Arch Resources Inc

NYSE:ARCH

Earnings Call Analysis

Arch Drives Value, Targets Strong Share Repurchases

Arch demonstrated strategic progress in Q4 with robust financials and a 10% reduction in Metallurgical segment costs and 25% improvement in average coking coal realization, enhancing shareholder value and laying groundwork for future growth. Adjusted EBITDA reached $180 million, discretionary cash was $127 million, and $107 million was added to cash reserves, signaling a pivot toward more aggressive share repurchases. Arch capitalized on high-vol A coking coal's strong price of $262 per metric ton, optimizing an arbitrage opportunity in the Asian market. Forward-looking guidance foreshadows modest Q1 disruptions due to weather and terminal outages, but overall shipping schedules are expected to align with 2023's realized prices. Thermal operations anticipate solid contributions moving into more advantageous reserves mid-2025. Share count is poised to reduce substantially due to a streamlined capital return program focused on share repurchases.

Financial Summary and Return to Shareholders

During the fourth quarter, the company demonstrated strong performance and continued its commitment to long-term value creation and growth, achieving $180 million in adjusted EBITDA and generating $127 million in discretionary cash flow. They were able to increase their cash position by $107 million, which aligns with their goal of boosting liquidity for potential stock repurchase opportunities. Furthermore, Arch paid a quarterly cash dividend amounting to $1.65 per share, taking the total capital deployed in shareholder return programs over the past two years to more than $1.2 billion. Remarkably, the Leer mine achieved Level A verification under the globally recognized Towards Sustainable Mining framework, making it the first mine of any kind in the U.S. to do so.

Operational Efficiency and Market Positioning

The team focused on operational productivity, resulting in a 10% reduction in average cost per ton in the Metallurgical segment and a 25% improvement in average coking coal realization. This led to a more than 50% increase in operating margins. The company took advantage of a strong market environment, notably, with high-vol A coking coal priced at $262 per metric ton on the U.S. East Coast, providing an attractive arbitrage opportunity for select U.S. volumes moving into the Asian market. The convergence of these operational achievements and market dynamics positions Arch to increase its penetration in Asian markets, capitalize on constrained coking coal supply, and continue driving substantial shareholder value through a strategy poised towards share repurchases.

Outlook for Metallurgical and Thermal Segments

The metallurgical segment saw significant progress with a 10% cost reduction from the third to the fourth quarter and elevated productivity at Leer South mine contributing to a nearly 20% output increase quarter-over-quarter. For the upcoming year, the company expects continued productivity increases and further improvements at Leer South. In contrast, the thermal segment will uphold its harvest strategy, optimizing cash generation from thermal assets, with nearly $1.4 billion generated in adjusted EBITDA from the fourth quarter of 2016 while only using $172 million in capital. The company also maintains a strong emphasis on sustainability, boasting exceptional safety performance and environmental compliance.

Financial Resilience and Capital Allocation Strategy

Arch achieved a net cash position of $178 million by year-end. Looking ahead, the company anticipates capital expenditures to be within $160 million to $170 million, essentially maintenance level, and predicts minimal cash taxes due to net operating loss carryforwards. A potential cash outflow of up to $40 million is expected in the first quarter due to working capital trends but is forecasted to benefit modestly over the entire year. With a streamlined capital structure and focus on opportunistically deploying the remainder of discretionary cash flow, Arch is well-positioned for substantial share count reduction bolstered by its robust capital return program emphasizing share repurchases.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Arch Resources, Inc. Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Deck Slone, Vice President of Strategy. Please go ahead, sir.

[Deck Slone, executive]

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 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 Laing, our CEO; John Drexler, our COO; 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, executive]

