. Just on the thermal side. I was wondering -- a few quick questions on the thermal side. The -- first of all, on the 2022 guide the text says 76 million tons have been sold from the Powder River Basin at an average price of $16.30 per ton, that's in the text. But then in the table, it says committed and priced 75.4 million in total for thermal at $17.17 a ton. So what -- can you just explain the difference between those 2 numbers?

[Paul Lang, CEO and President]

Yeah, Dave. The context of the table, one item just for clarification, that's kind of where we stood end of year looking forward. As we indicated in the prepared remarks, we have put some additional volume to bed. But as we look at the overall guidance, one of the things that we've expressed is some concern on rail performance.

So there is the potential that we could see some shortfalls in the rails over the course of the year. But from our book of business and where we're locked in at right now, if any of that volume were to fall over into the following year, which we're not hopeful that it does. But if it does, that's not necessarily a bad thing from our portfolio.

But once again, what we're essentially saying is we're sold out. We're continuing to manage the rail and are very pleased with what we were able to achieve both operationally and the market and the types of commitments we were able to obtain.

[Deck Slone, SVP of Strategy]

And Dave, the guidance table does include West Elk volumes as well. So that's important to realize. And we wanted to give you additional context around what we've done in the PRB at this point in time. So including volumes subsequent to the quarter, so that is that 76 million tons at $16.30. The 75 million tons is inclusive of West Elk, but again, was December 31, and would also say that it really only reflects West Elk's domestic volume.

So there are volumes we'll be exporting from West Elk that aren't priced as yet, which would potentially increase those realizations significantly given current pricing for both Newcastle and API-4.

[David Gagliano, BMO Capital Markets]

Okay, that’s helpful. And that's actually kind of where I was going with my question with regards to West Elk. So since you brought it up, if you could just frame how much volume you have to sell out of West Elk to price. I should say, out of West Elk in 2022? And if we assume Newcastle prices stay kind of where they are now, what's the netback price right now for that West Elk volume?

And if you can give us a sense, maybe just a range or something of the cash cost at West Elk that would help frame the potential there.

[Deck Slone, SVP of Strategy]

Dave, great questions. And look, West Elk is a great opportunity for us here as we sit here. And if you look historically, there's always been when the export window is open opportunities for West Elk to participate in those markets. Its product is well received, in fact, sought after. And so what we're seeing right now with the Newcastle markets created significant opportunities for that.

So historically, what we've seen and what we see here as we participate currently and we look into '22 is you're in a position where you can ship into the export markets call it, 2 million-2 million-plus tons depending on where those markets and logistics allow you to ship. We do that from our position through Oxbow [ph] in -- on the West Coast and through the Gulf.

And with where we see Newcastle pricing right now, the netback to the mine is well over $100 a ton. And obviously, the Newcastle markets are volatile, but we're looking at ways to lock in some of that volume as well from a price perspective and feel very good where things will be moving forward with the West Elk shipments.

[John Drexler, COO]

And Dave, just a little more color on where we're likely to get that kind of pricing. So about half the tons we move through Long Beach, we would get that sort of impact. So today, at Newcastle prices of $220 prompt, if you actually get the prompt price, it's a netback of $150. It's a very significant sort of a netback, but we would get that on about 600,000 tons, again, assuming that the market stays flat for the year and we get prompt pricing on all of that. And we do sell at the benchmark effectively. So no discount of consequence, really no discount.

And then another potentially 500,000 tons or so through New Orleans that we're moving into the Americas and API-4 today is sitting at sort of $130, so still a really attractive price and the physical market is better than that. So you can see the potential for significant netbacks on about 1 million tons of West Elk that could greatly increase the contribution of that asset this year.

[Paul Lang, CEO and President]

Yeah. David, this is Paul. I think we both go back a long way on the PRB and Western thermal assets, and I don't think you could understate the job that the marketing and operations guys have done this last year. I mean I don't ever remember being completely committed or having more tons than we think we could actually ship because of rail performance at both West Elk, Black Thunder and Coal Creek. It's an amazing position.

