Arch Resources Inc

NYSE:ARCH

Earnings Call Transcript 2022-Q4

[Operator]

Good day and welcome to the Fourth Quarter 2022 Arch Resources Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

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

[Deck Slone, Vice President, 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, Chief Executive Officer]

Thanks Deck and good morning everyone. We appreciate your interest in Arch and are glad you could join us on the call today. I'm pleased to report that the Arch team delivered another strong operating and financial performance in Q4 with adjusted EBITDA of $256.5 million due in large part to our core metallurgical segment that had significantly improved sales volumes, unit costs, and cash margins. In short, our Q4 results served as the capstone to an exceptional year for Arch Resources.

During 2022, the Arch team achieved a record financial performance, delivering full year net income of more than $1.3 billion or $63.88 per diluted share, generating adjusted EBITDA of $1.3 billion and reporting operating cash flows of more than $1.2 billion.

We also strengthened the balance sheet, repaying more than 70% of our indebtedness, returning us to a net cash positive position less than one year after completing our Leer South growth project and increasing the balance in our industry-first thermal mine reclamation fund to the initial target level of $136 million.

Finally, we relaunched our capital return program, deploying nearly $900 million over the last year, which included almost $515 million in quarterly dividends and avoiding the dilution of approximately 2.9 million shares through buybacks and the settlement of more than 90% of our convertible debt.

I'm pleased to report that the team continued standards long standing industry leadership and environmental, social, and governance performance during 2022. Setting the standard for ESG excellence in my view is one of the keys for success and part of our social contract.

Noting just a few highlights in this arena, we achieved the best safety record in the history of the company, which was approximately four times better than the industry average. We received just one SMCRA violation across our operating portfolio versus an average of 12 by our peers. And we received the 2022 Excellence and Reclamation award, the State of Wyoming's highest reclamation honor for the extensive and exemplary work conducted at Coal Creek, where we've now completed roughly 75% of the final reclamation work at that operation in less than two years.

Well, these are a significant list of accomplishments. The work the team did in 2022 to lay the foundation for continued success in 2023 and beyond is equally important. As evidence of that progress, we're guiding to markedly higher sales volumes in our core coking coal franchise in 2023, as well as markedly lower unit costs for the segment. We added seven world class Asian steelmaking customers in 2022 for 2023 shipments, thus setting the stage for long-term success in that fast growing region.

We've now contracted about 75% of our projected 2023 coking coal output, inclusive of recent sales, and at the midpoint of our guidance, and we further augment at the sales book for our legacy thermal franchise and are now entering into the year in an effectively sold out position with a significant contract book in the outer years as well.

Before I move on, I'd like to take a moment to discuss our capital return program, which we relaunched in February 2022. As indicated, we've already used that program to reward shareholders in a very significant manner, deploying almost $900 million over the last year.

As a reminder, under the program's allocation model, we target the return of 50% of the prior quarters, discretionary cash flow via dividends, and the use of the second 50% of discretionary cash flow on a menu of other value driving options, including share buybacks. In our view, both the capital return program and the allocation model, remain appropriate, durable and well aligned with shareholder interests and preferences. Given this, we fully expect these programs to remain the centerpiece of our value proposition as well as our efforts to maximize value for our shareholders.

Now, let me take a few minutes to comment on the coal markets before turning the call over to John to provide some additional color on the operations, starting with the seaborne metallurgical markets. In the past global hot metal production has acted as a primary driver for coking coal markets, which makes sense, higher hot metal output means increased demand for coking coal. And that's what makes the current market conditions so interesting.

At present, coking coal prices appear well supported, even though global hot metal production, excluding China was down 8.8% in 2022, coupled with the fact that roughly 20% of the global blast furnace capacity excluding China is idle. Today, the price for premium coking coal FOB the vessel in Queensland, now stands at $385 per metric ton, and the price of High-Vol A coking coal off the U.S. East Coast is being assessed at $325 per metric ton.

Moreover, steel market dynamics are starting to show signs of improvement with hot rolled coil prices up around 25% in the world's major steel markets, [indiscernible].

At the same time, the world's idle blast furnace capacity is starting to turn back on in the face of gradually rebounding steel demand, which is also providing additional support for coking coal markets.

Arch continues to view under investment in new and replace with coal supplies as the single most compelling support mechanism for the current constructive coal market dynamics. In 2022, Australian coal – coking coal exports were down 5%, or more than 9 million metric tons when compared to the already weak levels of 2021. Meanwhile, the second and third largest global suppliers of high quality coking coal, the United States and Canada were up only modestly versus 2021. Despite strong pricing throughout the course of last year, and both countries continue to significantly undershoot their pre-pandemic production levels.

On top of these fundamentals, the war in Ukraine continues to constrain Russian products in the broader market, while injecting greater uncertainty into overall global coal supplies. Added to this, we view the apparent reopening of the Chinese market to Australian coals, after two years of lockout is a generally positive development.

While this change in position by the Chinese will surely trigger some real – a seaborne trade flows back to their natural markets. It does seem to be part of a larger rebalancing of the global coking coal supply demand equation.

On the thermal side of the business, global markets have corrected significantly in recent weeks, with Asian pricing continuing to hold up better than European indices on a relative basis. We believe much of this decline in Europe is attributable to moderating demand for thermal coal in the face of mild winter, weak economic activity, widespread energy conservation efforts, and the increasing availability of LNG imports. At the same time, Asian demand remains strong, and the New Castle index is currently trading at $220 per metric ton, which is well above the historical average.

