February 9, 2021 - Arch Resources, Inc. (NYSE: ARCH) today reported a net loss of $78.5 million, or $5.17 per diluted share, in the fourth quarter of 2020, compared with a net loss of $8.6 million, or $0.57 per diluted share, in the prior-year period. The net loss included a $45.0 million charge primarily related to the planned, accelerated closure of the Coal Creek mine in the Powder River Basin. Arch had adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirement obligations (ARO), and non-operating expenses ("adjusted EBITDA") 1 of $4.1 million in the fourth quarter of 2020, which included a $2.0 million non-cash mark-to-market loss associated with the company's coal-hedging activities. This compares to $43.7 million of adjusted EBITDA recorded in the fourth quarter of 2019, which included a $1.3 million non-cash mark-to-market loss associated with the company's coal-hedging activities. Revenues totaled $360.6 million for the three months ended December 31, 2020, versus $549.5 million in the prior-year quarter.
Despite the challenges created by the pandemic, Arch made significant progress on a number of strategic objectives during 2020. Among the highlights, Arch:
"I am incredibly proud of how the Arch team persevered to execute at such a high level in the face of prolonged market headwinds and an increase in COVID-19 rates that mirrored the nationwide surge," said Paul A. Lang, Arch's CEO and president. "Through our team's significant efforts, we have laid the foundation for robust value creation as the world recovers from the pandemic, the economic rebound continues, and the global transition to a low-carbon economy advances."
"As we move forward in 2021, we are continuing to prioritize the safety and health of employees, taking all recommended precautions to limit the spread of infection, and preparing for the wider availability of the vaccine," Lang added. "At the same time, we expect to benefit from an ongoing resurgence in global steel output, rapidly improving metallurgical market dynamics and – most significantly – the third-quarter startup of the Leer South longwall mine."
Arch estimates that it incurred additional costs of $6 million during the fourth quarter – primarily at its underground metallurgical operations – due to virus-related quarantines and lost shifts in the latter part of the quarter, along with operational adjustments, intensive hygiene-driven protocols, and associated output and shipment level reductions.
Leadership on Key ESG Metrics
During 2020, Arch demonstrated operational excellence across a wide range of environmental, social and governance (ESG) metrics. Arch continued its industry leadership in safety, with a lost-time injury rate approximately three times better than its industry peers. Arch also again set the industry standard among large integrated producers for environmental compliance, matching its best year ever in this critical area of performance. In addition, the company recorded only one water quality exceedance during 2020 – against 168,000 parameters tested across more than 650 measuring points – equating to a 99.999 percent compliance rate.
During the year, Arch's subsidiary operations also claimed two Sentinels of Safety awards, the nation's highest distinction for mine safety; the Department of Interior's Good Neighbor Award, the nation's highest honor for community outreach and engagement; the Milestone Safety Award, the state of West Virginia's top safety honor; and the Greenlands Award, the state of West Virginia's top reclamation honor. Leer and Leer South – the company's flagship operations – set the company standard by claiming three of these major awards.
"Although we long ago established Arch as the industry leader in sustainability and social responsibility, we remain sharply focused on driving still further improvements in our ESG-related performance, which we regard as pivotal for long-term success," Lang said.
Leer South Update
During the fourth quarter, Arch maintained excellent momentum in the development of the Leer South longwall mine even as it navigated the impacts of the pandemic. During the quarter just ended, Arch invested a total of $57 million at Leer South. Excluding capitalized interest, Arch expended a total of $206 million on the project in 2020, and a total of $306 million since the project's launch in early 2019.
"We are in the stretch run in the Leer South buildout, and the project team continues to do an exceptional job of managing capital spending and staying on schedule for a third-quarter 2021 start-up of the longwall," said John T. Drexler, Arch's chief operating officer. "Importantly, we remain comfortable with our original projection of a total capital spend of $360 million to $390 million to complete the project, although the impact of COVID-19-related shift losses and quarantining efforts on our capitalized development costs are now likely to push us towards the upper end of that range." As noted previously, the total capital spend guidance for Leer South excludes approximately $23.5 million associated with the replacement of the shields that were lost at Mountain Laurel and for which Arch received a comparable insurance recovery in 2020.