And what's more amazing is these are prices that we've never seen, frankly, in 20-plus years. So the guys did a great job. It's an amazing position to be in, and it really took a lot of risk out of the thermal assets for us as we look at our options down the road.

[Deck Slone, SVP of Strategy]

And Dave, just to wrap up that commentary. Not only for 2022, but the marketing team did an outstanding job of layering an outer year volumes as well. So once again, kudos to what they were able to accomplish in the opportunities that kind of develop late in the third quarter and over the course of the fourth quarter.

[David Gagliano, BMO Capital Markets]

Okay. That’s helpful. Just to round out that West Elk conversation, what's a reasonable assumed cost offset for that $130 million to $150 million net back price that you just mentioned for the 1 million tons, for example?

[John Drexler, COO]

So Dave, once you get into those sorts of prices, you're going to get some meaningful sales sensitive costs. So again, we think of that asset when it's running the way it is running now close to 5 million tons in the sort of the low 20s. But again, you start to inflate that price, if you think about a 12% to 15% sales-sensitive costs, you're going to push those costs higher, again, high-class problem there.

But -- so you could certainly see us moving into the mid-30s, depending on where that ultimate average realization proves to be. But again, in sort of normalized market where we're getting $35 to $40 domestic -- for domestic pricing, you're looking at low-20s when the mine is running full out in the way that it is currently.

[David Gagliano, BMO Capital Markets]

And then just two more quick questions. Mentioned obviously quite a bit sold for 2023 in the PRB. Can you speak to pricing for what has been sold for 2023, please?

And then secondly, on the cash cost guidance on the met side, the $68 million to $78 million, can you frame what your met prices assumptions are between -- for that range? And can you talk a little bit about how the sales sensitive part of that price deck affects your cost guidance on the met side?

[Matt Giljum, CFO]

So Dave, on the future year's volumes and the pricing associated with that, that's not something that we'll get into on this call and this early in the year. But suffice it to say, the strength that we've seen in the current year markets does begin to spill over into the outer years as well. So we feel very good about the pricing that we've been able to layer in for significant volumes as we look into the outer years. So that's all we're going to be able to chat about at this point.

From the cost guidance on the met side of the book. As we talked about in the prepared remarks, you've got several things that are impacting it, inflationary impacts, but also the high-class problem as Deck described it, of the sales-sensitive costs. We aren't providing that guidance on what we expect our forward market curve to be that's, from our perspective, what we view for you guys to take that and build out. We give you all the pieces of the model.

However, as we talked about in the prepared remarks, for our met portfolio, we are fortunate that we own the vast majority of the reserves that we're mining. So if you look at the sales sensitive cost impact, it's a 5% rate that we pay for severance tax then there's -- add another couple of percent, depending on where the production is occurring and so you get a modest impact.

But as we sit here today and you look at what we were able to turn in for the fourth quarter from a price perspective at $200 a ton, layer in those sales sensitive costs, realize that you're coming from an environment at the beginning of '21, where we were at netbacks of $100 a ton and you can begin to see the significant impact the sales-sensitive costs has on that. And we'll take that all day long because it means we're expanding the margin as we move forward.

[Deck Slone, SVP of Strategy]

Dave, I would say that for 2023 on the thermal side, look very strong pricing on a historical basis. So we don't want to get into any detail, but it has been -- is very strong relative to the pricing that you would have seen historically in the PRB. So that's a positive.

And I would also say, we mentioned the erratic rail service, look there's certainly a possibility. And I think our guidance suggests that we could see some tons carryover from 2022 into 2023. That pricing will hold and in some instances will actually increase, in fact, those tons don't ship. So that also is beneficial. So we're feeling very good about the foundation that we're building for 2023.

[David Gagliano, BMO Capital Markets]

Okay. That’s helpful color. Appreciate it. Just very quickly, so when you tie all that together, Deck, and you have this average selling price of $16.30 a ton this year for PRB, is the 2023 business that's already been booked? Is that above in line or below that 16.30 number on average?

[Deck Slone, SVP of Strategy]

Dave, we're going to punt a little bit on that. Again, 16.30 is a very strong price and would only say 2023 is strong as well. We'll see where it all shakes out in the end. But obviously, $16.30 is a high bar when you consider what we've done historically.