In summary, with the steps we took last year, Arch is prepared to manage through a period of market weakness should world economic conditions deteriorate further, but just as importantly, we're also exceptionally well positioned to capitalize on the situation when the macro environment strengthens, global growth accelerates, and steel markets rebound. In addition, we continue to view the intermediate to longer term coal market dynamics as constructive – given the ongoing under investment in the space.

Heading into 2023, we plan to keep our eye squarely on a clear, concise, and actionable plan for value creation. Intend to leverage our competitive coking coal portfolio, with its expanding customer base in Asia, along with the benefit of our cash generating legacy thermal assets to again provide significant amounts of discretionary cash through 2023 and beyond.

With this, we plan to use that cash to continue to reward stockholders through the clearly articulated tenants of our capital return program.

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

[John Drexler, Chief Operating Officer]

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team capped off the year in impressive fashion delivering strong operating results, exceptional progress on our strategic plan in industry leading execution on our key ESG metrics. Moreover, the team set the stage for further value creation in 2023 by driving significant productivity gains in our core metallurgical segment, managing costs effectively in the face of significant inflationary pressures, and expanding our contract book in a strategic and advantageous way.

And there could be nothing more important than our safety and environmental performance. Our team's use an employee driven safety process, the cornerstone of which is peer-to-peer observations and we are set to achieve a critical milestone when we record our 2 million observations sometime in the first quarter. Those 2 million observations achieved over the program's 16 years are a true testament to the hard work of the entire Arch team.

I couldn't be prouder of the focus, passion and dedication our workforce gives to safety and environmental stewardship. On behalf of the entire management team, I want to thank the Arch workforce for their great and ongoing contributions to the company's performance and success.

Let's turn now to a discussion of the key drivers in our fourth quarter operating performance, starting with our core metallurgical segment. As anticipated, the metallurgical segment operated at a much improved productivity level in Q4, driving a 16% sequential increase in shipping volumes, and just as importantly, a 13% sequential reduction in average unit costs.

Of course, the continued maturation of the Leer – of Leer South factored significantly into these improvements. During Q4, Leer South achieved materially higher long-wall advanced rates when compared to Q3, capitalizing on much improved geologic conditions and making steady, systematic improvements in overall execution across a wide range of fronts.

The team has sharply focused on maintaining the strong upward momentum in 2023. And through the first half of Q1, that is exactly what we're seeing from the Leer South team. As you well have noted, our 2023 guidance reflects coking coal production levels of 9.3 million tonnes at the midpoint, due in large part to the continued advances at Leer South.

As we have indicated in the past, we believe the ultimate normalized run rate for our coking coal portfolio will be around 10 million tonnes, which we expect to achieve starting in 2024. We’re also guiding to per tonne coking coal costs of $84 at the midpoint versus the $86.83 per tonne we reported for Q4 and $93.61 per tonne for the full year of 2022. While this is a significant improvement, we expect these cost figures to continue to trend lower in 2024 as well, in keeping with the projected higher production levels.

As indicated in the release, we expect our metallurgical shipping volumes to approximate fourth quarter shipping levels before increasing incrementally during 2023s remaining quarters. Our legacy thermal segment also made a significant contribution to our Q4 results, although that segments results were dampened considerably by further deterioration in western rail service during the quarter.

As a result of that poor rail performance, sales volumes declined 2.3 million tonnes on a sequential basis and undershot our customers nominations for rail movements still further. Those reduced volume levels also served to pressure unit costs higher, which increased nearly $1 per ton in Q4 relative to Q3.

Even with these headwinds, the segment's still generated segment level EBITDA of $63.2 million for the quarter, reflecting both the strength of our contract book and the hard work the team has done to enhance our operational flexibility in the face of volume changes.

As a reminder, the legacy thermal segment has now generated a total of nearly $1.3 billion in segment level EBITDA over the course of the past 25 quarters, while expending just $138.6 million in capital, underscoring yet again the power and effectiveness of our harvest strategy.

As you are aware, the coal industry is dependent on rail service to execute on our plans. The poor rail performance over the last year in the West has been an extreme disappointment and dampened our results. We've continued to work with the railroads costly, and it will be important that they succeed in addressing their challenges in order for us to fully execute on our plan for our thermal segment in 2023.

Turning to our contract book, in addition to the strong operational execution, the Arch’s team made further advances in expanding and strengthening both our metallurgical and thermal contract book during Q4.

First our metallurgical book, inclusive of new contracts signed during the first several weeks of this year, we have now entered into commitments for nearly 75% of our expected 2023 coking coal production at the midpoint of guidance via an advantageous mix of index based and fixed price contracts.

Importantly, and as Paul noted, the coking coal books Asian waiting continues to increase as well. During the course of 2023, we signed first-time commitments with seven leading steel producers in Asia that we could easily foresee becoming stalwarts in our contract book long-term. That’s important of course, because Asia is almost certain to be the primary growth driver for steel production over the next several decades. By becoming part of these steel producers coke making blends and demonstrating the tremendous value in use of our high quality coking coal products, we are building a strong, durable and beneficial outlet for our future metallurgical output.

The marketing team made great strides in continuing to build out the thermal contract book as well. As a result, we ended the year in an effectively sold out position for 2023 with our western operations. Importantly, we already have a significant look of thermal business sign for 2024 and a solid start to contracting in the out years.

