Arch Resources, Inc. (NYSE: ARCH) today reported net income of $73.7 million, or $3.91 per diluted share, in the third quarter of 2023, compared with net income of $181.0 million, or $8.68 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 $126.3 million in the third quarter of 2023. This compares to $223.0 million of adjusted EBITDA in the third quarter of 2022, which included a $12.3 million non-cash mark-to-market gain associated with its coal-hedging activities. Revenues totaled $744.6 million for the three months ended September 30, 2023, versus $863.8 million in the prior-year quarter.
In the third quarter of 2023, Arch made significant progress on key strategic priorities and objectives, as the company:
Generated $130.9 million in cash provided by operating activities and $86.5 million in discretionary cash flow - defined as cash provided by operating activities less capital expenditures - to fuel its robust capital return program
Repurchased 215,551 shares of common stock for $28.2 million, increasing to 4.3 million shares the potential dilution avoided - via common stock and convertible notes repurchases - since the relaunch of the capital return program in February 2022
Increased to more than $1.2 billion the total capital deployed via the capital return program over that timeframe
'Even with constrained advance rates at Leer South, our core metallurgical segment delivered first-quartile cash costs, a sequential step-up in per-ton realizations, and a quarter-over-quarter increase in per-ton cash margin during the third quarter,' said Paul A. Lang, Arch's CEO and president. 'In total, the team generated $86.5 million in discretionary cash flow, recharging Arch's ongoing capital return program and underscoring yet again the company's significant and durable cash-generating capabilities. Additionally, the board recently increased the weighting of share repurchases in Arch's capital allocation formula, further highlighting its confidence in the company's long-term outlook.'
Operational Update
'After steady improvement and solid production levels in the year's first half, the Leer South mine encountered a thinning coal seam in its fifth longwall panel,' said John T. Drexler, Arch's chief operating officer. 'Despite those temporary and near-term challenges, the metallurgical team delivered higher per-ton cash margins on the strength of improved per-ton coking coal realizations. Additionally, Arch's thermal segment again generated substantial, supplemental adjusted EBITDA, driven by improved volumes and solid cost control at our Powder River Basin operations.'
Arch's thermal segment contributed adjusted EBITDA of $23.4 million in the third quarter, against capital spending of $10.4 million. Thermal segment margins were supported by a strong contribution from the Powder River Basin operations, which acted to counterbalance a roughly breakeven quarter at West Elk. Since the fourth quarter of 2016, the legacy thermal segment has generated a total of $1,357.4 million in adjusted EBITDA while expending just $164.5 million in capital.
Financial, Liquidity and Capital Return Program Update
As noted previously, the Arch board recently refined the allocation model governing Arch's capital return program. Effective immediately, and inclusive of the December dividend payment, the board is targeting returning to stockholders 25 percent of the prior quarter's discretionary cash flow - defined as cash provided by operating activities less capital expenditures - via a dividend, while directing the remaining discretionary cash flow to share repurchases or capital preservation.
'The centerpiece of our value proposition is the return to shareholders of effectively 100 percent of the company's discretionary cash flow,' Lang said. 'The board continuously evaluates the capital allocation model with the objective of optimizing the value generated for shareholders. While a significant dividend remains an integral component of the long-term capital return strategy, the board believes that, at present, directing a larger percentage of discretionary cash flow to share repurchases makes sense given its continuing confidence in the company's promising, long-term outlook.'
During the quarter just ended, the company deployed $28.2 million to repurchase 215,551 shares at an average price of $130.83 per share. In total, Arch has now used common stock and convertible notes repurchases to manage and reduce potential dilution by approximately 4.3 million shares. Arch ended Q3 with 18.8 million shares outstanding on a fully diluted basis.
In keeping with its capital return formula, the board has declared a total quarterly cash dividend of $21.6 million, or $1.13 per share, which is equivalent to 25 percent of Arch's third quarter discretionary cash flow. The December dividend - which includes a fixed component of $0.25 per share and a variable component of $0.88 per share - is payable on December 15, 2023, to stockholders of record on November 30, 2023.