[David Gagliano, BMO Capital Markets]

Okay. Thanks.

[John Drexler, COO]

Thank you, Dave.

[Operator]

We'll now move on to our next question from Lucas Pipes of B. Riley Securities. Please go ahead. Your line is open.

[Lucas Pipes, B. Riley FBR]

Thank you very much. And good morning, everyone. And congratulations on a strong 2021 and the capital return program that you announced this morning. I don't think I've seen 50% variable plus 50% buyback and special and capital preservation that adds up to 100%, which is remarkable.

I want to follow up a bit on that point, the 50% that would go to special plus buybacks, if you could maybe provide a split between what could be special versus buyback and to the extent you commenced buyback, when would that take place also in the second quarter or to be determined? Thank you very much.

[Paul Lang, CEO and President]

Hey, Lucas. This is Paul. I think we start this discussion that our capital needs going forward are going to be relatively small. And we should have strong cash generating capability, particularly in this market environment. And I'm sure Matt can weigh in, in greater detail about what we're targeting for liquidity. But the plan is basically to return all incremental cash flow to the shareholders.

And as we may return -- as to how we return the capital, I think the Board has clearly preserved a fair amount of flexibility on the discretionary piece, and it could change as time and circumstances warranted. But as we noted earlier, the Board has several levers that they can pull, share buybacks, obviously, special dividends, the repurchase of potentially diluted securities or even capital preservation.

With that said though, share buybacks or the use of the cash to potential future dilution by retiring the convertible securities and the remaining warrant seems like a good starting point right now.

And I think the board is going to be very contemplative and thoughtful on how they do this. And I think circumstances will change. But I think as a starting point, that's kind of how to think about things.

[Matt Giljum, CFO]

And just to add on to that, this is Matt. From a liquidity perspective. Obviously, where we were at, at the end of the year, a very comfortable liquidity position. As we continue to build that thermal reclamation fund, the need to hold that much liquidity probably goes down slightly, given the reduced risk around collateral calls.

So it's something in the neighborhood of, call it, $300 million or higher of liquidity makes a lot of sense with where the business is today and where we see the potential risk that we need to hold that liquidity for in the future. So as we look at kind of how we model out where we'll be at the end of the quarter, obviously, using a lot of cash flow this quarter for debt repayment and think we'll be around those target liquidity levels at the end of Q2.

So a long way of saying, if things remain really strong into Q2, that other 50% becomes available, probably during the quarter, if there are continued, we'll call it, delays around rail transportation or if markets weaken from where we're at, that may push the timing of some of the use of that other 50% further back in Q2 or potentially even to Q3. So that will still be sort of up in the air a little bit depending on how we see results and something the board will decide as we get to our meeting in April.

[Lucas Pipes, B. Riley FBR]

That is super helpful. Really appreciate that color. I wanted to also touch on capital expenditures for 2022. Can you maybe revisit to what extent you have discretionary capital in there and what your maintenance capital is now that Leer South is completed? Thank you very much.

[Deck Slone, SVP of Strategy]

Lucas, so with the guidance range of the $150 million to $160 million, the way we kind of broke it down, the vast majority and as we move forward, it will continue to be that way. The vast majority of our capital expenditures are going to be on the met side of the portfolio. So from a maintenance perspective, about $110 million of the capital for '22 is for metallurgical maintenance capital, about $15 million on the thermal side. So obviously significantly lower from that perspective.

And then discretionary capital are where we see significant opportunity to generate additional value is what we referred to as a press at the Leer plant. $25 million, what that effectively does is it takes some ultrafine product from the stream that's being processed in the plant that was previously being discarded captures that. It's about 150,000 incremental tons on an annual basis at a very low operating cost, almost de minimis.

And so therefore, once the capital is invested, you essentially get that additional stream of coal. If you take today's current market price and adjust it back to the mine, the payback at today's market price is a 7-month payback for that.

Now we'll be moving forward with that over the course of the year, our expectation is construction is complete by the end of the year. So that incremental volume essentially begins to come online at the beginning of 2023. But we think it's a tremendous opportunity for the Leer plant to squeeze out additional volumes from -- and add to our met portfolio.