Thanks, Deck, and good morning, everyone. We appreciate your interest in Arch and are glad you could comfort us on the call this morning. I'm pleased to report that during the fourth quarter, Arch continued to drive forward with our simple, consistent, and proven plan for long-term value creation and growth. During the quarter just ended, the team achieved adjusted EBITDA of $180 million, generated $127 million in discretionary accounts, bolstered our cash position by $107 million, consistent with our stated objective of building additional optionalities for potential future stock repurchases, initiated plans underlying cat call instrument associating with the now retired convertible securities, plate to a quarterly cash dividend of $32 million or $1.65 per share, increasing the total capital deployed in our shareholder return program since its relaunch 2 years ago for well over $1.2 billion, and achieved independent level A verification at the Leer mine under the globally recognized for sustainable mining framework becoming the first BS line of any type to do so. In short, we demonstrated strong progress against many of our strategic priorities, spanning numerous critical areas of fronts, including financial positioning, shareholder value creation, and sustainability. Critically, the team maintained its sharp focus on driving productivity improvements across the operating platform as well. Here too, we made a significant positive headwind as we achieved a 10% quarter-over-quarter reduction in the average cost per ton in our Metallurgical segment, secured a nearly 25% improvement in our average coking coal realization, and delivered an increase of more than 50% of our operating margin. Overall, the team delivered improved productivity, capitalized on a strong market environment and continued to lay the foundation for still stronger execution in future periods. Before moving on, let me make a few additional comments about our highly successful capital return program. As we stated many times in the past, the cap return program is the centerpiece of our value proposition and the single tenant of that program is a return to shareholders on effective 100% of the company's discretionary cash flow onetime. In any given quarter, of course, the amount of capital that is deployed in the program can and will vary based on several factors, including upcoming cash requirements, our minimum liquidity target we like. But those are these timing issues and do not change the fact that over time, effectively all of the discretionary cash returns to shareholders. On the Q3 call, as most of you will have noted, we signaled our intention of increasing our cash balance by $100 million or so, which we believe serves to enhance the potential for opportunistic share repurchases in the event of a market pullback. During Q4, we accomplished that objective, adding 7 million to our cash position. With that completed, we believe we've now effectively positioned the company to continue the evolution of our capital allocation model toward heavier share repurchases in the future. Matt will comment on the subject further in his remarks, but a major step in this regard is the planned settlement of the capped call instrument that we expect to complete in the near future. The settlement of the capped call in and of itself should result in the retirement of nearly 2% of our outstanding shares. Turning our attention to the market dynamics despite somewhat lackluster steel market fundamentals, coking coal markets appear reasonably well supported at present. Arch's primary product high-vol A coking coal is currently being assessed at $262 per metric ton on the U.S. East Coast, which while a step down from the average price that prevailed last quarter is still highly advantageous, particularly in line of March's first quartile cost profile. Moreover, the Australian premium low-vol index is currently trading $63 per metric ton higher than the U.S. East Coast price, which has created an attractive arbitrage opportunity for select U.S. volumes moving into the Asian market. Needless to say, we're sharply focused on trying to capitalize on that opportunity to the fullest extent possible. Of course, that focus on these opportunities aligns perfectly well with our already well-advanced objective of increasing our penetration in the Asian markets. We expect future steel demand to be centric. The primary reason that coking coal markets remain well supported in our estimation as of constrained supply standing from ongoing reserve degradation and depletion, accounting and regulatory pressures, limited capital availability, and persistent underinvestment. In 2023, according to Trade Dana, Australian coking coal exports declined nearly 6% when compared to 2022. That brings a total decline in Australian exports to around 40 million metric tons or more than 20% decrease since 2016, a peak year for our coking coal expense. While the U.S. and Canadian coking coal exports in aggregate bounced back moderately in 2023, offsetting the Australian decline to some degree, production for those 2 countries remains well below their respective peak levels. As a result of these factors, we remain constructive on the seaborne coking coal market and expect to continue to be in an excellent position to capitalize on this environment going forward. Looking ahead, we remain sharply focused on pursuing operational excellence, relentless, and hitting our volume and cost targets. Taking the reach of our high-quality coking coal products into the fastest-growing global markets, continuing to reward shareholders through our capital return program as we evolve towards a heavier share repurchase model, maintaining our strong financial position while capitalizing on the optionality in the foregoing periods of market pullbacks and advancing our industry-leading sustainability practices. We believe we're well-positioned to drive forward with all these objectives in 2024 and beyond, and in doing so, continue to generate significant value for our shareholders. With that, I'll now turn the call over to John Drexler for further discussion of our operational performance in Q4. John?

[John Drexler, executive]

Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team executed at a high level during Q4, delivering significant improvements against numerous operating metrics while turning in another outstanding performance in the critically important area of sustainability. In our core metallurgical segment, the team's strong execution contributed to significantly higher realizations, significantly lower unit costs, and much improved operating margins. In our Thermal segment, the team achieved a return to form of West Health as well as a solid contribution from the Powder River Basin assets despite a softening thermal market environment. The upshot was a greater than 50% sequential increase in discretionary cash flow, which, as Paul noted, is the engine for our robust capital return program. Let's take a closer look at the performance of the Metallurgical segment. During Q4, the metallurgical team delivered on one of its highest priorities, reducing its average cash cost by more than $10 per ton or more than 10% when compared to Q3. That's a significant achievement and one that serves to further solidify the metallurgical portfolios positioned in the first quartile of the U.S. cost curve. Importantly, the improved performance at Leer South contributed markedly to these stronger results. As anticipated, Leer South experienced slower-than-normal advance rates and lower-than-normal yields in the first 2 months of the quarter as the operation completed mining in Panel 5, where, as you will recall, the kolache was appreciably thinner due to its position at the outer edge of the reserve block. However, the mine made up for lost time once it transitioned to Panel 6 in early December, resulting in a nearly 20% increase in output in Q4 versus Q3. Looking ahead to 2024, we expect continued productivity increases for the portfolio as a whole as well as continuing improvements at Leer South over the course of the year. As you will have noted, we are guiding to coking coal volumes of 8.8 million tonnes at the midpoint for full year 2024. In addition, we are guiding to an average cost for the Metallurgical segment of $89.50 per ton, which is essentially flat versus 2023 despite inflationary pressures. More noteworthy in my view is the expectation of still further improvements in the Metallurgical segment's performance as Leer South transitions to the second longwall district in late 2024. As previously discussed, we expect better mining conditions in a materially thicker coal seam as the Leer South longwall advances into District 2 based on our significantly expanded drilling program. At a time when many of our competitors are wrestling with the migration to less advantageous and higher-cost reserves, we are fortunate to be moving in the opposite direction. Looking ahead, we currently expect a less-than-ratable shipping schedule for our metallurgical segment here at the outset of 2024. The constraint in sales volume relates to weather-related disruptions as well as unplanned and accelerated maintenance requirements at Curtis Bay, including, of course, majeure event that will affect vessel loadings in Q1. As you know, the Curtis Bay terminal is an important link in the seaborne logistics chain for our Leer and Leer South operations. So this outage will have a volume impact. We currently expect Q1 volumes to be modestly less than revenue. However, we expect the impact to be principally one of timing, which is to say we expect to make up for the mix shipments as the year progresses. I might add that we have factored those events into our full-year sales volume guidance. Let's turn now to our thermal platform, which includes our West of Well mine in Colorado with its high-quality coal and competitive access to seaborne markets as well as our legacy Powder River Basin operations. During Q4, West Elk capitalized on the transition to a more advantageous area of the reserve base by delivering its highest quarterly production level of the year at around 1.1 million tons. As most of you are aware, this is consistent with the normal run rates we have achieved at West Elk in recent years. While the line's overall financial contribution will continue to be muted to some degree by the need to make up for legacy price shipments that were missed in the second and third quarters of 2023, we expect a solid contribution in 2024 before a step-up in cash generation in 2025 when we will be transitioning into the beefing midyear. More encouraging still, in my view, as with our metallurgical platform, West Elk expects to transition to even more attractive reserves in mid-2025 when longwall mining shifts to the basin. As we have shared in the past, the cosine thickness is significantly greater and the coal quality appreciably better in the BC, which should translate into both higher volumes and stronger relative prices. This positive trajectory, coupled with the mine's access to seaborne markets and its durable domestic industrial customer base underscores West Elk's significant ongoing potential and further supports our belief that the mine will remain a value-generating component of our operating portfolio for the next decade, if not longer. In the final River Basin, the team made a solid financial contribution despite weakening market dynamics that resulted in a number of negotiated shipment deferrals based on customer requests. As always, we took steps to ensure that we preserved the value of our contract book with these negotiated agreements and parlayed the deferrals into additional sales in outer years, but those deferrals still resulted in lighter volumes in Q4. Looking ahead to the full year 2024, we have commitments in place for approximately 50 million tons of PRB coal and a price generally in line with our average realized price in 2023. As we have demonstrated repeatedly in recent years, we believe we can maintain our cost structure and preserve our ability to generate cash even at step-down production levels should that prove necessary. Finally, let me emphasize once again that our harvest strategy, which is to say our focus on optimizing cash generation from our thermal assets remains very much intact. Since the fourth quarter of 2016, the Thermal segment has generated a total of nearly $1.4 billion in adjusted EBITDA, while expending just $172 million in capital. Before passing the time to Matt, let me now spend a few minutes discussing our efforts in sustainability, which remains the very foundation of our corporate culture. During 2023, the company achieved an aggregate total lost time incident rate of 0.55 incidents for 200,000 hours worked, which is nearly 4x better than the industry average. Perhaps even more impressively, the Leer and Leer South mines completed 519 and 329 consecutive days, respectively, without a single lost time incident. Those strings are nearly unprecedented for underground mines of their size and complexity and further underscore our progress toward our ultimate goal of 0 incidents at every one of our mines every single year. On the environmental front, the company received 0 environmental violations under SMCRA versus an average of 11 by 10 of our large coal peers and recorded 0 water quality exceedances for the third year in a row, again, an impressive achievement by the team. Finally, and as Paul noted, our Leer operation became the first U.S. mine of any kind to achieve [ low-level ] amarification under the globally recognized towards sustainable mining framework. That accomplishment is further evidence of our deeply ingrained culture of continuous improvement and of our intense focus on raising the bar in all areas of our operating execution. With that, I will now turn the call over to Matt for some additional color on our financial results. Matt?

[Matthew Giljum, executive]

Thanks, John, and good morning, everyone. As usual, I'll begin with a discussion of cash flows and our liquidity position. For the fourth quarter, operating cash flow totaled $182 million, a sequential increase of nearly 40% from Q3 levels. As expected, we had a small working capital benefit in the quarter, contributing $7 million. Capital spending for the quarter totaled $55 million, and discretionary cash flow was $127 million. As planned, we grew our cash balance over the course of the quarter with an increase of $107 million. We ended the quarter with cash and short-term investments of $321 million and total liquidity of $444 million, including availability under our credit facilities. Debt at year-end was $142 million, resulting in a net cash position of $178 million. We have achieved our objective of enhancing our financial flexibility and do not anticipate needing to materially add to the cash balance in 2024. Before moving on, I managed to note a recent development in our outstanding debt that we completed shortly after year-end. As you will recall, we paid down the vast majority of Arch's term loan in early 2022, giving a small sub outstanding because of the interaction between the loan and other parts of our debt structure. Earlier this month, we refinanced that stub with a new $20 million term loan, all small transactions, the refinancing allows us to maintain the financial flexibility that we have grown accustomed to over the past several years without any material change in our ongoing debt service obligations. Next, I want to highlight a couple of notable financial accomplishments from 2023, starting with the capital return program. For the year, we deployed $355 million under the program, representing nearly 80% of the year's discretionary cash flow. That total includes dividends declared of $171 million or $9.20 per share and repurchases of common stock and diluted securities of $184 million. As for the remainder of the discretionary cash flow, we expect to deploy that opportunistically in future quarters. The second accomplishment is the ongoing reduction of our diluted share count and the simplification of our capital structure. Going back to the beginning of 2023, our diluted share count totaled approximately 20 million shares with more than 11% of that comprised of diluted securities, primarily the remaining convertible bonds and warrants. By the end of the year, the diluted share count was below 19 million shares with diluted securities representing just 3% of the total. So we reduced the total share count by 5% while greatly simplifying the capital structure. As the final step in that simplification process and another significant step in reducing the share count, we intend to unwind the CAT call. By unwinding in the near term, we will receive shares representing the current fair value of the instrument and estimate that could be as much as 2% of the fully diluted shares outstanding. While we are accepting a discount on the dollar value of the capped call, we believe that retiring the shares now in advance of expected future capital returns will prove more value-creating than delaying the retirement until the maturity date in late 2025. Before turning the call over for questions, I would like to cover a few cash flow guidance and modeling items for 2024. First, we expect capital expenditures to be in the range of $160 million to $170 million, representing maintenance-level spending. We currently expect that to be spread fairly ratably over the course of the year. Second, we expect Arch's share of additional maintenance and improvements at DTA over and above the normal operating costs to be approximately $10 million. This is not included in our CapEx guidance but is accounted for as an equity investment. I would also note that we expect this to be offset by additional income that we will generate from selling our excess capacity in the terminal to third parties. Third, with respect to cash taxes. At current metallurgy prices, we would expect our cash taxes for the year to be near the bottom end of our guidance range as we continue to utilize our net operating loss carryforwards. Lastly, as we look at working capital trends, we typically see a cash outflow in the first quarter, and we expect that to be the case in this quarter as well with an outflow of as much as $40 million. As we look at the full year, we currently expect to see a modest working capital benefit, which represents a tailwind of more than $80 million as compared to the working capital build we experienced in 2023. To wrap up, Arch entered 2024 in a great position to continue to deliver robust capital returns, only maintenance capital spending, minimal debt service obligations, the ability to utilize NOL carryforwards to minimize cash taxes, and a more favorable working capital trend. As we look at how we execute the capital return program, the combination of a streamlined capital structure, the reweighting of the program towards share repurchases, and the additional cash we currently have on hand positions us nicely to substantially reduce the share count this year. With that, we are ready to take questions. Operator, I'll turn the call back over to you.