While, we are facing some headwinds in the thermal segment from still weak rail service, weak natural gas pricing, and the recent pullback in international prices. We believe, we are still positioned for another strong year of EBITDA generation from our thermal assets.

As noted in our guidance table for the year, we have already locked in an attractive margin for our thermal segment and would expect that margin to expand further as we lock in pricing on incremental export volumes. However, it's important to point out that the Western rail service remains a significant question mark and is likely to constrain our total export opportunity for the year.

Our existing guidance includes 750,000 tons of priced exports from West Elk. As we sit here today, we are reasonably confident that we will export an incremental 500,000 tons of West Elk coal that is not currently reflected in the guidance table and hope that there is meaningful upside to that number. Based on today's market prices, we would anticipate that those 500,000 tons alone would add another dollar per ton to the projected average margin for the segment as a whole. Of course if the rails can facilitate additional export volumes beyond that level, the margin expansion for the segment would be greater steel.

In summary, while we are pleased with the success achieved over the course of 2022, we are squarely focused on the future and on the opportunity ahead. We fully intend to leverage our platform of low cost operations and our portfolio of committed sales to again generate significant value in cash flow in 2023 and beyond.

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

[Matt Giljum, Chief Financial Officer]

Thanks, John. Good morning, everyone. I'll begin with a few comments on the fourth quarter financial results, which were a strong end to an outstanding year.

EBITDA for the period totaled $256.5 million, an improvement of more than 15% from Q3 levels. Net income for the quarter was $470 million and included an income tax benefit of $253 million from the release of the valuation allowance on our federal net operating losses.

As we discussed previously, the release of the valuation allowance is a non-cash item and was due to the significant improvement in our income levels and expectations for fully utilizing the federal NOLs.

From a cash flow perspective, operating cash flows for the quarter totaled $194 million, which despite the improvement in earnings was our lowest quarterly total for the year. We had an increase in working capital during the quarter, a trend that we expected and discussed in detail in last quarter's call.

Included in the operating cash flows is a nearly $6 million contribution to the thermal mine reclamation fund, including interest that was earned on the funds. We completed the planned accelerated funding earlier in the year and would now anticipate only modest contributions inclusive of earned interest as we target keeping the fund in line with the Black Thunder ARO liability.

Capital spending for the quarter totaled $78 million. This was the highest quarterly total for the year and resulted from the delivery of several items that had been delayed by supply chain issues. As we move into 2023, we would expect the quarterly run rate to revert to a more ratable cadence.

I'll discuss the capital return activities for the year in more detail shortly, but discretionary cash flow for the fourth quarter was $116 million and consistent with the capital return formula, our Board has declared a dividend of 50% of that amount, or $3.11 per share. The dividend will be paid on March 15th to stockholders of record on February 28th.

The end of the year with cash on hand of $273 million and total liquidity of $401 million, including availability under our credit facilities. Cash and liquidity at year end were essentially at target levels.

Turning now to the capital return program. As we previewed in October, we came into the fourth quarter with cash levels that were well above our targets and an expectation to use that excess cash to ramp up capital returns.

As you can see, we clearly followed through on those expectations, deploying nearly $352 million during the quarter. That breaks down as follows; $192 million of dividends paid, $101 million to repurchase nearly 690,000 shares, and finally, $59 million to retire convertible bonds.

Paul has already mentioned the full year dividend, but I wanted to provide some additional detail on the second 50% of the program, including the reduction in the diluted share count that he mentioned.

For the full year, we deployed approximately $367 million on stock and convertible bond repurchases with $208 million used to retire convertible bonds and the remainder for share buybacks.

Prior to launching the capital return program, our fully diluted share count was approximately 21.6 million shares. Notably, had we not bought back shares or settled convertible bonds during the year, that number would actually have increased by 1.2 million shares to almost 22.8 million shares by year end.

That's principally because absent the steps we took to settle the bonds, we would have incurred additional dilution, stemming from the 2022 dividend payments because those payments result in an increase to the conversion rate for the convertible bond holders. That's why in a nutshell, we prioritize the settlement of the convertible bonds rather than share buybacks at the launch of the return program. We knew that in doing so we would not only reduce the diluted share count at the time of the bond repurchases, but that we would also avoid the additional dilution resulting from the dividend payments throughout the course of the year.

And that's exactly what happened. In some, the $367 million we use for stock and bond repurchases, translated into a reduction in the year-end diluted share count of more than 2.9 million shares with the reduction of 1.1 million shares from buybacks -- share buybacks and the remainder attributable to the bond repurchases. On a per share basis that has effectively an average price of $125 per share.

In comparison, had we focused our efforts solely on share repurchases that same amount of capital would have bought back less than 2.4 million shares at more than $154 per share. So while the amount of capital return in 2022 is impressive on its own, the way in which the capital was deployed in the sequency of that deployment has also significantly benefited shareholders.

Before moving on, I wanted to touch on two final points related to the convertible bonds. First, with the repurchases that we completed in the fourth quarter, we now have just $13 million of principal that remain outstanding. That represents just 8.5% of the original issuance.

Second, the capped call that we purchased at the time the bonds were issued remains outstanding in full and has an intrinsic value of $62 million, representing approximately 425,000 shares at yesterday's closing stock price.

Turning now to 2023 and starting with the first quarter, we are clearly encouraged by what we're seeing in the met market so far this year, with higher index pricing quarter to-date relative to Q4. While we expect to capture that benefit on our first quarter earnings, the cash flow timing is likely to be delayed. We expect a significant build in accounts receivable this quarter.

