Arch Resources, Inc. has reported net income of US$27.9 million, or US$1.66 per diluted share, in 2Q21, compared with a net loss of US$49.3 million, or US$3.26 per diluted share, in the prior-year period. Arch had adjusted earnings before interest, taxes, depreciation, depletion, amortisation, accretion on asset retirement obligations (ARO), and non-operating expenses (adjusted EBITDA) of US$66.5 million in 2Q21, which included an US$8.8 million non-cash mark-to-market loss associated with the company's coal-hedging activities. This compares to a negative US$10.7 million of adjusted EBITDA in 2Q20, which included a US$0.1 million non-cash mark-to-market gain associated with the company's coal-hedging activities. Revenues totalled US$450.4 million for the 3 months ended 30 June 2021, vs US$319.5 million in the prior-year quarter.
In 2Q21, Arch made important progress on its key strategic priorities:
- Neared completion of the transformational Leer South project, which is on track to commence longwall operations in August.
- Extended the company's track record as one of the US metallurgical industry's lowest cost producers.
- Generated significant cash with its legacy thermal segment, while simultaneously reducing its long-term closure obligations in a responsible and systematic way.
- Maintained a perfect regulatory record and joined ResponsibleSteelTM, furthering its intense focus on – and exceptional performance against – a wide range of environmental, social and governance (ESG) metrics.
“Arch's core coking coal segment executed with efficiency and precision during the second quarter, delivering increased volumes, outstanding cost performance, and steadily improving margins,” said Paul A. Lang, Arch's CEO and President.
“At the same time, we advanced towards the finish line of the best-in-class Leer South growth project, which promises to elevate our metallurgical segment performance still further and cement our position as the world's leading supplier of premium High-Vol A metallurgical coal.”
“This is an exciting moment for Arch,” Lang commented. “The start-up of Leer South represents the culmination of our 10-year effort to develop a world-class metallurgical portfolio capable of generating strong margins and significant levels of cash across a wide range of market environments.”
“We expect Leer South and its companion mine, Leer, to serve as the strong foundation of Arch's value proposition for the next 20 years, as we set the industry bar for cost execution, margin generation and ESG leadership over that time frame.”
Arch expects to continue its positive operational and financial momentum in 2H21, supported by the impending start-up of Leer South, a strong coking coal price environment, and substantial contributions from the company's legacy thermal assets.
During 2Q21, Arch maintained its exemplary performance across a wide range of ESG metrics. Of particular note, Arch extended its exceptional environmental and water quality compliance performance, maintaining a perfect record through the first 6 months of 2021.
In addition, Arch became the first and only US metallurgical coal producer to join ResponsibleSteel, the steel industry's first global multi-stakeholder standard and certification initiative.
“Arch is committed to playing a vital role in building a sustainable global economy,” continued Lang. “We view ResponsibleSteel as a valuable forum for collaborating with our steelmaking partners as they endeavour to create a more ESG-compliant value chain and as they seek to lower – and ultimately reduce to zero – the carbon intensity of the steelmaking process.”
With its strategic shift towards metallurgical products – which are an essential input in the production of new steel – Arch has realigned its value proposition to reflect the global economy's intensifying focus on de-carbonisation. Arch believes that a significant amount of new steel will be required in a de-carbonising world, given steel's importance in urbanisation, infrastructure replacement and the construction of essential de-carbonisation tools such as mass transit systems, wind turbines and electric vehicles.
Leer South update
“We appreciate the tremendous focus and dedication of the Leer South team,” said John T. Drexler, Arch's Chief Operating Officer.
“In a span of just 2.5 years, including through the global pandemic, the Leer South team has brought this large and multi-faceted project to the cusp of completion, on time and effectively on budget. I commend the entire workforce for this remarkable achievement, which we believe sets the stage for strong and consistent value creation for all of our stakeholders in the quarters, years and decades ahead.”
Late week commencing 19 July, the operations team commenced a planned, 30-day suspension of development mining at Leer South to tie the upgraded conveyance systems into the new preparation plant. At the same time, the team began to move the longwall mining equipment underground in preparation for start-up, which is slated for late August.
During 2Q21, Arch invested a total of US$50 million at Leer South and has now expended a net total of US$392 million on the project, which – as previously projected – is slightly above the high end of the original guidance range of US$360 million – US$390 million. Arch is raising its 2021 CAPEX guidance by US$10 million – to between US$210 million and US$230 million – to reflect the modest amount of additional capital required to complete Leer South and to fund certain opportunistic optimisation efforts at its metallurgical mines.