With the addition of Leer South, Arch expects to expand its High-Vol A metallurgical output by an incremental 3 million tons annually; enhance its already advantageous position on the global cost curve; strengthen its coking coal profit margins across a wide range of market conditions; and cement its position as the leading supplier of High-Vol A coking coal globally.
Leer South has started to take delivery of the longwall equipment, and expects to have the full longwall system on site by the end of the first quarter. In the second quarter, the team will be tying in the mine's conveyance systems to the new preparation plant during a 30-day period in which development mining will pause but longwall setup and final mine reconfiguration will continue.
Strategic Plan for Legacy Thermal Assets
During the fourth quarter, Arch took another step in its ongoing transition towards steel and metallurgical markets by contributing its Viper thermal mine in Illinois to Knight Hawk Coal, which will operate the mine going forward. As part of the transaction, Arch's equity stake in Knight Hawk increased to 49.5 percent from 48.0 percent, and Knight Hawk assumed long-term undiscounted mine closure liabilities totaling $21.0 million.
"We view the Viper transaction as a highly positive outcome in our ongoing efforts to identify and execute on strategic alternatives for our thermal assets," Lang said. "Significantly, Knight Hawk shares Arch's deep commitment to safety, environmental stewardship and social responsibility, and recognizes and values the essential contributions of the Viper workforce in the mine's ongoing success."
Arch is also pressing forward with its plans to reduce its operational footprint in the Powder River Basin, even as it explores strategic alternatives for those assets. As a next step in this effort, Arch is proceeding with the accelerated closure and final reclamation of the Coal Creek mine, with a concerted focus on reducing highly inflated, state-calculated surety bond requirements. The company plans to ship on its existing contracts at Coal Creek during 2021 before beginning final closure of the mine's active pit in 2022.
Through these accelerated efforts, Arch expects to reduce the total asset retirement obligation (ARO) at Coal Creek by an estimated $40 million, or 80 percent of the ARO at the mine, over the course of the next 18 months. Simultaneously, Arch is laying the groundwork for systematically reducing the operational footprint at its Black Thunder mine.
"We are driving ahead with our strategic pivot with a strong sense of urgency," Lang said. "Our objective is to continue to harvest value and cash from our legacy thermal assets, even as we execute on reducing our long-term closure obligations in a measured, systematic and sustained way."
"We are tremendously proud of the accomplishments of our talented, dedicated and resilient thermal operating teams, who have shown their mettle again and again in a difficult and declining demand environment," Lang added. "We value and appreciate their staunch commitment to operating at the highest level while adjusting effectively and nimbly to the realities of the current market environment."
"Our core metallurgical segment maintained its focus on tight, disciplined cost control even while navigating a dramatic increase in infection rates during the fourth quarter," Drexler said. "For the full year, the team achieved metallurgical segment cash costs of $61.13 per ton despite lower-than-anticipated volumes and other COVID-19-related costs. With widespread availability of the vaccine just around the corner and the startup of Leer South imminent, we are targeting a marked improvement in our unit costs over the course of the next two years."
After relatively modest impacts from the pandemic during the first three quarters of the year, Arch's operations experienced a surge in infection rates that accelerated in the latter half of the fourth quarter. Arch estimates that the virus increased the metallurgical segment's per-ton costs by approximately $3 per ton, while reducing production and shipment levels by more than 200,000 tons during the quarter.
Arch's legacy Powder River Basin segment continued to generate significant levels of cash in excess of capital expended during the fourth quarter of 2020, despite thermal demand weakness.
Arch is projecting modest improvements in the performance of the West Elk mine – the only remaining operation in the segment post the Viper transaction – due to an improving outlook for export sales associated with the recent step-up in seaborne pricing.