As many of our agents shipments are initially billed at a provisional price from last quarter, with the final true up ultimately to be received in Q2. Additionally, aside from these pricing dynamics, we typically see an investment in working capital in the first quarter and we expect that to be the case again this year.

Before turning the call over for questions, I wanted to provide some brief comments on a few of the financial guidance items in the release. First, our capital spending this year will be in the range of $150 million to $160 million and consists entirely of maintenance capital with over 80% of that related to the Core Metallurgical segment. Despite the inflationary environment, we have maintained the capital guidance in line year-over-year.

Second, you'll note that we expect net interest expense of less than $5 million, reflecting our tremendous progress in reducing indebtedness during 2022. Notably, interest income on our cash and short-term investments will largely offset the interest on our remaining debt.

Finally, with respect to income taxes, now that we have released the valuation allowance, we expect to have a more normal tax provision on the income statement with a range of 10% to 15% of pre-tax income. For 2023, we expected cash tax payments will be less than 5% of pre-tax income, as we continue to benefit from net operating loss carry forwards. As you model years beyond 2023, we would expect the tax provision and tax payments to be more closely aligned in that 10% to 15% range, as we will have utilized most of the NOLs.

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Lucas Pipes with B. Riley Securities. Please go ahead.

[Lucas Pipes, B. Riley Securities]

Thank you very much, operator, and good morning everyone. Also I wanted to add – good job on the – on the progress at Leer and Leer South on the cost side. That's really impressive. I want to spend my first question here on the Met side and just get a little bit more sense for the cadence of shipments throughout the year. Is it pretty readable? Do we expect maybe a little bit more here in the beginning, or is it back end weighted? If you could provide some color on that? I would appreciate it. Thank you.

[John Drexler, Chief Operating Officer]

Hey, Lucas, John Drexler, how are you? As far as the cadence on the – on the volumes as we indicated in the release, as we sit here today we're looking like we're going to be flat from Q4 to Q1. And then if you take the midpoint of the guidance and kind of distribute that with the difference of what we ship in – in the first quarter. Right now, the expected cadence would be kind of ratable for about three quarters of the year. So, we're happy with the progress that we've been able to make it Leer and Leer South and thrilled with the increase in the volumes that we expect to achieve over the course of 2023. So that's kind of our view on the cadence right now.

[Lucas Pipes, B. Riley Securities]

That's helpful. Thank you. And then switching to the thermal side, John, you made some comments in the prepared remarks. I think it was 500,000 tons could move the total margin in the thermal business by $1. If you could just remind us, what the dynamics are there and then the sales guidance for the year, I think from the low into the high end about 8 million tons. What is – what are the key drivers there? Would appreciate – appreciate that color.

And then as you look out to 2024, how is the normal sales book position today and what's your outlook in light of the weaker gas price environment? Thank you very much.

[John Drexler, Chief Operating Officer]

Yeah. Thanks, Lucas. You know, as we sit here today, the – and we talked about it throughout the course of the prepared remarks. The challenges that we've had really had been rail over the course of 2022 it's significantly limited our opportunity, deliver a coal into the export market. As we sit here today, that coal going into the export market even with some of the pressure that we've seen on some of those international pricing, still nets back to a very healthy margin for us. And so those 500,000 tons that we're looking at right now, we're fairly confident we're going to be able to get those exported. They're not priced right now, clearly though, in today's market price those will be leveraging and would add $1 per ton to the margin.

More importantly though, we think there's a larger upside on the exports as well. If the rails perform, we could continue to enhance that thermal margin significantly, if we have the opportunity to get more coal off the coasts.

[Paul Lang, Chief Executive Officer]

Lucas, those volumes that stack, those volumes are principally off the west coast and so you're looking at a Newcastle price of $220. If you look at the spot and so at those prices, that's what that would translate into given our expected costs at West Elk. So you can you can see that 500,000 tons is it's still quite leveraging. It's less than we'd like to ship. It's less than we hope to ship, but it's the amount we feel – we feel confident about at this point. And still it's a significant uplift in the average realization and then the average contribution and the total contribution for the thermal segment.

[John Drexler, Chief Operating Officer]

From a thermal perspective, at least as the wide range in the guidance that we provided the 8 million tones, so much of that is driven by where the – where the rails are going to perform. We are sold out essentially at the midpoint of the guidance. And I want to go all the way back to the beginning of 2022. But if you remember, as we work through the course of 2022, because of the significant rail challenges we had, we ended up shifting less coal then we had committed over the course of the year.

Right now our guidance, kind of aligns with what we were able to ship in 2022. We're hopeful that the rails continue to improve, which would give us some additional opportunity, especially with deleveraging export tonnes that we just discussed.

[Deck Slone, Vice President, Strategy]

And look, it’s again, Deck. It's – for 2024, we're probably not ready to go there yet. It's premature for us to talk about the sales book and quantify that in a significant way but we do have a very solid foundation we have built, we feel really good about where we are and the pricing we've achieved.

So you know, we would expect the strong pricing you've seen here or expect to see in 2023 to roll into 2024 as well. But we're not ready to give precise volumes as yet. We would only say again, it's a really quite solid foundation, we feel quite good about our position for 2024 as well.

[Lucas Pipes, B. Riley Securities]

That's a lot of color. I really appreciate that and best of luck.

[Paul Lang, Chief Executive Officer]

Thanks, Lucas.

[John Drexler, Chief Operating Officer]

Thank you, Lucas.

