July 6, 2024 - Arch Resources, Inc. (NYSE: ARCH) has reported net income of $14.8 million, or $0.81 per diluted share, in the second quarter of 2024, compared with net income of $77.4 million, or $4.04 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 $60.0 million in the second quarter of 2024. This compares to $130.4 million of adjusted EBITDA in the second quarter of 2023. Revenues totaled $608.8 million for the three months ended June 30, 2024, versus $757.3 million in the prior-year quarter.

In the second quarter of 2024, Arch overcame logistical challenges and drove forward with its key strategic priorities and objectives, as the company:

• Shipped 2.0 million tons of coking coal despite the extended closure of the Baltimore shipping channel following the tragic collapse of the Francis Scott Key Bridge
• Achieved record production levels from its metallurgical segment while continuing to progress towards District 2 at Leer South, where mining conditions are expected to be more advantageous
• Paid down an incremental $12.5 million of debt, bringing the company's total debt level to $133.3 million and its net positive cash position to $146.0 million
• Repurchased an additional 94,367 shares at a total investment of $15.0 million, bringing the overall reduction in share count to over 3.5 million shares, or more than 16 percent, when compared to the level in May 2022, and   
• Declared a $0.25 fixed dividend, for a total payment of $4.6 million, payable in September.

"During the quarter, the Arch team moved quickly and nimbly in the wake of the tragic bridge collapse in Baltimore, taking steps to facilitate the continuing flow of our coking coal products to steelmakers and redirecting volumes to our 35-percent-owned DTA facility," said Paul A. Lang, Arch's CEO. "Through these efforts, the metallurgical segment – in collaboration with our railroad and terminal partners – succeeded in shipping more than two million tons of coking coal even as Baltimore's deepwater channel remained closed throughout the first 70 days of the quarter before all restrictions were lifted on the shipping channel on June 10. In addition, the metallurgical segment delivered a record-setting quarterly production performance while continuing to progress systematically towards a more geologically advantageous reserve area at Leer South."      

While Arch was able to move a substantial amount of coking coal in Q2, the additional efforts required to achieve these volume levels along with other impacts of the bridge collapse acted to pressure sales netbacks. In total, the metallurgical segment's adjusted EBITDA was reduced by more than $12 million as a result of vessel demurrage, retimed vessel movements, increased rail surcharge fees, and mid-streaming activities.

"Even with Q2's logistical challenges and a meaningful working capital build, Arch deployed an incremental $19.6 million in our capital return program via the repurchase of 94,000 shares of common stock and the declaration of a $0.25 per share fixed dividend payable in September," Lang said. "Since the relaunch of the capital return program in February 2022, Arch has now deployed well over $1.3 billion in that program."

Operational Update

"The Arch team did an excellent job of managing through the highly challenging logistical environment during the quarter, delivering record overall production levels in our core metallurgical segment, driving ahead with development work in advance of the transition to District 2 at Leer South, and managing the cost structure in our thermal segment in a way that should set the stage for a much stronger second half performance," said John T. Drexler, Arch's president. "As we look ahead to the year's back half, we believe we are well-positioned to deliver positive step-changes in our metallurgical coking coal shipments, our per-ton metallurgical costs, and our thermal segment cash margins."   

Arch's core metallurgical segment contributed adjusted EBITDA of $87.3 million in the second quarter. As indicated, the unexpected efforts to maintain shipment levels in the wake of the Baltimore bridge collapse acted to reduce adjusted EBITDA by more than $12 million, principally via lower sales netbacks.

In addition, the metallurgical segment deferred the shipment of nearly 150,000 tons of thermal byproduct, as it sought to direct every feasible loading slot to coking coal vessels. Given that the thermal byproduct is inventoried differently, the reduced shipping schedule for this product served to increase the segment's cash cost per ton sold by an estimated $6 per ton. That cost impact was counterbalanced by a severance tax rebate of $12.8 million from the State of West Virginia related to investment incentive legislation aimed at boosting employment and production levels in the state. Arch expects the segment's cash cost per ton sold to benefit significantly when the excess thermal byproduct tons are monetized in the year's second half.