Arch has now deployed a total of $1,208.2 million under its capital return program since its relaunch 20 months ago - inclusive of the just-declared December dividend - including $661.8 million, or $35.77 per share, in dividends and $546.4 million in common stock and convertible notes repurchases. Since the second quarter of 2017 - and inclusive of the program's first phase - Arch has now deployed a total of more than $2.1 billion under its capital return program. As of September 30, 2023, Arch had $220.7 million of remaining authorization under its existing $500 million share repurchase program.
Arch also achieved a further streamlining of its capital structure during the third quarter and the first few days of October via the exercise or expiration of 100 percent of the warrants remaining from the original grant seven years ago, with a negligible impact on the diluted share count.
Arch ended the third quarter with indebtedness of just $131.2 million after paying down an incremental $6.5 million during the quarter. In comparison, cash, cash equivalents and short-term investments totaled $213.5 million, resulting in a net cash positive position of $82.3 million. Total liquidity at quarter-end stood at $337.2 million.
'We continue to make good progress towards our long-term goal of further fortifying the balance sheet and simplifying the capital structure,' said Matthew C. Giljum, Arch's chief financial officer. 'Since the beginning of 2022, we have reduced overall indebtedness by 77 percent; retired all of our convertible notes; built a thermal mine reclamation fund that has largely pre-funded our Powder River Basin final reclamation obligation and - most recently - achieved a further streamlining of our capital structure via the exercise or expiration of the remaining warrants. In short, we have set the stage for an even sharper focus on capital returns and the systematic reduction of our share count via share repurchases going forward.'
ESG Update
During the third quarter, Arch maintained its exemplary environmental, social and governance performance. Arch's subsidiary operations achieved an aggregate total lost-time incident rate of 0.42 per 200,000 employee-hours worked during the first nine months of 2023, which was nearly five times better than the industry average, while recording zero environmental violations and zero water quality exceedances over that timeframe.
The U.S. Department of the Interior recently honored Arch's Powder River Basin operating subsidiary as the sole recipient of the 2023 Excellence in Coal Mining Good Neighbor Award, the nation's top honor for community engagement. This marked the third time in five years an Arch subsidiary was so honored. In addition, the National Institute for Occupational Safety and Health recently honored the Leer mine with the Mine Safety and Health Technology Innovation Award for the coal sector.
Market Update
Coking coal prices moved sharply higher during Q3, despite lackluster global steel markets. High-Vol A coking coal - Arch's principal product - is currently being assessed at $277 per metric ton on the U.S. East Coast. Meanwhile, supply dynamics remain generally constructive due to persistent under-investment in new and existing coking coal capacity globally. Aggregate coking coal exports from Australia, the United States and Canada - the principal suppliers of high-quality coking coal to the global seaborne market - remain flat to down versus last year's already-constrained levels, and well-off the peaks of recent years.
Global thermal coal markets appear to be range-bound at present, trading at prices well below last year's historically strong levels but at a level that still supports healthy U.S. export volumes. Arch expects thermal coal market dynamics to continue to benefit from underinvestment in supply, which should create attractive export opportunities for the West Elk mine in 2024 and beyond. Domestically, Arch's Powder River Basin operations are approaching sold-out status for 2024 at fixed price levels that should deliver a solid margin.
Since the start of the third quarter, Arch committed to ship approximately 1.5 million tons of coking coal to North American customers in 2024, at an average fixed price of approximately $158 per ton.
Looking Ahead
'The Arch team continues to execute on our clear, consistent and actionable plan for long-term value creation and growth,' Lang said. 'We remain sharply focused on driving incremental productivity and cost improvements in our top-tier operating performance; capitalizing on a highly constructive global coking coal market; extending the global reach of our suite of high-quality coking coal products; maintaining and augmenting our strong financial position and extending our industry-leading sustainability practices. Through these substantial and ongoing efforts, we are seeking to lay a strong and durable foundation for long-term cash generation - in a wide range of market environments - in support of our robust and ongoing capital return program.'
Contact:
Tel: 314/994-2916
ARCH RESOURCES, INC. 