[Paul Lang, CEO and President]

Lucas, as I think about this, particularly on the thermal side of the house. I'll keep the math simple. We're going to do roughly 75 million tons at about a $4 cash margin. That's about $300 million of cash. We're going to put $15 million of capital. And even if we put $100 million plus or minus into the sinking fund, these are still huge cash-generating assets that have tremendous amount of residual value. And look it sets us up as I said earlier, for a lot of options.

With the book of business we have and the reclamation fund in place, it gives us an opportunity down the road if we want to monetize these assets. But just as importantly, if we're the ones that hang on to them and continue to run them to a logical end, we've got essentially a very good option going forward where the reclamation cost is covered and there should be no impact on the broader metallurgical franchise for the company.

[Lucas Pipes, B. Riley FBR]

Super. Thank you very much. And a quick follow-up. So if I add the 150,000 tons to this year's midpoint of the range, we'd probably be understating the 2023 potential given that year is still ramping, and we have the rail issues. So for '23 and beyond, is it reasonable to assume greater than 10 million tons of coking coal sales?

[Deck Slone, SVP of Strategy]

So Lucas, just to clarify, this opportunity, we're actually putting on at the Leer operation, our existing longwalls. So this is going to be incremental to that existing preparation plan.

As we reported, the Leer South ramp continues to go very well. And so we haven't provided guidance yet for 2023, but once again, we'll be looking at every opportunity we have with this low-cost Tier 1 portfolio to get as much volume as we can into what we think will be strong markets.

[John Drexler, COO]

And Lucas, that 9.8 million coking at the top end of the range -- and as you say, some continuing rampant Leer South certainly suggest the 10 million tons for 2023 would be a possibility. And really, that's what we've been guiding to for a long time, and the build-out of this portfolio is that the target would be 10 million tons of coking coal or more. So that certainly is the goal and the objective. But you're certainly right to suggest that we need to be cautious given logistics at the moment.

[Lucas Pipes, B. Riley FBR]

Very helpful. Thank you very much. And continued best of luck.

[John Drexler, COO]

Thank you, Lucas.

[Operator]

We'll take our next question from Michael Dudas of Vertical Research. Please go ahead. Your line is open.

[Michael Dudas, Vertical Research Partners]

Good morning, gentlemen.

[Paul Lang, CEO and President]

Hey, Michael.

[Michael Dudas, Vertical Research Partners]

So topic of everybody's thoughts with inflation, labor availability, et cetera. Maybe you could share a little bit more light on productivity, turnover access to the fold that you need at your operations? Do you get a sense that things are peaking? Or is it still going to be pretty tight for the rest of the year and how you're thinking about in the future? Is there a step change level on that from other -- from a cost standpoint, availability given the length of reserves and the fact that you guys are crushing it with the amount of money you can generate?

[John Drexler, COO]

Michael, yes, it's a great question. And one of the things that -- and you hit on it. One of the things we're fortunate is the Tier 1 long-lived assets and the culture we have and operate in -- operating in a very safe environment, operating in a very responsible way. And I think our employee base appreciates that. We're very fair to the employees. But as it's been widely reported, labor challenges are significant across corporate America and then specifically in our industry. So we have seen pressures from that perspective. So once again, we'll continue to address that. We think it's incredibly manageable from a personnel perspective, but it could cause some inflationary pressures.

We also discussed in the prepared remarks, some of the other things that we're seeing. One of the things that we're getting the biggest benefit from is increased steel pricing as that benefits the top line. But obviously, we use a lot of steel in our portfolio. And therefore, we see those cost pressures coming through on that as well.

So as we discussed, kind of our expectation from an inflationary perspective overall is in the range of 5% to 10% over the course of 2022. But once again, with the increased productivity with the volumes coming on with Leer South its low-cost portfolio, we think that we have ways to mitigate some of those pressures that we see over the course of '22.

[Paul Lang, CEO and President]

The only thing I'd add, Mike, is I think John covered it fairly well on the people side, but we've been blessed with the fact that we've historically always had low turnover at our operations. And we also don't have a big need to hire a big group of people this year.

