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Arch Resources reports $407.6M net income in Q2 2022

A coal train moves in front of the Black Thunder mine outside Wright in October, 2016. (Andrew Graham/WyoFile)

GILLETTE, Wyo. — Arch Resources strengthened its financial position in the second quarter, company officials reported today.

Arch Resources reported net income of $407.6 million, or $19.30 per diluted share, in the second quarter, up from $27.9 million, or $1.66 per diluted share, in the prior-year period.

Its adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirement obligations (ARO), and non-operating expenses (“adjusted EBITDA”) were $460.0 million in the second quarter of 2022. It experienced a $1.9 million non-cash mark-to-market loss associated with its coal-hedging activities.

In the second quarter of 2021, the company had $66.5 million of adjusted EBITDA, including an $8.8 million non-cash mark-to-market loss associated with its coal-hedging activities.

Revenues totaled $1.13 billion for the second quarter, more than double its prior-year quarter revenues of $450.4 million.

The second quarter saw Arch deliver record net income for the third straight quarter, make record coking coal realizations and gross coking coal margins; reduce its debt by 42%, increased its thermal mine reclamation fund, deploy $280.7 million for dividends and convertible securities settlements under its recently relaunched capital return program, and declare a third quarter cash dividend of $118.7 million, despite an increase in high-priced seaborne shipments in the quarter’s second half, the report said.

“During the second quarter, the Arch team delivered another strong financial performance – with record net income, record coking coal realizations and record coking coal margins – despite continuing rail service challenges and isolated geologic issues in our core metallurgical segment,” Arch CEO and President Paul Lang said. “In addition, Arch deployed a total of $280.7 million under its recently relaunched capital return program; further fortified the balance sheet via the repayment of $135.8 million of indebtedness; and contributed $90 million to the thermal mine reclamation fund – inclusive of a July payment – that increased total funding to $130.0 million, or 100 percent of the target level.  In short, we are delivering on our clear, consistent and actionable plan for value creation by continuing to strengthen our financial position and reward our stockholders.”

Lang said the board’s declaration of a total quarterly dividend of $118.7 million, or $6 per share, is based on continued strength in operations performance and conforms with the company’s recently adopted capital return formula. The dividend is half of Arch’s second quarter discretionary cash flow.

“We view this substantial dividend, in conjunction with the $8.11 per share dividend paid in the second quarter, as a clear indication of the board’s ongoing confidence in the company’s future outlook, and as compelling evidence of Arch’s significant and expanding cash-generating capabilities,” he said.

In February, Arch established a capital allocation model that returns half of the prior quarter’s discretionary cash flow to stockholders via a variable quarterly cash dividend and a fixed quarterly cash dividend.

The company plans to retain the rest of the discretionary cash flow from the prior quarter for use in share buybacks, the repurchase of potentially dilutive securities, special dividends, and/or capital preservation, the release said.

Arch generated $268.2 million in cash flow from operating activities in the second quarter, despite a $137.8 million build in the company’s receivables balance associated with a substantial increase in high-priced seaborne shipments in the quarter’s second half.

Second quarter dividend payments are payable on Sept. 15 to those who hold stock Aug. 31.

The board is determining how to use the remaining discretionary cash flow. The release said the board views share buybacks as an effective means of returning capital to stockholders and sees Arch stock as an attractive investment option.

The Arch board recently increased the company’s authorization under its share repurchase program to $500.0 million.

Arch ended the second quarter with cash and cash equivalents of $281.9 million, total liquidity of $349.7 million and net positive cash position of $94.9 million. It repaid $135.8 million of its outstanding indebtedness during the second quarter. Total outstanding debt is $187.0 million.

“We are pleased to deliver on our commitment to returning our discretionary cash flow to stockholders, even as we take steps to further fortify our balance sheet, fully fund our thermal mine reclamation fund, and simplify our capital structure via the settlement of a significant percentage of our convertible notes,” Arch’s Chief Financial Officer Matthew Giljum said. “Through these carefully structured efforts, we believe we are driving significant value for our stockholders while at the same time reducing the overall risk profile of the company and ensuring we have the financial flexibility to manage through future market downturns.”