[Operator]

The next question comes from David Gagliano with BMO. Please go ahead.

[David Gagliano, BMO]

Hi. Thanks for taking my questions. I just have a couple of quick ones. I think you kind of talked about a little bit but I was wondering if I could just ask directly, what's the split in the – you know the guy, the average price is 1750 a tonne for overall US thermal. What's the split between PRB and West Elk embedded in that?

[Paul Lang, Chief Executive Officer]

So Dave, it's about caught 1525 or so it's kind of the PRB price on the 65 million tonnes or so that John referenced and then West Elk, obviously provides the – the uplift from that level for the average – for the average committed pricing on quite frankly, again, fairly modest export tonnes.

[John Drexler, Chief Operating Officer]

And the volume splits about 65.5?

[Paul Lang, Chief Executive Officer]

Correct. Absolutely.

[David Gagliano, BMO]

Okay. All right. helpful. Thank you. And then just on – there was a comment earlier about potential working capital build in the first quarter. I just wanted to ask if that can be quantified, obviously, just to help with the calibration of the estimate of the variable dividend?

[Matt Giljum, Chief Financial Officer]

Yes, Dave. This is Matt, you know, one of the things John highlighted in his discussion was the success we've had on the Asian customers. You know, the good of that is that you know, those are some great customers that hopefully will be long-term folks that will sell to and be in their book for a long time.

The downside if you want to look at it is in a rising price environment. We will hang up more of those receivables on the balance sheet and so that's what we're expecting this quarter as you see the PRB price rise throughout the quarter. The way some of the pricing works there is the provisional price that will bill at and collect in the quarter but that true-up to the higher pricing will come next quarter.

So when you look at – at the receivables I think we'll see a fairly significant built in receivables, much more so than what we saw in Q4. And then there are some typical seasonal working capital items that we faced in Q1, inventory build related to the Lake season business, typically some of the payables will decline from year-end levels to the end of first quarter. As I look at it, I think we could see in working capital build this quarter of at least $100 million. And, obviously, most of that we'll get back later in the year and a lot of it in Q2, but here in Q1 expect to see a pretty significant headwind.

[Paul Lang, Chief Executive Officer]

This is Paul, and I think I said last quarter, I think the biggest surprise of any of us is how lumpy the working capital can be. And my guess is we're going to see a corresponding impact on dividends in 2023, where they're just not going to be ratable, they're going to be up and down. But, obviously, over the course of the year it's going to evened out till it all work out.

[David Gagliano, BMO]

Great, that's very helpful. Thank you. And then sticking with the capital allocation, just on the buybacks, obviously, nice number this quarter. And after adjusting for working capital, any reason to expect on a quarterly basis, the 50/50 split to move that much in one direction or the other between specials and buybacks?

[Paul Lang, Chief Executive Officer]

I mean, right now David, I think the way the program is set up for the allocation model, we're going to stick with 50% of the discretionary cash flow to dividends, it's very simple, people understand it. Absent working capital changes, it's very simple.

What's a little more lumpy is going to be the repurchases and what we do with the other 50% but, David I think we believe the program is working well. It's been well-received by our shareholders. And our plan right now is to stick with things.

[Matt Giljum, Chief Financial Officer]

David, it's a fairly simple formula, but as Paul said, we're going to -- because we paid the dividend in arrears and the way we pay it, it's going to be lumpy, but our general view is 10 quarters from now, when you look back over what's been paid out for the first 50 to second 50. They're going to be relatively equal, because again, it's just math.

Having said that, we are going to see lumpiness quarter-to-quarter. So we try to provide guidance around that, not always possible to provide precision. But again, it's the 50/50 will hold, it just may not hold in any given quarter.

[David Gagliano, BMO]

Perfect, thank you. It’s very helpful. Last question, I know, I’m going to be quick, but not that quick, really quickly now last question. Can you talk a little bit about the customers on the US thermal side? I know it's early days, the numbers haven't been good on the demand side. Can you just speak through the potential as we get into the year for maybe deferrals and how much is open for re-openings and stuff like that, plus or minus how much in the committed volumes for 2023? Thanks.

[Paul Lang, Chief Executive Officer]

Good question. David. As we sit here today, and we look at the book for 2023, right, there are some headwinds, we referenced those. But at the same time, as we're talking and looking at customers and the inventories that they have, we continue to see that there's demand for rebuild that needs to occur from an inventory level. That we believe will continue to play itself through over the course of the year. We'll continue to evaluate things as we move forward, but we have good confidence that for what our committed levels are that we expect to ship those over the course of the year.

[Matt Giljum, Chief Financial Officer]

So Dave, I mean, if you'll recall last year 2022, there was an awful lot of coal conservation going on because of poor rail performance. And so generators would have been burning more coal, and they just didn't have the inventory. They couldn't get the volumes. And so as a result, they are focused on rebuilding those inventories.

Now, clearly, it's been a slow start to the winter in terms of weather and demand had been down, natural gas price is very low. So that will have an effect on burn, but so far we're not hearing from any of our customers, that they don't want to continue to receive, their full amount, their full allocation, and quite frankly, still, they're still struggling to get the kind of rail service that they that they expect.

So, if it's a mild summer as well, you know, perhaps we start to see that push back but right now, we don't expect it to see that. We think this is going to be a year of, sort of, rebuilding of these inventories and more -- to more normal levels.