Financial and Liquidity Update
Arch ended the fourth quarter with $284.3 million of cash and cash equivalents and short-term investments on the balance sheet, and total available liquidity of $314.9 million.
During the fourth quarter, Arch successfully completed a previously disclosed and oversubscribed $155.3 million convertible debt issuance that carries a 5.25 percent interest rate, with a portion of the proceeds used to purchase a capped call to increase the effective conversion price to $52.26 per share. Net of the capped call, the proceeds totaled $137.7 million, bringing the total raised during 2020 to $244 million – at an average carrying cost of 6 percent – via the convertible debt offering and previously announced equipment financing and tax-exempt bond issuances conducted in prior quarters.
"Our continued ability to secure external financing at a very low carrying cost enabled us to drive forward with the Leer South buildout even in the unique and challenging macro environment that prevailed during most of 2020," said Matthew C. Giljum, Arch's chief financial officer. "As a result of these efforts, we remain on track to reap the benefits of a significant step-up in Arch's overall cash-generating capabilities when the Leer South longwall starts up in the third quarter of 2021, and to deliver still greater value for our shareholders as the market recovers."
During the fourth quarter, Arch continued to work closely with its surety bond providers on the long-term plans for final reclamation and closure of its thermal operations.
"We are pleased with our ongoing discussions with our surety bond providers, who recognize and support the steps we have taken – and are continuing to take – to strengthen our balance sheet, enhance our future cash-generating capabilities, and systematically address our bonding requirements and asset retirement obligations," Giljum said. "We expect our thermal mines to continue to generate sufficient levels of free cash to fund their own final reclamation and closure costs. We will put some of that cash to work immediately – through the accelerated closure of Coal Creek and other efforts – while directing the remainder to initiatives such as sinking funds to pre-fund future mine remediation costs."
Global steel markets appear on course for a strong and sustained recovery. Global steel output was up by approximately 6 percent in December, and steel prices in key producing regions have increased by between 50 percent and 150 percent versus pandemic-driven lows. In fact, as a result of surging production across all global theaters in the back half of the year, 2020 global steel production is estimated to have recovered to nearly flat versus 2019 levels. In North America, blast furnace utilization rates currently stand at 76 percent – 25 percentage points higher than the recent low-water mark in early May – and that progress is emblematic of the strengthening under way in the rest of the world as well.
Global metallurgical markets have rebounded markedly, too, even with the continuing uncertainty surrounding Chinese import policies and Australian-mined coal. In fact, China's seaborne coking coal imports were up nearly 20 percent in 2020, and India's coking coal imports have risen in each of the past four months versus year-ago levels. As for pricing, the U.S. East Coast High-Vol A metallurgical price assessment has increased nearly 50 percent when compared to last summer's pandemic-driven lows.
In addition to resurgent demand, an extended round of supply cuts have also served to bring global coking coal markets back into healthier balance. Arch believes that well over 30 million tons of coking coal supply has been taken out of the market since the start of the downturn in mid-2019, with a significant percentage of those cuts expected to be permanent.
During the fourth quarter, Arch committed an additional 2.6 million tons of coking coal for 2021 delivery, principally at market-based pricing, and signed its first-ever term business with a Chinese producer. Arch continues to expand the breadth and depth of its High-Vol A customer base in preparation for the start-up of Leer South, and has found it necessary to ration sales of its Leer-brand product until the expected start-up of Leer South in the third quarter of 2021.
"As the world transitions to a post-pandemic future, we plan to capitalize on our carefully cultivated strengths and competencies, including our low-cost metallurgical assets, high-quality product slate, industry-leading ESG performance, top-tier marketing and logistics expertise and best-in-class growth project," Lang said. "We are confident in our ability to continue to drive operational excellence across all facets of the business while executing on our simple and clear plan for long-term value creation."
To read the full results with financial figures included, click here.