Since Jan. 1, Arch has deployed approximately $403.2 million under its capital return program, reduced its total debt by about 70% and used $110.0 million to complete the cash pre-funding of its thermal mine reclamation fund.

Arch Chief Operating Officer John Drexler said the metallurgical segment overcame rail service disruptions, inflationary pressures and isolated geologic issues in its coking coal portfolio in producing record margins during the second quarter.

“Even with localized, tougher-than-expected cutting conditions in the second panel at Leer South, the metallurgical segment continued to build coking coal inventories during the quarter,” he said. “With 1.1 million tons of high-value coking coal in our mine and port stockpiles at quarter-end and the expectation of much-improved geologic conditions at Leer South beginning in late August, we fully expect to capitalize on still-strong market conditions as rail service recovers.”

Arch expects some increases in coking coal shipments in the third quarter over second quarter levels, reflecting gradually improving but still hampered rail and logistical service levels. The company has adjusted down full-year volume guidance to reflect ongoing challenges.

The second quarter tends to be the weakest shipping period of the year in the Powder River Basin. Despite the reduced shipments and some margin erosion, Arch’s legacy thermal segment delivered $93.3 million in segment-level adjusted EBITDA while expending just $4.6 million in capital, the report said.

Arch has reduced its asset retirement obligation at its Powder River Basin operations by more than 20% since the beginning of 2021, with $151.2 million June 30.

Arch is using a thermal mine reclamation fund to pre-fund and defease the long-term mine closure and reclamation obligations of its Powder River Basin operations.

The company reached its $130 million goal for the fund, matching the asset retirement obligation at the Black Thunder mine.

Arch expects future contributions to this fund to total $3 million to $5 million per quarter – consistent with projected future accretion related to its asset retirement obligation at Black Thunder – potentially offset by creditable reclamation work completed during any given period.

“Since establishing our thermal mine reclamation fund in the fourth quarter of 2021, we have moved quickly to build the fund’s balance to the targeted level of $130 million,” Giljum said. “In doing so, we have set the stage for strong, continued cash generation from these assets even as we move forward with winding them down over an extended timeframe in a careful and responsible manner.”

Coking coal prices are strong, Arch said. Arch’s primary product, High-Vol A coking coal, is currently being assessed at $249 per metric ton on the U.S. East Coast.

Arch leaders believe slowing economic growth globally is driving erosion in coking coal market dynamics. Global hot metal production in the first half of 2022 is down about 5.5%. Yet, coking coal export volumes are down roughly 7 percent, year-to-date, and the war in Ukraine could decrease Russian coking coal export levels, particularly once the EU’s ban on Russian coal imports take effect in a few weeks’ time.

The international thermal market remains strong, as the price for thermal coal is currently around $415 per metric ton in Australia and about $390 per metric ton in northern Europe.

Arch sold a vessel of its High-Vol B coking coal to a European thermal customer for delivery in the fourth quarter, above U.S. East Coast metallurgical marks, as a result of that nearly unprecedented negative spread between metallurgical and thermal prices, the release said. The company said it’s actively exploring similar opportunities.

It’s also capitalizing on exceptionally strong international thermal market conditions directly through the export of thermal volumes from its West Elk and Black Thunder mines.

The company said that while rail service continues to stifle moving more volumes to energy-short international customers, it anticipates shipping an incremental 600,000 tons of West Elk coal and nearly 500,000 tons of Black Thunder coal into international markets in the second half of 2022, at exceptional price levels.

“With our greatly upgraded coking coal portfolio, Arch is exceptionally well-positioned to capitalize on still-constructive coking coal market dynamics, both in the near and longer term, while continuing to harvest robust amounts of cash from our increasingly de-risked legacy thermal segment,” Lang said.  “Even with rail-related volume constraints, inflation-driven cost pressures, and lower-than-anticipated productivity rates, we expect to generate significant amounts of discretionary cash flow in the year’s second half, and to return this cash flow to stockholders according to the clearly articulated tenets of our recently established capital return formula.”