With the addition of Leer South, Arch expects to expand its High-Vol A metallurgical output by an incremental 3 million tpy; 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 metallurgical coal globally.
Strategic plan for legacy thermal assets
During 2Q21, Arch advanced its dual objectives of harvesting cash from its legacy thermal assets and simultaneously driving forward with its accelerated Powder River Basin reclamation plan. During the quarter, the thermal segment generated a gross margin of US$39.9 million; completed work totalling US$15.5 million towards the reduction of its Powder River Basin asset retirement obligation (ARO); and expended almost no maintenance capital.
“We remain sharply focused on generating value from our legacy thermal assets while working down their associated, long-term closure obligations in a systematic and measured way,” Lang added. “While we will continue to explore strategic alternatives for our thermal assets, we are confident that we have the right strategy, people and cost structure in place to generate sufficient cash from our thermal segment to address its long-term closure obligations while still creating meaningful incremental value for our stockholders.”
Arch is intent on completing its strategic transition towards steel and metallurgical markets, while managing the long-term wind-down of its legacy thermal assets carefully and responsibly and in a way that serves the needs of the company's thermal employee base, mine communities, and thermal power customers.
Since the beginning of 2021, Arch has reduced its Powder River Basin ARO by US$17.3 million, or nearly 10%. As previously announced, Arch plans to discontinue production at the Coal Creek mine and to reduce the mine's total ARO by an estimated US$40 million, or approximately 80%, by mid-2022.
“Our core metallurgical segment continued to execute at a high level during 2Q21, with a 23% step-up in coking coal sales volume, a 26% increase in per-tonne cash margin, and a small but meaningful reduction in costs when compared to an already strong 1Q21 performance,” Drexler said. “In short, we demonstrated once again that we have a powerful foundation in place, with anticipated further improvement from the start-up of the Leer South longwall mine next month.”
The seaborne metallurgical market is currently strong and well-supported, with global steel output on pace to match pre-pandemic levels and global steel prices at healthy if not historic levels. Importantly, Australian metallurgical coal indices have recently returned to parity with Atlantic Basin pricing, demonstrating more-than-sufficient global metallurgical coal demand even in the face of the continuing Chinese lockout of Australian volumes. In short, while Chinese policies are re-mapping global trade flows, the overall supply-demand balance remains constructive at present, despite growing concerns about the spread of new COVID-19 variants.
Also of note, opportunities for North American metallurgical coals to move into China remain substantial. At present, the delivered-in price for premium hard coking coal in China is approaching US$320/t, underscoring China's need for high-quality replacement products. Moreover, the domestic spot price for high-quality indigenous Chinese products stands at nearly US$310/t, which Arch views as further evidence that China's mine cost curve continues to shift higher.
In addition to the uplift in metallurgical coal markets, Arch is seeing strong upward movement in thermal markets as well. US thermal coal consumption is on track to increase by more than 50 million t, or approximately 12%, in 2021, while seaborne thermal prices have surged to multi-year highs. As a result, Arch expects to harvest healthy levels of cash from its legacy thermal assets in 2021.
During the quarter, Arch committed an additional 300 000 t of metallurgical coal for delivery in 2021, bringing total commitments for the current year to 7.1 million t and leaving just 700 000 t still to sell at the mid-point of guidance. In addition, Arch committed an additional 7.6 million t of thermal coal for delivery in 2021, spurring a 5-million t increase in the company's projected thermal 2021 sales volumes at the mid-point of guidance.
“We remain singularly focused on executing on our clear, consistent and actionable strategy for long-term growth and value creation,” Lang concluded “With the global economy in recovery mode, infrastructure-driven stimulus efforts gaining momentum around the world, and an intensifying focus on the build-out of a new, low-carbon economy, we expect demand for steel and our premium metallurgical coal to continue to increase. With our low-cost metallurgical assets, premium High-Vol A product slate, industry-leading ESG performance, top-tier marketing and logistics expertise, and nearly complete best-in-class growth project, we believe we are well-positioned to generate significant, long-term value for our stockholders.”
Read the article online at: https://www.worldcoal.com/coal/28072021/arch-resources-reports-2q21-results/
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