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Arch Resources(ARCH) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported adjusted EBITDA of 130millionforQ22023,whichwaslowersequentiallyandcomparedtothepreviousyearssecondquarterduetoweakenedmarketpricesforbothmetallurgicalandthermalcoal[19][20]Operatingcashflowforthequarterwas130 million for Q2 2023, which was lower sequentially and compared to the previous year's second quarter due to weakened market prices for both metallurgical and thermal coal [19][20] - Operating cash flow for the quarter was 197 million, an increase of over 56% sequentially, although lower than the previous year's second quarter [20] - Discretionary cash flow for the quarter totaled 151million,withadeclareddividendof151 million, with a declared dividend of 3.97 per share [21] Business Line Data and Key Metrics Changes - Coking coal sales for the metallurgical segment totaled 2millionat2 million at 6.54 per ton for the first half of the year, with Q2 representing the strongest production quarter for Leer South to date [13][14] - The thermal segment contributed total segment-level EBITDA of 29.2million,whichwashigherthaninitiallyanticipated,demonstratingexcellentcostcontrol[14]MarketDataandKeyMetricsChangesGlobalhotmetalproduction,excludingChina,wasdown2.829.2 million, which was higher than initially anticipated, demonstrating excellent cost control [14] Market Data and Key Metrics Changes - Global hot metal production, excluding China, was down 2.8% through May compared to 2022, contributing to a softening in coking coal markets [9] - High-Vol A coal, the principal product, is currently trading at 210 per metric ton on the US East Coast, with demand remaining weak but prices still supporting healthy margins [10] Company Strategy and Development Direction - The company aims to enhance its position in the market by maintaining a strong cash generation capability and a robust capital return program, having returned nearly 1.2billiontoshareholderssincerelaunchingtheprograminFebruary2022[8][12]ThefocusremainsonexpandingtheAsianmarketpresence,withexpectationsofincreaseddemandforcokingcoaldrivenbygrowthinblastfurnacecapacityinAsia[76][78]ManagementsCommentsonOperatingEnvironmentandFutureOutlookManagementacknowledgedthecurrentmarketweaknessasanopportunitytodifferentiatethecompanybyhighlightingitslowcostpositionandabilitytogeneratesubstantialfreecashflow[83]ThecompanyexpectstoreturntonormaloperationsatWestElkbyQ4afteraddressinglocalizedgeologicalchallenges[65]OtherImportantInformationThecompanyhasmaintainedaperfectperformanceinenvironmentalcompliance,achievingzeroenvironmentalviolationsanda471.2 billion to shareholders since relaunching the program in February 2022 [8][12] - The focus remains on expanding the Asian market presence, with expectations of increased demand for coking coal driven by growth in blast furnace capacity in Asia [76][78] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the current market weakness as an opportunity to differentiate the company by highlighting its low-cost position and ability to generate substantial free cash flow [83] - The company expects to return to normal operations at West Elk by Q4 after addressing localized geological challenges [65] Other Important Information - The company has maintained a perfect performance in environmental compliance, achieving zero environmental violations and a 47% reduction in CO2 equivalent emissions since 2011 [17] - The Board is committed to the capital return program, with ongoing discussions about the relative weighting of dividends versus share buybacks [9][70] Q&A Session Summary Question: Cost expectations for the metallurgical segment - Management expressed confidence in achieving cost guidance for the metallurgical segment, despite variability due to mining operations [29][30] Question: Market appetite for spot pricing - Management indicated confidence in managing the met book and remaining exposure, with ongoing efforts to optimize sales [31][33] Question: Discrepancy in asset retirement obligations - Management clarified that the funding on the asset side is primarily directed towards Black Thunder, with ongoing reclamation efforts [34][35] Question: Working capital return expectations - Management expects around 60 million to $65 million in working capital returns in the back half of the year, potentially skewed towards Q4 [43][45] Question: Performance expectations for West Elk - Management confirmed that West Elk is on track to return to normal operations by Q4, following a longwall move to a higher quality area [64][65] Question: Future market flexibility - Management indicated readiness to shift volumes to the seaborne market if it proves to be the best economic option [80]