[Operator]

[Operator Instructions] And the first question will come from Lucas Pipes with B. Riley.

[Lucas Pipes, analyst]

I first wanted to ask about the met coal guide for 2024. And when I think about the midpoint, 8.8 million tons, and I compare that to 2023 sales of 8.6 million tons kind of call it a delta there of 200,000 tons at the midpoint. A little surprised given the transition at Leer South. And so I just wondered if you could maybe walk us through maybe some puts and takes across the portfolio. I would appreciate your perspective on that.

[John Drexler, executive]

As we look at the volume guidance for '24, we're comfortable with what we have out there. We, as we've discussed, expect a continued opportunity to ramp at Leer South over the course of '24. District 2 for us, which we've been talking about and sharing with you guys as well is something that we'll be getting to toward the end of '24. So that transition is continuing. The expectation for Leer South is around 3 million tons this year. And so that, for us, is kind of comfortable. As you look at the rest of the portfolio, there are a lot of things that happen operationally between longwall moves at each of our longwall operations over the course of the year, et cetera, timing. But we're comfortable with that 8.8%. I'll share with you. The team is very focused on being higher than that number as we work over the course of the year. But as we kick the year off here, I wanted to make sure we were all in a range that we were comfortable with, but we're very focused on improving that number as we work over the course of the year.

[Lucas Pipes, analyst]

That's helpful. I appreciate the color. I'll turn over to the thermal side for a moment. And first, I wondered if you could maybe provide a mix expectation between West Elk and the PRB and then also where you kind of see PRB pricing contracted for 2024.

[John Drexler, executive]

Yes. Lucas, as we look at the tunnel portfolio, we're excited about what we've seen and the progress we've made at West Elk. As we reported, we've gotten back essentially to the expected run rates for that operation. As we got through the fourth quarter, we were at 1 million tons. That's kind of where we expect to be as we work through 2024, so 1 million tons a quarter, 4 million tonnes for the year. The balance then comes over to the PRB. West Elk's note, the real excitement is we're back to normal levels, but we're also going to be in a position where we're transitioning to the basin. So development is occurring there. By the time we get to mid-2025, we're going to be in an even thicker closing with better quality, so we're excited about that. In the PRB, the rest then still back to the PRB. We've indicated that we're kind of that 50 million ton level. If you look at our guidance, the midpoint of that guidance, our commitments are actually slightly higher where we sit today. You see where natural gas prices is at. As we reported, we took advantage of the opportunity of some of our customers in '23 that needed to look at their commitments and their inventories, and we were able to parlay that into additional volumes with some rollovers. In '24, it was about 5 million tons. So as we sit here today, we don't think it'd be unreasonable to think of something else in that magnitude, 5 million tonnes that could be impacted as we work through.

[Deck Slone, executive]

I would add that for the West Elk, we expect volumes to be higher. That's for sure, volumes were only around 3 million tonnes in 2023. So we expect a meaningful step up to between 4 million and 4.5 million tons in 2024, but prices are likely to be lower. So obviously, the seaborne pricing has come down. We have some legacy contracts that we still need to service. So the sort of size ways contribution despite the better results at West Elk from a production perspective, the better operations. Then the Powder River Basin, that pricing is around $15 is kind of where we're committed to right now. We still think that creates the opportunity for us to generate $1 to $1.50 margin. So look, overall, for the thermal contribution, perhaps a small step down given that the volumes are likely to be lower, but still a substantial contribution from the thermal segment. I know that doesn't necessarily come across from the guidance table because things like export tons are missing, et cetera. But we still think the sera segment is going to contribute a significant amount of cash in 2021.

[John Drexler, executive]

One thing I think I'd like to just kind of touch on again another second. I know it's a little line, we're guiding below what sold by about 1 million or 1.5 million tons. I think it's just plain and simple recognition that natural gas has fallen so much in the last couple of weeks that we're expecting a pretty hard pushback. Now we'll get that value. I think it's the reality, and I think we wanted to show it in our guidance.