[Paul Lang, Chief Executive Officer]

David, I think Deck touched on the frustration of some of our customers on rail service. And I think if you stand back and look, the Eastern rails had the same issue that we hear about in the west. These two rail services basically settled their problems in about four or five months. Frankly, the western rail service has gotten worse in the fourth quarter. I mean it's extraordinarily disappointing what they're doing and their ability to bounce back and that frustration has come through from our customers. And I think if they can get the rail service, I feel a little more optimistic this year about them taking what they contracted.

[David Gagliano, BMO]

Okay, great, very helpful. Thank you.

[Paul Lang, Chief Executive Officer]

Thank you, David.

[Operator]

The question, Nathan Martin, from The Benchmark Company. Please go ahead.

[Nathan Martin, The Benchmark Company]

Hey, good morning, guys. Thanks for taking my questions.

[Paul Lang, Chief Executive Officer]

Good morning Nate.

[Nathan Martin, The Benchmark Company]

I think most of them have been addressed at this point, but maybe just drilling down a little bit more than expected shipment cadence. I know John had some good comments there, but maybe on the met side, and he planned long haul moves to be mindful of?

Paul, you just said it sounds like eastern rail services is moving along fairly well. But as Curtis Bay back up to running it 100% again? And then on the thermal side, again, rail service continues to be poor. It sounds like how do you expect that maybe to affect the cadence or timing of shipments on the thermal business?

[John Drexler, Chief Operating Officer]

So, Nate, from a long haul move perspective, our operations have gotten exceptionally good and efficient at moving the walls from panel-to-panel. Leer South just right at the beginning of January of this year, had a very successful move from Panel 2 to Panel 3. We got several moves scheduled over the course of the year depending on advance rates, something might get pulled into 2023 or push out to 2024. But all of that is incorporated into the guidance and our teams have high confidence on the ability to execute on the plan that's out there and don't see any significant impacts or variability to kind of the case of our production over the course of the year.

[Paul Lang, Chief Executive Officer]

And look -- sorry, Nate, it's been a slow start obviously, on the rail side. I mean you do have typical seasonality. Q2 tends to be a lesser period because of weather in the PRB on the thermal side. Q3 tends to be a strong shipping quarter. So, there certainly could be some level of lumpiness. But again, we started out Q1 at a fairly slow pace. So, stay tuned.

[John Drexler, Chief Operating Officer]

I think if you look at the cadence, if you were just to make it ratable over the course of the year to that midpoint of 70 million tonnes, it'd be 17.5 million tonnes a quarter. As Deck indicated, there's typically some seasonality and in a traditional year, but then when you've got the rail impacts and challenges, we do expect improvement from Q4, but probably not on a true ratable basis in Q1 for the full year the 70 million tonne midpoint of the guidance for the year if that if that helps.

[Nathan Martin, The Benchmark Company]

Yes, no. That's very helpful guys. And just real quick Curtis Bay, is that kind of backup to running normally at this point?

[John Drexler, Chief Operating Officer]

Yes Nate. We -- over the course of the year things -- they address the issue that started in January of 2022 and work to kind of repair the facility. The logistics team here did an outstanding job of managing that issue over the course of the year. As Curtis Bay continued to make repairs our opportunity to participate continued to increase there and Curtis Bay and as we rolled into the end of the year there. We're not seeing any issues with Curtis Bay as we go forward.

[Paul Lang, Chief Executive Officer]

Okay, I'll just say Nat that CSX effectively did what they said, they delivered on the operating side, they got Curtis Bay back up and running. No complaints on the east.

[Nathan Martin, The Benchmark Company]

Great to hear guys. And then they did it relates to the full year 2023 met segment cost per ton guidance, what net price you kind of embedding in your $79 to $89 ton range there?

[Matt Giljum, Chief Financial Officer]

So, Nat, as part of the reason for that a wide range is a lot of those different variables that are out there, including sales price, remind everyone that given the ownership structures of the reserves that we have out in the east where we own a majority of those reserves, our sales sensitive costs and relative terms are a fairly modest kind of we guide to about a 7% range type of sales sensitive cost numbers. So we're not going to provide a specific guidance on what the market range was, but once again, it's all incorporated in into the guidance that we have out there.

[Paul Lang, Chief Executive Officer]

And, Nat, just a reminder that 7%, 5% of that is severance tax we started to pay the State of West Virginia, which I think underscores further the strength of our position and the fact that we own the vast majority of our reserves and fees. So we really are in a quite a good position and feel very comfortable that while sure higher prices will have some effect on our costs. It's fairly modest and so not that difficult for us to encompass those sorts of increase prices within the range we provide.

[Nathan Martin, The Benchmark Company]

Got it. I appreciate that guys. And maybe just finally, a bigger picture question and just timely reports out this morning, tech might be looking to announce a spin off of its met coal business as early as next week according to Bloomberg. I know you guys obviously can't comment, specifically on deals, but how would you maybe characterize the current coal M&A landscape? Would you have any interest in adding some high quality met coal assets?

[Paul Lang, Chief Executive Officer]

You know, Nat, as we've said in the past, we'll look at everything and consider about it, anything but it's a very difficult environment to do a deal. And you talk about what is the environment well, it's effectively frozen. There's lots of reasons for that and I think anybody or everybody should agree that if there is a deal out there that lowers costs, and in our case does not hurt us on a quality basis, we'd probably take a lot of interest in it, but absent that it's hard to put a deal together right now. And we'll keep looking, we'll keep considering but frankly, we're in a good position. We're on the low end of the cost curve. Frankly, we're well below the average cost curve for the rest of US and if our downside cases simply harvesting cash and turn it back shareholders, that's fine.

