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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to the Arch Coal, Inc. Fourth Quarter 2017 Earnings Release Conference Call. Today's call is being recorded.
At this time, I would like to turn the call over to Ms. Logan Bonacorsi, Director of External Affairs. Please go ahead, miss.
Good morning from St. Louis, and thank you for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as maybe required by law.
I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.
On the call this morning, we have John Eaves, Arch's CEO; Paul Lang, Arch's President and COO; John Drexler, our Senior Vice President and CFO; and Deck Slone, our Senior Vice President of Strategy and Public Policy.
We will begin with some brief formal remarks and thereafter, we'll be happy to take your questions.
John?
Thank you, Logan, and good morning, everyone. I'm pleased to report that Arch turned in a solid operational performance during the fourth quarter, while continuing to make exceptional progress on a range of different fronts that we view highly value creating for our shareholders.
Of course, operational and marketing execution remains paramount. During the quarter just ended, our coking coal mines rebounded strongly from the geologic challenges we encountered during the third quarter, with both the Leer and the Mountain Laurel mines achieving normal rates of advantage.
We didn't ship as many tons as expected due to the impact of severe winter weather on the logistics chain late in the year, but we built inventory at the mines and expect to make up those shipments as 2018 progresses.
We continue to place coking coal volumes with an expanding international customer base, while maintaining market exposure through index length and other agreements tied to prevailing market conditions.
We also capitalized on continuing strength from our Other Thermal segment, which achieved excellent margins and contributed significantly to our results, due in part to the highly positive market fundamentals in the international thermal markets.
In addition to those accomplishments, we also made positive strides on ongoing strategic initiatives, taking steps to reward our shareholders, bolster our financial foundation and streamline our operating portfolio.
In particular, we're proud of the great progress we've made on our capital return program. John Drexler will provide more details on that program in a few minutes, but the high-level overview is this, in the 8 short months since we announced the program, we have repurchased approximately 4 million shares of common stock, representing 16% of shares outstanding at a total cost of just over $300 million. We believe that our shareholders have benefited greatly from the speed and execution, from which we have pursued this initiative.
Building further on those continuing efforts to reward our shareholders, we also announced a 14% per share increase in our quarterly dividend. The Board views that increase as appropriate as it reflects our continuing confidence in the company's strong future prospects.
As we've just stated in the past, our goal is to provide a dividend that can be maintained through all points in the market cycle, and today's announcement is consistent with that long-term philosophy.
In addition, we took steps to further streamline our operating portfolio during the course of the year, selling our highest cost mine along with some associated idle properties. In the process, we lowered our overall operating costs, sharpened our focus on coking coal in Appalachia, eliminated carrying costs and reduced our legacy liabilities. We believe that the constant attention to the portfolio is the way to maintain competitiveness and ensure that we're optimizing value creation.
Furthermore, in early 2017, we increased our equity interest in the DTA Coal Export Facility in Newport News, Virginia. This expanded position enhances our ability to access global coal markets in an efficient and cost-effective way and further supports our strategy to ship a greater percentage of our coking coal to international steel customers.
We also continued our efforts to ensure a solid balance sheet throughout the course of 2017. Restructuring our debt, cutting our annual interest payments and reducing both collateral and restricted cash requirements. The recent tax reform, coupled with our tax-deferred tax asset, represents another step forward in an overall financial strength and positioning.
In short, it has been an exceptional year for the company and we believe that we've set the stage for continued strength and progress in the future.
Let's turn now to coal markets, where there is yet another good story. In particular, we continue to see positive momentum in the global coking coal markets and the international thermal markets, and we're sharply focused on ensuring that we're well positioned to capitalize.
Our view is that coking coal markets are well calibrated at present, with supply working hard to keep up with healthy demand. As evidence of this fact, we see metallurgical coal prices cross over $200 per metric ton FOB vessel 4 separate times in the past 18 months.
In short, every time there has been a supply disruption or a demand bump in the global marketplaces, prices have surged higher. We believe those same conditions will continue to prevail.
Most recently, challenges in the logistics chain in Australia, worries about the Cyclone season, supply rationalization in China and a pickup in seasonal steel demand translated in a strong upward move in Q4. As those concerns abated, prices drifted down only to drive the return to the market of Chinese and Indian buyers.
We're also encouraged by the fact that the swaps market for 2019 is currently reflecting hard coking coal price of nearly $230 per metric ton, suggesting that other market participants see current condition prevailing for some time.
Likewise, the Dalian futures market in China is reflecting a price of around $215 for May delivery, again, a sign of continued strength.
Of course, we focus more closely on the Atlantic Basin pricing and we're seeing good strength there as well, particularly in the High-Vol A market, where we have our greatest exposure. High-Vol A prices off the U.S. East Coast, as assessed by Platts, currently stand at $214.50 per metric ton.
Moreover, High-Vol A has reclaimed its premium over Low-Vol coals in the recent weeks, with a $19 per metric ton advantage as currently assessed. The spread between High-Vol coals has widened as well, with High-Vol A commanding a $70 per metric ton premium over High-Vol B presently.
International thermal markets also remain strong on growing Asian demand, with Newcastle pricing holding in around $100 per metric ton for prompt month, a favorable level for Arch's West Elk mine.
In domestic thermal markets, heating degree days year-to-date are up more than 15% over 2017. While this development is helpful, there's still work to be done to eliminate the overhang created by high generator stockpiles.
