April 25, 2024 - Arch Resources, Inc. (NYSE: ARCH) today reported net income of $56.0 million, or $2.98 per diluted share, in the first quarter of 2024, compared with net income of $198.1 million, or $10.02 per diluted share, in the prior-year period. Arch had adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirement obligations, and non-operating expenses ("adjusted EBITDA") [1] of $102.9 million in the first quarter of 2024. This compares to $277.3 million of adjusted EBITDA in the first quarter of 2023. Revenues totaled $680.2 million for the three months ended March 31, 2024, versus $869.9 million in the prior-year quarter.

In the first quarter of 2024, Arch drove forward with its key strategic priorities and objectives, as the company:

• Generated $128.3 million in cash provided by operating activities and $82.8 million in discretionary cash flow – defined as cash provided by operating activities less capital expenditures – to fuel its significant capital return program
• Reduced its diluted share count by 3 percent as it retired 315,721 shares via the unwinding of the capped calls associated with the now-retired convertible senior notes and deployed $15.7 million to repurchase an additional 94,701 shares
• Maintained $319.8 million of cash, cash equivalents and short-term investments and a net cash position of $174.0 million, and
• Extended its sustainability leadership, with its Leer and Leer South operations sharing the 2024 Governor's Milestones of Safety Award, West Virginia's top safety honor, and Leer South claiming the Greenlands Award, West Virginia's top environmental honor

"During the quarter, our core metallurgical segment – despite headwinds stemming from a weaker pricing environment, logistical disruptions, and lower productivity rates associated with less favorable geologic conditions – delivered another first-quartile cost performance, achieved a $56 per-ton cash margin and generated substantial discretionary cash flow," said Paul A. Lang, Arch's CEO. "These solid results underscore yet again Arch's durable cash-generating capabilities – as well as the value-creating power of our robust capital return program – across a wide range of market environments. We have now deployed more than $1.3 billion in our capital return program since its relaunch in February 2022, inclusive of the just declared June dividend, and expect that total to grow appreciably in coming quarters, with an emphasis on the ongoing reduction in our share count."

Operational Update

"After a solid but less-than-ratable first quarter performance, our core metallurgical portfolio is in the process of transitioning into increasingly favorable geologic conditions, and we expect good momentum through the balance of the year," said John T. Drexler, Arch's president. "We anticipate ongoing improvements in both production levels and unit costs, culminating in a step-up in output at Leer South as we advance into the second longwall district in the fourth quarter of 2024. While our thermal operations experienced an effectively break-even Q1 performance in the face of a rapidly cooling domestic demand environment that drove an estimated 10% quarter-over-quarter decline in U.S. thermal coal production, we are moving quickly to better align production and shipping levels in our thermal segment. We expect those steps to drive a material improvement in cash generation in the year's second half."  

Arch's core metallurgical segment contributed adjusted EBITDA of $129.5 million in the first quarter. During January and February, the Curtis Bay Terminal (CBT) in Baltimore experienced weather-related disruptions as well as unplanned maintenance requirements, including a force majeure event, that reduced vessel loadings. Those disruptions were followed by the tragic collapse of the Francis Scott Key Bridge on March 26 that closed the harbor and prevented the movement of two Arch export vessels – totaling 165,000 tons – that were scheduled to sail prior to quarter-end. Based on U.S. Army Corps of Engineers projections, the harbor's main channel is expected to remain closed until the end of May, restricting all large vessel movements from CBT.

Arch is working closely with the DTA terminal in Newport News, Virginia, in which it owns a 35-percent interest, and with its rail service provider to move as much of its export coking coal volume as possible via that terminal, while also exploring other options. Based on the currently projected timeline for the reopening of the main shipping channel in Baltimore, Arch expects to ship between 1.9 and 2.2 million tons of coking coal to international and domestic customers in Q2, with the precise level dependent in large part on the actual timing of the CBT reopening and the full restoration of the logistics chain. While the Baltimore tragedy will have an impact on its second quarter sales, Arch believes it has the necessary stockpile capacity to avoid any disruptions in production. The company continues to guide to coking coal sales volume of 8.6 to 9.0 million tons for the full year, with the expectation of heavier shipping levels in the second half of 2024.

Arch's thermal segment effectively broke even in the first quarter. Arch's West Elk longwall mine operated efficiently and generated a solid cash margin, while the Powder River Basin assets operated at a loss after entering the year at a stripping rate that significantly exceeded Q1 shipment levels. While the thermal team is still in the process of realigning stripping rates and operational activities with lower demand levels, Arch expects another negative cash contribution from the Power River Basin operations in Q2. However, the company expects to benefit from the first half's excess stripping levels in the year's second half. Since the fourth quarter of 2016, the thermal segment has generated $1.2 billion more in adjusted EBITDA than it has expended in capital. 