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 significantly higher shipping levels in the second half of 2024. Similarly, the company continues to guide to an average per-ton cost for the metallurgical segment of $87 to $92, with the expectation of lower unit costs in the year's second half. 

Arch's thermal segment effectively broke even for the second straight quarter. Arch's West Elk longwall mine operated efficiently and generated a solid cash margin, while the Powder River Basin assets were cash negative for the quarter as they continued to operate at a stripping rate in excess of shipment levels, which were further reduced by typical seasonal weakness in the spring quarter. The thermal segment expects to benefit from cost-cutting initiatives as well as the excess stripping levels in the year's second half, when shipped volumes are expected to exceed stripping rates markedly. 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

During the second quarter, Arch deployed $19.6 million in its capital return program via the repurchase of 94,367 shares of common stock for $15.0 million, or $158.94 per share, and the declaration of a fixed dividend of $0.25 per share, with a total payment of $4.6 million. The company generated discretionary cash flow of $12.3 million, which reflected the impact of a $15.2 million working capital build.

"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 significant streamlining of our balance sheet, the emphasis on share repurchases in our capital return formula, and the build of surplus cash for more opportunistic share repurchases in the event of a market pullback, we remain in an excellent position to substantially reduce the share count over time, and in doing so drive significant value for stockholders."

Arch paid down $12.5 million in debt during Q2 and ended the quarter with $279.3 million in cash, cash equivalents and short-term investments. Arch ended the quarter with a net cash position of $146.0 million.

The just-declared dividend is payable on September 13, 2024, to stockholders of record on August 30, 2024.

In total, Arch has now used common stock and convertible notes repurchases and the unwinding of the capped calls to reduce shares outstanding by over 3.5 million shares, or more than 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 September dividend – including $731.5 million, or $38.78 per share, in dividends and $614.7 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 June 30, 2024, Arch had $187.0 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 second quarter. Arch's subsidiary operations achieved an aggregate total lost-time incident rate of 0.47 incidents per 200,000 employee-hours worked during the year's first half, which is more than four 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.

During the quarter, the State of Colorado recognized the West Elk Mine with the Outstanding Safety Performance Award; the Excellence in Innovative Safety Technology Award; and the Excellence in Mining Reclamation Award for the deployment of advanced technology to improve the reclamation process. In addition, the State of Wyoming honored the Coal Creek mine with a surface mine safety award.

Market Update

Global coking coal demand remains relatively subdued at present, reflective of the general malaise in the global macroeconomic environment. Weak infrastructure and property market spending in China, the advent of the monsoon season in India, and a still-slow climb out from multiple quarters of stagnation in Europe are all weighing on global steel demand, with the expected knock-on effect on coking coal demand. Despite those pressures, Asian steelmakers continue to signal an expected need for steadily increasing volumes in future periods, as they seek to identify the critical inputs they will need as new coke-making and blast furnace capacity comes online.

Meanwhile, the coking coal supply story remains muted, reflecting degradation and depletion of the resource base in major supply regions; only modest investment in new and replacement capacity; recent mine outages that have acted to remove 2 to 3 percent of supply to the global seaborne market; and an increasingly fragile logistical supply chain. Moreover, we believe that current coking coal prices are below the marginal cost of production on a global basis. As a result of these various factors, we expect coking coal markets to balance quickly once global demand begins to reassert itself.

Outlook

"Looking ahead, we remain sharply focused on driving continuous improvement in execution across our entire operating platform in support of strong, value-generating capital returns for our stockholders, even in today's subdued market environment," Lang said. "With our cost-competitive coking coal portfolio, high-quality product suite, rapidly expanding penetration in Asian markets, and recognized sustainability leadership, we believe we are exceptionally well-positioned to capitalize as global steel demand stabilizes and then resumes its anticipated long-term, upward growth trajectory."

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