[Lucas Pipes, analyst]

Yes. That's exactly what I wanted to get at. If you look at the guidance table, you committed at, call it, $17 and cash cost guidance is 16% to 17%. So maybe to help us understand this better in today's Newcastle price environment and what you have left to sell at West Elk, maybe domestically as well, where would you expect that $17.09 to trend in today's market environment?

[John Drexler, executive]

So Lucas maybe will tons on that. I mean, right now, you can look at it as the netbacks could be sort of in the 40% sort of 40-plus range. But look, there are a lot of moving parts of West Elk. And again, we grant you that there's a little -- that guidance table might cause a little confusion. But the reality is there are so many moving parts at Westell given in the wake of some of the quality issues we had in 2023, that we do think there is a meaningful margin still to be gained. And even with what I just described in that sort of mid-$40 range of netback, we still believe that when you sort of factor in some of the volumes that are on price, again, you're going to see a widening out and a solid margin from the thermal segment at all. Lucas, I mean, you're not -- with that additional export volume, even in use castle prices that are down from where they have been that will move that number up that's in the guidance table over the course of the year. I think that's kind of been the historical practice you would have seen from us as well if you go back to the previous quarters, beginning of the year, et cetera.

[Lucas Pipes, analyst]

And sorry if I missed it, how many West Elk tons are uncommitted on price today? And would that all go into the export market with that $40-something netback?

[John Drexler, executive]

So it would be -- it's close to 1 million tons that would not be priced as yet.

[Operator]

The next question will come from Katja Jancic with BMO Capital Markets.

[Katja Jancic, analyst]

Staying on West Elk, how much does West Elk contribute in '23?

[John Drexler, executive]

So Katja, once again, we're -- as we've indicated, this past year, '23, West Elk, while it was constrained and had issues, it produced 3 million tons. We expect that to grow to 4 million tons. So we do see an enhancement there, given where the international markets were and with some of the challenges we had, we still had a nice margin at West Elk. You've got -- as we just talked about some pressures in the markets themselves as we step into '24 of West Elk, but you see a very meaningful increase in volume. So the contribution, as we see it, is probably flattish between '23 and '24 and still results in a nice cash flow for that complex contributing to the Thermal segment.

[Deck Slone, executive]

Maybe just a little bit more granularity back again, probably $10 to $15 margin is how you think about that for the 3 million tons. So if you think about that $10, $15 margin, kind of what we're saying is, look, you could see that volume that John just described, the 3 million ton step up to 4 plus, the way that margin gets compressed a little bit in the current environment. So maybe that's helpful.

[Katja Jancic, analyst]

No, that's super helpful. And then on the met side, you're guiding 8.6 to 9. Do you still, over time, expect you can get to 10 million tons?

[Deck Slone, executive]

So Katja, I think as we continue to have discussions around the met portfolio, we are comfortable, especially as Leer South transitions into District 2 that we're going to see volumes at that 9-plus million ton level. We'll continue to do everything to focus on getting that to the highest amount of production that we can out of that portfolio. And we do expect it to be well north of 9. And that will be a great net portfolio. And if we can push it up to 10, we'll be working to do that as well. But it's too early for that far out to really solidify some of that guidance.

[Paul Lang, executive]

The one thing I'd add is -- I'll give John a lot of credit. As he noted in his remarks, we came through October, November as expected through some bad conditions. We hit December in the new panel to my ran as well as we've seen it grow. And we know we can run the volumes. So I gained a lot of confidence in what I saw and we saw the team produced. So I still remain fairly optimistic on that.

[Operator]

The next question will come from Nathan Martin with the Benchmark Company.

[Nathan Martin, analyst]

Maybe just a follow-up on the most recent question. As we think about the net operations, in general, again, I think you guys had in the past to eventually get to that 10 million ton run rate. But just to be clear, does that include the thermal byproduct tons? Because I know some people, I think, have likely assumed that was just coking coal. So if that does include the byproduct tons, that, in theory, your coking coal tons more likely in the low $9 million kind of range. Just it would be great to get your thoughts on the right way to think about that.

[Matthew Giljum, executive]

So Nathan, what we're talking about met, in these numbers, we're using the goal of ultimately maximizing the net sales. That's just the met. It excludes the thermal by-product. As we mine across our portfolio as part of the production and processing, you are left with that big product. So that's incremental to the volume, the net volume that you have there.So if you add in the MIS product, then yes, we will be over 10 million tons when you add back the impact of the mid as we look longer term absolutely.

[Nathan Martin, analyst]

Okay, John. Just wanted to make sure that I was clear for everyone. I appreciate that. And then maybe sticking with Met for a second. Any thoughts, guys on this historically wide spread between U.S. East Coast and met coals like we and the Altmetcoals, especially given your high portion of mix to HCA production? And then how do you see that possibly affecting your realized price return in '24? And what do you think it takes for the spread to kind of return closer to normal?

[Deck Slone, executive]

And let me take a shot at that, and others can join in. Obviously, we don't have a perfect answer. This is a very wide differential historically. We think it's too wide. We think it will close over time because it creates significant arbitrage opportunities. But as you noted, the average over the past 7 years between the average differential over the past 7 years has been a $10 or so premium for premium low-vol, looking to make the argument that the spread could reasonably be assumed to be around $20. That's the transportation differential between moving tons from Australia into Japan versus the U.S. East Coast into Japan. But the fact is it's more than $250 today. One of the things I would point to is different products like different roles in coking coal blends. And so right now, as we discussed, as Paul noted, coking coal exports out of Australia are down 40 million tons, 40 million metric tons since 2016, and we continue to see operational challenges there. So there's real pressure on the availability of premium low-vol and premium low-vol does have a very specific role that it plays in blends. And so look, I think there's scarcity there. I would add the fact that with cost and royalties moving up in Australia, and that also is supporting that higher premium low-vol price not to say that's justification because, again, we think this creates a significant arbitrage opportunity for us to sell our tons in the Asian market rather than into the Atlantic market and for the Asian buyers to reach on to the U.S. East Coast to pick up tons.So look, we still expect that spread to contract. I do believe the fact that there are fewer U.S. producers who really have a lot of experience and exposure in Asia as more U.S. producers get that exposure. I do think that creates more of an opportunity to see the equilibration of those 2 prices. But look, we're glad to see the higher PLD price. We absolutely believe that HPA and the other U.S. East Coast prices should be pulled up over time by the scarcity there.