Financial, Liquidity and Capital Return Program Update

Consistent with its capital return framework – which stipulates the deployment of 100 percent of the company's discretionary cash flow via its capital return program with an emphasis on share buybacks – the board has declared a fixed and variable dividend totaling $20.7 million, or $1.11 per share, which equates to 25 percent of Q1's discretionary cash. This dividend – which includes a fixed component of $0.25 per share and a variable component of $0.86 per share – is payable on June 14, 2024, to stockholders of record on May 31, 2024. The board has directed that the rest of Q1's discretionary cash flow be returned to shareholders via share repurchases.

Arch ended the quarter with $319.8 million in cash, cash equivalents and short-term investments, which was roughly equivalent to the year-end 2023 total. This compared to $145.8 million in total indebtedness at March 31, for a net cash position of $174.0 million.

"The centerpiece of our value proposition is the planned return to stockholders of effectively 100 percent of the company's discretionary cash flow over time," Lang said. "With the streamlining of our balance sheet, the emphasis on share repurchases in our capital return formula, and the building of surplus cash for more opportunistic share repurchases in the event of a market pullback, we believe we are in an excellent position to substantially reduce the share count over time, and in doing so drive significant value for stockholders."

In addition to the 315,721 shares retired in concert with the previously announced unwinding of the capped call instrument, the company deployed $15.7 million during the quarter to repurchase 94,701 shares at an average price of $166.30 per share. In total, Arch has now used common stock and convertible notes repurchases and the unwinding of the capped calls to reduce shares outstanding by 3.5 million shares, or 16 percent, when compared to the level in May 2022.

Arch has deployed more than $1.3 billion under its capital return program since its relaunch in February 2022 – inclusive of the unwind of the capped call instrument and the just-declared June dividend – including $726.9 million, or $38.53 per share, in dividends and $564.6 million in common stock and convertible notes repurchases and retirements. Since the second quarter of 2017 – and inclusive of the program's first phase – Arch has deployed more than $2.2 billion under its capital return program. As of March 31, 2024, Arch had $202.0 million of remaining authorization under its existing $500 million share repurchase program.

Sustainability Update

Arch maintained its exemplary environmental, social and governance performance during the first quarter. Arch's subsidiary operations achieved an aggregate total lost-time incident rate in Q1 of 0.62 incidents per 200,000 employee-hours worked, which was more than three times better than the industry average. On the environmental front, the company again recorded zero environmental violations under SMCRA as well as zero water quality exceedances across all its subsidiary operations for the quarter.

Arch subsidiaries also garnered some of the industry's highest sustainability awards during Q1.   The state of West Virginia named the Leer and Leer South mines co-recipients of the Governor's Milestones of Safety Award for underground mining, the state's highest safety honor. In addition, the Mountain Laurel mine and the Leer, Leer South and Mountain Laurel preparation plants were each honored with a Mountaineer Guardian Award for safety excellence.

In the environmental arena, Leer South claimed the Greenlands Award, the state's highest honor for environmental achievement, and Leer and Leer South were honored with additional environmental excellence awards. 

Market Update

After declining steadily throughout the first quarter, seaborne coking coal prices appear to have found a base in recent days. At present, Platts is assessing High-Vol A coking coal at $220 per metric ton FOB the U.S. East Coast, versus an average of $285 per metric ton on the same basis during the month of December. Notably, certain demand fundamentals have improved in recent months, with hot metal output for the world excluding China up 2 percent year-to-date, and Chinese imports of seaborne coking coal up strongly as well. Counterbalancing those positive indicators, Australian and U.S. coking coal exports have rebounded modestly year-to-date, albeit to levels significantly below their respective peaks.

Despite these modest increases in global supply, Arch remains confident in its longstanding thesis that underinvestment and ESG-related constraints will continue to support a constructive long-term supply-demand balance in global coking coal markets. In fact, those dynamics could spur a quick recovery in coking coal markets if global economic conditions show even modest signs of improvement or if major economies implement steel-intensive stimulus spending in the quarters ahead. It's also worth noting that recent price declines may already be taking a toll on high-cost operations. In recent weeks, several small coking coal mines have closed sections or ceased production entirely, according to market intelligence.

Turning to thermal markets, U.S. fundamentals remain challenged at present, with natural gas trading at sub-$2.00 per million Btu at Henry Hub and utility stockpiles at historically high levels after the mild winter. On a more positive note, the seaborne thermal market has bounced somewhat, with the prompt Newcastle price standing at around $130 per metric ton and API-2 at around $120 per metric ton. Due in part to this improved price environment, U.S. thermal coal exports were up roughly 26% for the first two months of 2024 when compared to 2023.

Looking Ahead

"Looking ahead, we are sharply focused on driving continuous improvement in execution across our entire operating platform in support of ongoing, robust, value-generating capital returns for our stockholders," Lang said. "While the Baltimore port closure is likely to constrain Q2 coking coal shipments, we are seeking to capitalize fully on the strategic optionality afforded us by our investment in DTA, where the team has risen to the occasion and is operating at a very efficient level at present. At the same time, we believe we are exceptionally well-positioned – with our highly productive operating portfolio and unmatched workforce – to continue to generate solid levels of discretionary cash flow even in the face of near-term market softness."

To see the full results with financial figures included, click here.