I would hate to be in a position this year where I'm trying to go out and look for a couple of hundred people. I don't know that they exist. But what I would say is that even with our low turnover, we've got to be fair with our people. We don't have to pay the highest rate out there. We don't have to do a lot of crazy things, but we've got to treat them fair and we got to give them what they're due.

So I think there will be a little bit of cost pressure, but I think compared to where we would have been if this occurred a year ago, we're in pretty good shape.

[Michael Dudas, Vertical Research Partners]

Yeah. It sounds -- that’s very helpful, sounds very logical as well. And just my follow up, Paul or John, how do you think your customers are thinking about the world today relative to maybe on the thermal side in the U.S. and the steel company, certainly you're much more export? Is there -- it -- obviously, the market signaling there needs to be more product produced than across the board. Are there getting a sense that there's the concern about that availability longer term or is it just once things ease the rails get back space and that gas comes back down, things are back to normal and are all good again? There seems to be a risk that, that could be not the optimal situation over the next couple of years.

[Paul Lang, CEO and President]

I'll start out kind of on what I'd say kind of a macro view of things in that. Look, at the end of the day, some of what we're seeing on both the thermal and metallurgical side are one on the same, and that is there has just been a lack of investment the last couple of years in the coal sector and that is catching up with people.

As we talked about in the international markets, you look at the pricing, particularly in '21 and the lack of response, it's shocking. But I don't know if it's -- that distance from what we saw in 2017-18. There was a huge run-up in price during that period, but production went down. The availability of capital and the willingness to put money into these projects is very diminished worldwide.

[John Drexler, COO]

And Michael, I agree wholeheartedly with that. Just to bring it back to our portfolio while the space may be volatile, and we may see volatility in the market, the portfolio that we've put together here, low-cost, Tier 1 operations, high-quality products allows us to generate significant amounts of cash no matter where that market cycle goes.

So longer term, that lack of capital in the space, I think, is concerning. I think our customers are beginning to really understand that and why we're seeing the markets where they are. But we're prepared no matter where that market curve takes us.

[Deck Slone, SVP of Strategy]

Michael, forgive us for bridging over in the coking side. I know that was a thermal question in part. But absolutely globally, we're seeing, as Paul said, under investment. And if you look at Australia, Australia was down again in 2021, despite the weakness in 2020. And relative to the peak of 190 million tons in 2016, Australia came in at 167 in terms of coking coal exports in 2021. So that underinvestment really is catching up and is pretty apparent out there on the coking side as well.

And as you pointed out certainly, the prices we've seen on the thermal side here in the U.S. are stronger than we've ever seen. Again, a function of that underinvestment in large part as well as other stresses like higher natural gas prices and natural gas prices staying above $3 out through 2024. So the market fundamentals look quite strong and well supported to us.

[Michael Dudas, Vertical Research Partners]

At the same JV didn't go through a get a lot more coal out of those operations for the user, for the buyers here, but that's for another story. Thanks, guys. Take care.

[Deck Slone, SVP of Strategy]

Thanks, Mike.

[Operator]

We will move on to our next question from Nathan Martin of The Benchmark Company. Please go ahead. Your line is open.

[Nathan Martin, The Benchmark Company]

Good morning, guys. Good morning. Most of my items have been addressed and maybe just a quick one or two here at the end. I think you guys disclosed for the first time is about 400,000 tons of net exports locked in at $134. There's some commentary in the release that was done early on last year. But just maybe any thoughts on the timing of those sales since they are pretty below the current market?

[John Drexler, COO]

Yeah, Nate. If you look at those sales, they were done at the beginning of last year, very late in '20, early '21. They aligned with the export steel year. So they will ship -- we expect to ship them in the first quarter of this year and get them behind us. It will be good to get them behind us, but then that's kind of the cadence of that commitment there.

[Nathan Martin, The Benchmark Company]

Got it. That’s helpful, John. Appreciated. And then also with the commentary on the 1Q met shipments being down possibly 25%, I mean should we expect on the cost side that needs to lead to in combination with some of the higher prices we're seeing in the market right now, maybe it's a kind of a high watermark from a met cost perspective in the first quarter?