[John Drexler, executive]

Yes. I think one of the interesting things, Nate, is that with Leer, we have unusual ability for the U.S. and that we can compete closer to a PLD because of the CSR plastic properties of the coal. And because of that, we do get an opportunity to participate in that arbitration. Look, it's a little odd and I think Deck did a good summary of all the things that are going on that are created. Right now, we have that ability to compete head-to-head, and we'll take advantage of it while it exists. And that we are selling and we are taking advantage of it in some instances. So there are tons we're selling tied to ELD. In other instances, it may be that there are buyers in Asia who aren't quite willing to pay that price because they don't need that full quality. So we can sell a lower quality product with a little more ash and take advantage of a blend between PLD and some of the other indices and still get a premium to the U.S. East Coast price. So we absolutely are tapping into that and taking advantage, but it would be nice to see the entire East Coast market lift. And I think, again, that would take some of our competitors following suit and being able to sort of penetrate into Asia in the way we have.

[Nathan Martin, analyst]

Appreciate those comments, guys. And then maybe one final question, Paul, or maybe Matt, just as it relates to the discretionary cash flow, again, you guys mentioned your decision to increase your cash position quarter-over-quarter. Obviously affected share repurchases. I think you only spent about $3 million in the fourth quarter there. Now the talk is moving to heavier, more opportunistic share repurchases. So I guess, first, can you provide maybe just some more details behind your decision to build that cash during 4Q? I think the average share price was below where it has been at the start of the year here. And then second, should we expect the return of discretionary cash flow, obviously, other than the dividend to continue to kind of be lumpy? And then finally, would you expect to increase your buyback authorization as you shift to buying back more stock?

[Matthew Giljum, executive]

Van, I think I'll start this, but I think this is probably a group effort. But as I look back to the capture program in the last 2 years, in fact, there's very little that changed. Arguably, Arch took the lead in this area and really set the standard with colder the subdermal premise of our shareholder return program is really pretty simple, and we live by it. And this is the shareholders' money, and we're going to return. And we have shareholders that prefer dividends or leaving shareholders of preferred buybacks, and we've tried to be responsive. The decision to build the $100 million on the balance sheet is really responsive from some of our shareholders, we thought we should really hold on some dry power when we see pullbacks in the market. Like everybody in the commodity business, we experienced significant volatility here. And I'd expect that to be the case in the future as well. Now while we remain very constructive on the current seaboard coking coal market, our tour story in general also, and I think you see that by our willingness to exit the capped call. When we see pullbacks, it generally coincides with lower cash balances on the balance sheet, and that's exactly what we're trying to take advantage of. So I look at our buybacks. The history of it has, I think, been pretty good stewards of the shareholder money. The 12 million shares we've bought back over the last 6 or 7 years, we've averaged about $90. I think in this pricing environment, it's a pretty good story. And we're clearly not better at picking the timing of buying and selling our investors, but we want to be prudent on how we deal with the buyback program and building cash towards the operation targets done with the goal of trying to be a little more responsive.

[Paul Lang, executive]

And maybe just to add a little bit to that. Just to give you a specific example. If you go back to the middle of last summer, we saw the stock price dip when the net prices dipped. We're in the cost $110 a share, maybe a little lower. And as we entered Q3 of that year, we were at minimum liquidity levels. So we had -- certainly, we used the cash flow we were generating at the time to buy back. But if you look at our Q3 buybacks, relatively weak. And if we had had a little dry powder at that time, we really have done something more substantial. And that's really the type of thing we're trying to build in the ability to do today is really be able to take advantage of those times. There's going to be volatility in this industry, and we should be able to manage to take some of that volatility out of the trading for one, but also to take advantage of times when we think that the value has gotten a little lower than it really should be. So I mean I think that's the right way to look at the cash build. When you think about the part of your question regarding the lumpiness of capital returns, look, for better or worse, the cash flows are fairly lumpy the way the business runs. And so there's going to be some element of that. But hopefully, what we've done by building and cashiers try to smooth some of that out. And then as we look at the authorization, look, we'll continue to watch that. I wouldn't be surprised if here in the next quarter or so, we need to potentially refresh that authorization, but that will be a discussion we'll have with the Board when the time is right.

[Operator]

Your next question will come from Alex Hacking with Citi.

[Alexander Hacking, analyst]

So I guess just coming back to Nate's question on HVA pricing because your gap is pretty wide, right? I think FOB Australia, HCC was priced around $290 a short ton in the fourth quarter. You guys are realizing $195 million. $100 gap, right? And a lot of that has to do with the pricing of HVA. I guess how much of the issue there is with all the new supply? Because Leer South ramped up, and it seems like mine #4 in Alabama has also transitioned to HVA. Like is that the fundamental problem that we've just had a big chunk of new supply and the market's struggling to absorb it? Or is there something above and beyond that?