[Nathan Martin, The Benchmark Company]

Appreciate those comments, Paul, I'll leave it there. Best of luck to you guys in 2023.

[Paul Lang, Chief Executive Officer]

All right. Nat, thank you very much.

[Matt Giljum, Chief Financial Officer]

Nat, thanks.

[Operator]

The next question comes from Michael Dudas with Vertical Research Partners. Please go ahead.

[Michael Dudas, Vertical Research Partners]

Good morning, gentlemen.

[Paul Lang, Chief Executive Officer]

Good morning, Michael.

[Michael Dudas, Vertical Research Partners]

So adding those seven Asian customers, you can put that in context relative to your comments and your prepared remarks of utilization starting to improve some hot metal coming back. Is that helping your product kind of get noticed in the marketplace? And, and with regard to looking at the best net back value for, our actual long term is, yeah, how important you think Asia will be going forward? Is there going to be significant marketing of the tons that you have in the market for export customers that sounds that's like what you'd like to do if the economics of that makes sense?

[Paul Lang, Chief Executive Officer]

Yeah, Mike, I'll start off broadly and see if Deck or John would add in. Literally, our thinking has been in the last couple of years is to expand our customer base in Asia. And, the logic is fairly simple. Both the US and European blast furnaces are slowing down or for a variety of reasons, starting to move away and the real growth on the – raw steel, the hot rolled steel is in Asia. So, we have purposely done this jump to the Asian markets, and spent a lot of time and effort in there.

[Deck Slone, Vice President, Strategy]

And so, Mike, I'd say, look, we we've now crossed over 40% of our volumes moving into Asia, we think that's really important and strategic, that is where the growth is going to be, as Paul said, the Europeans are looking at some migration away from integrated steel production towards more EAF and maybe DRI with EAF. The Asian market is not, the Asian market is full speed ahead on new integrated steel capacity being added and post COVID. The projects that have were put on pause, have now started back and are moving forward with great momentum.

As we look out between now and 2030. We could see 70 million tons of additional hot metal production manifest itself in Southeast Asia, including India, and that – that's a huge market opportunity for us. The vast majority of that will be served via the seaborne market, and so we absolutely believe its strategic, would also add that look we think we've got the ideal product for that marketplace, because we've got, with our Leer and Leer South product. We've got the high CSR that Australia provides. The 70 CSR kind of – kind of product along with the plastics properties that make it great for blending and, you're looking at you know, steel makers that are – that are weighing their options. And trying to find blends of multiple products, while adding our High-Vol A product really makes those blends so much more effective, because of those plastics properties, the temperature range, the fluidity.

So we are – we do believe we're getting traction there and a better understanding of the value of the product. These seven customers are indicative of that. But certainly, as we look forward, we expect Asia to represent an increasing percentage of our mix.

[John Drexler, Chief Operating Officer]

And Michael, I'll add just to recognize the marketing team and the tremendous work that they've done to go out into secure additional business in these Asian markets. We've talked about it for some time, the Deck just alluded to, the qualities of the product that we're producing and wanting to get introduced into a growing area like that. The marketing team has done an outstanding job of – of getting those relationships, getting opportunities to have the product tested and then executing on the ability to enter into contracts.

So it's been a big win all around. And, just to kind of wrap-up that discussion, in addition to the growing demand there, and we've hinted on this a couple of different times. It's there's just a complete lack of investment globally in new production, and so we see a tremendous opportunity here as we move forward. And think we're positioned very well.

[Michael Dudas, Vertical Research Partners]

That's – that's very well said gentlemen. Just a follow-up maybe on your – on your last comment there, John, do you think US can contribute? What do you think US can contribute to export met in 2023? And even in next 2024 and 2025 is there the ability to kind of maintain those numbers it's still or I would assume there's still going to be these struggles.

[Deck Slone, Vice President, Strategy]

Yes, Mike, it’s Deck. And look we – we are comfortable with the fact that you know, demand could slack in if the macro environment continues to slow and weaken, we're in a great position to sort of ride out any kind of trough, so I want to say that first. So, you know, we're not we're not making this projection for the market, you know, for great market strength unbroken, and that the end of the business cycle.

We will say this, you know, right now you're right, you've got steel production and hot metal production now starting to show signs of kicking back up after declining by nearly 9% last year in the world, excluding China. And yet, supply side continues to be under a lot of pressure.

So Australia was down nearly 9 million tonnes in terms of production in 2022, coking coal exports in 2022. They are the big horse in the seaborne market, as you know, but they are – they're now down 30 million tonnes from the peak year of 2016. They ended the year at about 158 million tonnes versus the peak year of 188 million tonnes in 2016. So you continue to see that – the under investment that John mentioned, manifests itself in a very significant way.

The US, is really the same story, you've got degradation and depletion of the reserve base. You've got relatively limited investment and so despite the fact that last year and 2022 average High Vol A price was $350. US exports increased by 1 million tones,

Canadian exports increased by 2 million tonnes last year and those are the three biggest suppliers in terms of high quality coking coal.

So yes, we continue to see pressure on supply and believe that is going to continue in 2023, which suggests that the market could retain this strength for some period of time. Again, we don't need it to, we can do well in a market that is less robust than the one that persists right now, but the fundamentals do continue to look strong.

