Arch Resources Reports Second Quarter 2023 Results

Arch's core metallurgical segment contributed adjusted EBITDA of $132.8 million in Q2.  In sum, the metallurgical segment's average selling price for coking coal decreased approximately 27 percent on a sequential basis due to the significant pull-back in seaborne coking coal prices; the average cash cost per ton sold increased by approximately 9 percent; and the average cash margin per ton declined by approximately 56 percent.  During Q2, Arch shipped a significantly higher percentage of coking coal from its higher-cost and lower-realization metallurgical operations, particularly Mountain Laurel, affecting comparisons with Q1.  Arch expects coking coal sales volumes to increase between 5 and 10 percent in Q3 versus Q2, despite the softer demand environment. 

Arch's legacy thermal segment contributed adjusted EBITDA of $29.2 million in Q2, against capital spending of $10.0 million.  Thermal segment margins were compressed by previously discussed geologic challenges at the West Elk mine in Colorado that acted to constrain volumes and erode product quality, which was counterbalanced to some degree by improved margins from the Powder River Basin operations due to strong cost control.  Arch expects the challenges at West Elk to continue to hamper the thermal segment's sales volumes and to pressure unit costs in Q3, at which point the mine expects to transition to an area of more advantageous geology.  Arch expects to ship approximately 60 million tons from its Powder River Basin operations in 2023, while rolling the remaining 5 million tons of its committed and priced PRB volumes into 2024 in response to customer requests and in exchange for volume and/or price considerations on future shipments.  Since the fourth quarter of 2016, the legacy thermal segment has generated a total of $1,334.1 million in adjusted EBITDA while expending just $154.2 million in capital.

Financial and Liquidity Update

In keeping with its capital return formula, the Arch board has declared a total quarterly dividend of $75.4 million, or $3.97 per share, which is equivalent to 50 percent of Arch's second quarter discretionary cash flow.  In addition, the company deployed $73.5 million in Q2 to repurchase 623,304 shares at an average price of $117.91 per share. 

Arch has now deployed a total of $1,161.3 million under its capital return program since its relaunch – inclusive of the just-declared September dividend – including $643.7 million, or $34.64 per share, in dividends and $517.6 million in common stock and convertible notes repurchases. 

In total, Arch has now used common stock and convertible notes repurchases to reduce dilution by approximately 4.1 million shares.  Arch ended Q2 with 18.9 million diluted shares outstanding.  Additionally, Arch ended Q2 with approximately 419,000 warrants outstanding, or less than 22 percent of the original issuance.  Arch expects these remaining warrants to be exercised by year-end, which will further simplify the capital structure. 

Arch ended Q2 with indebtedness of just $137.7 million after paying down an incremental $13.0 million during the quarter.  In comparison, cash, cash equivalents and short-term investments totaled $235.1 million and liquidity stood at $361.2 million.

"We have made excellent progress in recent quarters towards simplifying the capital structure, reducing indebtedness, and defeasing long-term reclamation liabilities," said Matthew C. Giljum, Arch's chief financial officer.  "Through these efforts, we believe we have positioned the company to generate significant levels of discretionary cash in a wide range of market environments, thus laying the foundation for strong shareholder returns and the ongoing, systematic reduction in our overall share count in future periods."

Capital Return Program

Arch generated $196.8 million in cash provided by operating activities in the second quarter, which included a reduction in working capital of $62.5 million.  The company invested $46.1 million in capital expenditures, resulting in total discretionary cash flow for the quarter of $150.7 million.  The third quarter dividend payment of $3.97 per share – which includes a fixed component of $0.25 per share and a variable component of $3.72 per share – is payable on September 15, 2023 to stockholders of record on August 31, 2023. 

Since the second quarter of 2017 – and inclusive of the program's first phase – Arch has now deployed a total of nearly $2.0 billion under its capital return program.

"The board views the capital return program as the centerpiece of Arch's value proposition," Lang stated.  "While we believe the current capital allocation model has driven – and continues to drive – substantial value for shareholders, the board is committed to continuously evaluating the optimal means for deploying future discretionary cash flow, including the relative weighting of dividends versus share buybacks.  The board factors significant changes in circumstances – including movements in the company's share price – into its decision-making process." 

As of June 30, 2023, Arch had $248.9 million of remaining authorization under its existing $500 million share repurchase program.

ESG Update

During the second quarter, Arch maintained its exemplary environmental, social and governance performance.  Arch's subsidiary operations achieved an aggregate total lost-time incident rate of 0.47 per 200,000 employee-hours worked during the first half of 2023, which was almost five times better than the industry average, and recorded zero environmental violations and zero water quality exceedances over that timeframe as well. 

Arch also published its 2023 Sustainability Report during Q2, which details – among other things – the 47-percent reduction in CO2-equivalent emissions the company has achieved since its base year of 2011. In addition, the State of Wyoming recognized the Black Thunder mine with the 2023 Excellence in Mining Reclamation Award during the second quarter. 

Market Update

Coking coal prices retraced significantly during the quarter, likely due to continuing weakness in global steel production.  Hot metal production for the world excluding China was down an estimated 2.8 percent through June, against 2022's already depressed levels, according to the World Steel Association.  Even with this challenging backdrop, U.S. High-Vol A coking coal – Arch's principal product – continues to trade at levels supportive of healthy margins for the company's low-cost metallurgical segment.

The supply side remains constructive, in Arch's estimation.  Exports from Australia, the United States and Canada – the principal suppliers of high-quality coking coal to the global seaborne market – are down nearly 3 million tons in aggregate year-to-date against last year's already-constrained levels.  In addition, there is evidence that recent price levels are beginning to exert pressure on marginal cost producers, with two U.S. metallurgical complexes having shuttered in recent weeks. 

Looking Ahead

"The Arch team continues to drive forward with our simple, clear and actionable plan for long-term value creation," Lang said.  "In recent quarters, we have expanded and strengthened our world-class coking coal portfolio; increased the global reach of our high-quality coking coal products; reduced our indebtedness while building and maintaining a net positive cash position; greatly simplified our capital structure; and extended our industry-leading ESG practices.  Through these substantial and ongoing efforts, we believe we have laid a strong and durable foundation for long-term value creation, with the capability to generate significant levels of discretionary cash with which to continue our ongoing capital return program."

				2023
				Tons			$ per ton
Sales Volume (in millions of tons)
Coking				8.9	-	9.7
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