[John Drexler, COO]

Yes. Nate. Obviously, the more volume that we have, the better the unit costs are. So yes, with the reduced volumes in Q1, you are correct. We expect that to be a little bit of a high watermark as we look at the cost structure over the course of 2022.

[Nathan Martin, The Benchmark Company]

Perfect. Thanks for that too. And then maybe just shifting real quickly to the thermal side, good commentary there on the PRB and West Elk. 76 million tons of PRB for '22 guide. Just wondering what's the latest on Coal Creek? Is that still slated to wind down at some point? Any thoughts there?

[John Drexler, COO]

Yeah, Nate. Coal Creek has been obviously a great story for us and very proud of the team out in the Powder River Basin, taking that operation as we've talked about and essentially preparing it for closure. And what we've done is we've done a significant amount of the reclamation work. We talked about it. We reduced our ARO by 20%, $40 million. Most of that a result of the work that's gone on at Coal Creek. But what the opportunity at Coal Creek has is we are now in a much smaller area, one remaining operating pit that allows us to participate in this market.

So we'll continue to run out of that pit. We continue to sell coal at attractive pricing that will earn money at Coal Creek at least here in the near term. Longer term, things continue to look likely the same longer term for Coal Creek. But we're in a great position to have a very small incremental footprint that's remaining that we can address when markets no longer are giving us the signal that, that coal is needed.

[Nathan Martin, The Benchmark Company]

So John, just maybe thought, I mean, with a significant portion of the PRB booked for '23 means the expectation to kind of keep that single pit running than maybe through next year?

[John Drexler, COO]

We'll continue to evaluate that with where the markets are and our very low cost to produce from that pit. So once again, it's just a small portion of the overall footprint. We've, for all practical purposes, done all of the reclamation work we've needed to do there except for a very small piece that's remaining. And we'll continue to evaluate those markets. And if markets continue to be strong in future years, we'll have the opportunity to continue to participate. But when it comes time, we'll have a very small footprint remaining to address.

[Deck Slone, SVP of Strategy]

And Nathan remember, it's a different quality. So there are unique opportunities for that product, and we're in an area where it's very low ratio. So attractive at the moment and may want to continue to run that asset for a few years or not.

[Nathan Martin, The Benchmark Company]

Got it. Make sense, guys. And then maybe just finally, maybe this is a question for Matt. You guys are guiding to a tax rate approximately 0% again this year. But just curious how many NOLs you guys have left as of the end of '21? Thanks.

[Matt Giljum, CFO]

Yeah. So Nate, as we look at the NOL position, with what we anticipate using for 2021 return, we're still going to have about $1.3 billion plus of remaining federal NOLs. And given the expected usage for 2021 and kind of how we look at '22, frankly, we expect that those NOLs will continue to last for at least the next half a dozen to 10 years and potentially longer. And so still find ourselves in a very fortunate position on the tax side, where we don't expect cash taxes anytime in the near future.

[Nathan Martin, The Benchmark Company]

Great. Thanks, Matt. I’ll leave it there guys. Very helpful. Thank you for your time. And best of luck in ’22.

[Matt Giljum, CFO]

Thank you.

[Operator]

It appears we have no further questions. I'd like to turn the conference back to Mr. Paul Lang for closing remarks.

[Paul Lang, CEO and President]

I'd like again to thank everyone for their interest in Arch today. The resumption of our multifaceted capital return program represents the next phase of the company's long-term strategy for value creation and follows the culmination of our efforts to build a world-class coking coal franchise.

Our people have delivered on their commitments to our shareholders. They brought Leer South up into a robust market environment. They restored our balance sheet to its historic pre-pandemic strength. They created a mechanism to isolate the thermal assets from our coking coal franchise through the creation of a unique cash reclamation funding mechanism. And they're now initiating what we believe will be the model for the industry relative to rewarding shareholders for their trust and patients.

In short, we remain focused on our clear, consistent and actionable strategy. And in doing so, set the stage for significant and ongoing value creation.

With that, operator, we'll conclude the call. And we look forward to reporting to the group in May. Stay safe and healthy, everyone.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.