[Deck Slone, executive]

Yes. So Alex, yes, I mean, look, I think the right way to think about the spread with PLD is right now, it's about a $53 differential. So that is simply a function of sort of market conditions and the aspects we talked about. Now when you look at our average coking coal realization, the average HBA price in Q4 was $281. When you think about sort of the Arch blended portfolio, we might be talking about something more like $75 would have been sort of the average price that prevails. So you take that $275 million, and you say, okay, that $275 metric. That's $250 short, you assume a $50 rail rate that's 200. And then when we think about the fact that we had North American volumes committed at 182, then we're a fixed price for about 40% of our volumes, it kind of lands you right on top of that $196 number. So look, I would say we're really delivering on that U.S. East Coast HBA price or the U.S. East Coast prices generally, we're capturing that realization fully. So we feel good about that. And I still believe that's the best proxy for us going forward is U.S. East Coast pricing. Even though as indicated, there will be instances when we try to move tons into Asia at the PLD price and instances where we can do that or at a blended price in Asia. So look, we feel good about that. But I would say, back to the issue of sort of what the differential is between PLD and HDA, again, some of those fundamentals that we discussed, certainly don't view this as a new supply issue. Yes, U.S. production did bounce back about 5 million tons or exports bounced back about 5 million tons in 2023. But Australia was down 10 million tons. So in reality, the seaborne market lost supply during 2023. So we certainly don't see that as the issue. I would suggest that the 5 million tons of the U.S. was really just for the most part, bringing additional volumes out of the existing portfolio. There aren't a lot of shiny new assets being added. So we see sort of limitations to how much the U.S. can move up. But again, we think the market is really quite well supported. We think we'll continue to have opportunities to move additional volumes. In Asia, we're shipping 40% of our tonnes into Asia today. We expect that to be 50% in relatively short order and probably 60 thereafter. So look, we're moving in the right direction into the sort of the center of the steel-making future. And so feel good about all of that.

[Alexander Hacking, analyst]

Okay. You actually kind of answered my second question, which was going to be around the tonnage that's going into Asia. So let me just talk, I guess, real quick. I apologize if I missed this. In terms of the shipments in the first quarter, there are going to be weaker or impacted by some logistical issues. Did you quantify that? Or can you quantify that?

[John Drexler, executive]

We indicated they'd be less than ratable for the 8.8 million tons. The word we used was modestly, I think from a ratable perspective, you could look to a 5% to 10% reduction from ratable on the 8.8%. So that's a vessel or two, Alex. So that's just the kind of timing that you're talking about here, and we'll be making that up as we go forward. We don't have any concerns about that. That suggests missing -- look, the 2 vessels 150,000 tonnes. It doesn't take much for volumes to slip from one quarter to the next. Look, Persta is moving quickly to resolve the issues. But when you're talking about force majeure events and an outage that spans multiple days, that really does result in a change in kind of the efficiency and productivity of the facility. They did a great job of getting things lined out. But it was multiple days of outage. And so again, we could have a small effect, and we want to be prepared for the fact that we could see a couple of vessels slip out of Q1 into Q2.

[Operator]

The next question will come from Michael Dudas with Vertical Research Partners.

[Michael Dudas, analyst]

So anyway, first thing on the met coal front, maybe Matt can go over admirable with per ton cost flat, but what are you budgeting for 2024 on some of the input costs, labor, consumables, contracting, royalties, et cetera? What are you moving at a better rate or higher rate than normal? I want to kind of contribute to help those costs as we move through '24. And is that something similarly given with expected better volumes we could think about for 2025 preliminarily?

[Matthew Giljum, executive]

Yes, Michael, No, good question. I mean you hit on everything. I mean, as the economy recovered, as supply chain issues prevailed, we saw significant inflationary pressure on the industry. We saw supply chain issues pushing things out, delaying major pieces of equipment, what have you. The team did a fantastic job of managing all of that and continues to do a great job of managing all of those things. We continue to see higher inflation in certain things that repair parts and supplies that we're acquiring. We're seeing other things where inflation has slowed down significantly. So that all gets factored in. From the labor perspective, labor is tough in our industry. Really, as we've talked about this at length before, we're very fortunate that we've got great, long-lived, low-cost assets that operate incredibly safely and have a great culture. Our most important asset are our employees. And when they feel that way, our turnover is lower than others, but still labor is another impact that is affecting the cost. As we sit here today to be able to move flat from '23 to '24, obviously, with some modest improvements in volumes but still hard work by the team to manage costs across the board. As we step forward into '25, one of the wonderful things about our portfolio is our ability to continue to manage to that first quartile cost structure once again, high volumes, great assets, great people running them, and we think we're in a good position as we move forward.

[Michael Dudas, analyst]

Appreciate that. My second question maybe for Paul, John, or maybe the group. Certainly, there's been a pretty sizable shift in the thermal market in the U.S., so with gas prices remaining quite low. Maybe a sense of what your customers are thinking, any thoughts on plant retirement pace or the speed up? And as you're thinking about the next several years, did we have a nice recovery when prices were strong because of the Ukraine issue a couple of years ago? On the pace of maybe moderating or declining what the PRB assets will contribute in the marketplace, given what maybe could be a little longer trough in the market from a cyclical side relative to the other secular issues that face your customers.