[John Drexler, Chief Operating Officer]

Michael, the other thing you know, related to this, you know, we used to always talk about what we need is an average of about $150 East Coast price for the world to work. You know, you think about that now and the guidance that you're hearing from a lot of the US producers. $150 is breakeven. That number has moved up dramatically. And as Deck said, look, we don't need it to be $200 or $300 to do well. But it is interesting where it's settling in that.

Look, I don't think $150 as a normal going forward price structure. Our cost – our price structure is going to be the norm going forward.

[Michael Dudas, Vertical Research Partners]

Well said John, I appreciate those observations. Thank you.

[John Drexler, Chief Operating Officer]

Thank you, Mike.

[Operator]

The next question comes from Chris LaFemina with Jefferies. Please go ahead.

[Chris LaFemina, Jefferies]

Hi. Thanks, operator. Hey, guys, thanks for taking my question. And I apologize. I mean, you touched on some of this already. But, Deck, you were talking about kind of the structural supply problems in the in the in the seaborne coal market, which are not going to get solved easily. And, you know, we went through a year last year when Chinese demand for metcoal lease was very, very weak. And Chinese domestic coal production increased to us, so pretty astonishing when you consider how bad China was last year, how strong in the coal markets or anyway.

So the debate now that we're hearing from a lot of investors is whether or not this China recovery will be steel intensive. And I think the overwhelming consensus view is that it's going to be consumer-driven. It's not going to be about steel, but we're hearing from some of the big iron ore miners that they're already seeing evidence of pickup in activity in real estate and construction. And you know, there's been a lot of policy shifts in the China housing market that could drive potentially a pretty strong recovery in steel for construction, which I think the market is probably not really expecting.

So my first question is, are you guys seeing any evidence yet of an increase in demand in the Chinese steel market? And then secondly, if that does indeed play out, and you get a stronger than expected recovery in Chinese steel demand, what does that do to the met coal market? I mean, again, coming off of a year where Chinese demand was horrific, what happens is that does a bit of a V shaped recovery. How does the world solve that problem for a lack of met coal? Thank you.

[Deck Slone, Vice President, Strategy]

Chris, it’s Deck, it’s such a good question, and as indicated look, last year, hot metal production was way down and that's the key driver in coking coal markets and yet coking coal markets were very robust. And so China -- if China continues to import 40 million tons of seaborne coking coal that certainly supports the kind of market we're in, if that does in fact ratchet up, you're right. That's additional pressure.

We saw in November, you had 25 million tons or so of European steel mill capacity that was idle, 10 million tons of that has now come back. So again, we're seeing signs of pickup elsewhere as well. And so China weighed back into this market in a significant way. It certainly could provide additional support, and so we agree the market continues to ply, it continues to look very tight, it's not entirely evident where the volumes are going to come from.

There are a lot of variables I mean, on the other side of the equation with thermal prices down, you're going to see less crossover times. But that's relatively modest compared to the driver represented by increased hot metal production. So there are lot of puts and takes here, but we also see a pretty constructive market environment as we head into 2023.

[Chris LaFemina, Jefferies]

Great. Thank you.

[Operator]

The next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

[Lucas Pipes, B. Riley Securities]

Thank you very much for taking my follow-up question. I first wanted to touch on the initial target being reached at the reclamation fund. Should we expect minimal contributions this year or not? And if so, what could be maybe the contributions longer term? Thank you very much.

[Matt Giljum, Chief Financial Officer]

Yeah, Lucas. We essentially as we noted, it's really completed the accelerated funding during 2022 And what we're really going to target now is just to make sure that as changes in that future obligation take place that we're continuing to try and match what the ultimate obligation will be with what's in the fund.

So I think this year, you can see that fund grow by somewhere in the neighborhood of $20 million. Some of that's going to be interest that's just accruing on what's there. Some of that will be modest contributions that we'll make over the course of the year. And then, look, as we look at it in the interest rate environment that we're in, after this year, I'm not sure we'll have to make much in the way of additional contributions as the interest accrues on that fund that we've already got in place. So, I think we're going to be in very good shape to have the obligation fully funded.

[Paul Lang, Chief Executive Officer]

I think for modeling, Matt, the best way to look at it's about 5 million a quarter.

[Matt Giljum, Chief Financial Officer]

Correct.

[Lucas Pipes, B. Riley Securities]

Very helpful. Thank you, and Matt, I do want to congratulate you on the share repurchases. That was about $20 per share of better pricing things to the convert, acquisitions you did, so well done there. Matt, can you remind us what the share count is today?

[Matt Giljum, Chief Financial Officer]

So the diluted share count today is -- call it just under 20 million shares that includes all of what's underlying the remaining convertible bonds, the warrants that are outstanding, and the employee shares. The basic shares today, call it just around 17.5 million shares.

[Lucas Pipes, B. Riley Securities]

Very helpful. Thank you for taking my follow-up questions and again, best of luck.

[Paul Lang, Chief Executive Officer]

Thank you, Lucas.

[Operator]

This concludes our question-and-answer session. I'd like to turn the conference back over to Paul Lang, CEO and President for any closing remarks.

[Paul Lang, Chief Executive Officer]

I want to thank you again for your interest in Arch. 2022 was a year of tremendous accomplishments for the company in terms of ESG execution, financial performance, shareholder returns, and critically, building the foundation for even a stronger future.

With our clear strategic direction, low costs, strong book of business, and talented team, I'm confident that we're poised for ongoing success as we move into 2023 and beyond. With that operator we'll conclude the call and we look forward to reporting to the group in late April. Stay safe and healthy everyone.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.