[Paul Lang, executive]

I'll start off and let the others jump in. But as I've said in the past, we look at this situation from a pretty pragmatic point of view. The last coal-fired power plant in the United States was 10 years ago. Last year, we saw about 13 gigawatts of coal-fired generation shut down in the U.S. and there's expected to be another 7 million or 7 gigawatts in '24. The funny thing is, though at the same time, 2023 was a record year for global coal consumption or excuse me, 2022 was, and 2023 is looking like it also is going to be another record year. So the tool market as well as seaborne thermal as well as seaborne in the coking coal market. It still remains very strong. And if you have assets in the U.S. that can get coal offshore, it still has a very good outlook. And West Elk is a prime example of that, where it's a coal that sits very well in the Asian market because of its low ash and low sulfur, and high CV. So I think there is a diminishing role in the U.S. for coal. Our kind of internal view is that the PRB will continue to drop about 5% or 10% a year. And I think what you're seeing or we could see in 2024 or head into the early part of the year is look at $1.70 natural gas, it's a pretty tough road to go forward.

[John Drexler, executive]

And Michael, I would agree with all that, obviously. But look last year, utility consumption was around 390 million tons in the U.S., go back to 2008, it was $1.1 billion. So clearly, there's been a pretty steep glide path here. We are absolutely prepared if we start to see a plateau, we're prepared to continue to produce at a higher level, have the ability to do that, we'll take advantage of it. But I think we've been right to prepare for that sort of decline and do all the things that you know we've done, trade the footprint, build the thermal mine reclamation fund. The PRB shipped about 230 million tons in total in 2023. As Paul said, right now, we expect that to continue to step down 10% per year or so probably makes sense. We could definitely see some delayed retirements of power plants, that $1.50 or that $1.70 natural gas price right now is a green line saying, you're okay to close. I will say this, concerns about reliability are growing. There is more discussion. We'll see if we end up with some more significant delays. We've seen a few here lately. So we're prepared to do in the direction. If it continues to decline in the way that it has, we're prepared to bring the plane in for a soft landing in peer Basin, if suddenly we see a plateau, we're also ready to capitalize.

[Matthew Giljum, executive]

And Michael, I'll round out those comments with just the wonderful folks out at our operation that have done an incredible job through the entirety of that cycle and through the decline over many years to continue to manage the asset in nimbly and to do it in a way to manage the costs. You go back to the high watermark for the Powder River Basin or Black Thunder was 117 million tonnes. This year, it was $60 million. Right now, you see us guiding to the entirety of that decade of change. The team there has embraced and continues to manage the costs and to be able to put us in a position to continue to generate cash, and we've got high confidence no matter where that goes as we go forward that we're in a position to do the same thing as well.

[Operator]

The next question will come from Christopher LaFemina with Jefferies.

[Christopher LaFemina, analyst]

I had a question about the capital return strategy. So Paul, you mentioned accumulating this cash as dry powder. You've talked about in the past as well. You've targeted $100 million of cash build, which you achieved in the quarter. So as we go forward from here, let's assume that you don't get the pullback in your stock price. Should we then assume that -- or free cash flow will be returned to shareholders and it's really just a question of whether it's dividends or buybacks? Or do we continue to accumulate more cash waiting for that potential pullback to happen? That's my first question.

[Paul Lang, executive]

Well, Chris, I think the real simple answer is that we got ourselves to where we said kind of the upper end of our cash range is, and we're ready to move on. I think we've positioned ourselves very well. And I think there are 2 stall arguments for moving forward with heavier share repurchases right now. I think first and foremost, is the discussion here earlier. The fundamentals for the metallurgical segment are still pretty good. Pricing is looks pretty strong over the medium and short term. And that's probably not baked in the dynamic or it's not reflected in our share front. And second, as John pointed out, we expect ongoing operational improvement in '24 and '25. So I think we set ourselves up well for what's coming. And I feel good about the position we put ourselves in.

[John Drexler, executive]

One thing I'll add, Chris, we're -- as Paul said, on the cash balance, we're at the level we wanted to be at. And I think I was pretty clear in my prepared remarks. We don't see the need to build that here in 2024. Maybe one data point. As we look at the cap call, which is going to be something similar to a share repurchase, the breakeven, if you look at where we're at today from a share price perspective and where we would need to be in 2025 to make this a better bet to do it today currently sits at a little less than $200 a share. And if we look at it that way, we look at our plans, we look at what we think we'll be able to achieve in terms of capital returns over the next couple of years. We think it's better to do this today. And so taking that and translating into share repurchases, we think we're in a position that in today's share price environment, we've got a lot of cash we're going to generate to buy back shares. And then if we do see a pullback in the world where we don't have a pullback would be one of the first times. I think we've seen something like that in a long time in our business, but we don't see a pullback. We're going to be spending 100% of the cash flow as we sit here today, returning that to shareholders.

[Christopher LaFemina, analyst]

And is there a kind of number on a pullback that you'd be looking for? I'm not sure if you answered that question, but your stock is down 15% from its recent high. Is that enough of a pullback? Or does it have to be much more significant than that?

[John Drexler, executive]

I don't think we want to get into where we're going to be at certain price points. I think where we sit today, what the stock has done in reaction to this, I think we'd be fairly active in the repurchase program.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Paul Lang for any closing remarks. Please go ahead, Sir.

[Paul Lang, executive]

Well, thank you again for your interest in Arch. As I noted earlier, we remain focused on pursuing operational excellence, delivering on our volume and cost targets while driving continuous improvement across the portfolio. At the same time, we continue to reward shareholders through our capital return program. We're intensifying our focus on share repurchases and opportunistically shrinking our diluted share count over time. With that, Operator, we'll conclude the call, and we look forward to reporting to the group in May. Stay safe and healthy.

[Operator]

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