Notably, stockpiles declined by an estimated 5 million tons in January and are now down a total of 65 million tons since the beginning of 2016. However, there's still an estimated 20 million to 30 million tons above target and an estimated 132 million tons at the end of January.
We continue to believe that the target level should ultimately be reached during the course of 2018, which should greatly enhance market fundamentals.
While we expect coking coal in international thermal markets to moderate as the year progresses, we remain encouraged by the solid market fundamentals that we see. We firmly believe that Arch's diversified asset base, strategic marketing plan, talented and experienced workforce and strong balance sheet should translate into high levels of free cash flow and strong returns for our shareholders for the foreseeable future.
With that, I'll now turn the call over to Paul Lang for a discussion of Arch's recent sales and operating performance and outlook for 2018. Paul?
Thanks. As John mentioned, coking coal supply and demand fundamentals remain in relative balance. International thermal demand continues to be strong and domestic thermal markets are in the process of correcting, albeit slowly.
With this macro background, we believe we have positioned Arch to capitalize on the potential upside offered in this complex global marketplace.
In our Metallurgical segment, the Leer and Mountain Laurel mines successfully returned to normal operations, precipitating an 8% reduction in our cash costs in the fourth quarter. As a result, we're able to increase our cash margins by 30% when compared to the previous quarter.
This year, we are expecting our cash costs to be slightly below 2017 levels, ranging from $55.50 to $60.50 per ton. Given that range, we expect to maintain our position as one of the lowest cost U.S. coking coal producers.
Severe winter weather in the eastern United States late in the fourth quarter hampered our coking coal shipments as rail service in that area of the country slowed and unloading operations at East Coast ports were severely restricted. As a result, approximately 200,000 tons of our coking coal did not ship during the period.
The transportation difficulties have eased, although we did lose about 13 days of shipping in January due to various force majeure actions. Still, we anticipate that the volumes we missed in the fourth quarter, will ship in the first half of 2018, preserving the value of these commitments.
Looking ahead, we expect to see improvement in the segment's cash margin as we realize the benefits of improved pricing with our North American business and a continuation of a strong seaborne market.
We are forecasting comparable production levels in this segment this year, with the majority of our coking coal destined for High-Vol A markets, a product that is currently commanding a premium over other U.S. coking coal qualities.
However, with the anticipated production at Mount Laurel improving and a decrease in production at Leer due to operating in shorter panels and a lower seam height over the next 12 months, we do expect to see a slight change in our product mix that will increase our percentage of High-Vol B in 2018.
Moving to our sales strategy, we currently have 4.3 million tons of coking coal committed, of which 1.7 million tons are fixed at a price of around $104 per ton and 2.6 million tons are tied to U.S. East Coast coking coal indices, are subject to negotiations based on prevailing market conditions.
At the midpoint of our guidance, we now have 5 million tons total, which includes 2.4 million tons still uncommitted subject to market pricing heading into 2018.
During the quarter, we selectively committed about 500,000 tons of additional volumes to North American steel producers, about 300,000 tons to the seaborne customers at a fixed price and about 400,000 tons to international customers on market-linked basis.
As indicated, we also rolled over about 200,000 tons of business that did not ship in the fourth quarter.
In total, we now have commitments in place to North American customers of approximately 1.2 million tons, including carryover, at an average price of around $96 per ton. This represents approximately 18% of our expected coking coal volumes at the midpoint of our guidance.
It's worth noting that a majority of the volume committed in North America is our High-Vol B product.
We are pleased to have these volumes locked down on price with our more traditional customers, but we're even more enthusiastic about the percentage of our coking coal volumes that remain exposed to the seaborne market. We continue to see strong fundamentals and have the balance sheet that enables us to embrace such exposure.
At the midpoint of our 2018 coking coal guidance range, we're nearly 65% committed.
We anticipate selling the balance of our open position into the seaborne market mainly on an index basis.
Turning to the thermal side of the business, we're entering the year about 82% committed across all products at the midpoint of our guidance.
During the fourth quarter, our Powder River Basin cash costs increased 5%, on 10% lower sales volumes, that were driven by stubbornly high utility stockpiles and a sluggish start to winter.
We were successful in placing additional volumes for 2018, strengthening our committed position, while still maintaining significant exposure to improving prices, particularly from our Black Thunder mine. We are effectively sold out at our Coal Creek operation.
In the fourth quarter, we sold 11.8 million tons for 2018 delivery at an average price of $11.51 per ton, including in this is 1.3 million tons of 8400 Btu coal. With these new sales, we now have 64 million tons committed for the year, of which 62 million are priced at $11.95 per ton.
Going forward, we currently anticipate operating our mines in this segment at levels on par with 2017. But we're taking a cautious approach. As John mentioned, we would expect our customers to further liquidate their stockpiles in 2018, which should ultimately lead to better supply and demand fundamentals over time.
Further, while Powder River Basin pricing remains muted, we continue to believe current levels are unlikely to be sustainable in the long term.
As the market normalizes, we expect to see opportunities to place spot volumes as we progress through the year.
Clearly though, we expect our customers to be careful in their contracting strategies and we will not push tons into the market if the demand does not develop.
Year-over-year, we expect segment cash cost to range from $10.45 to $10.95 per ton, with the only expected major cost pressure from an increase in diesel prices, which is included in the guidance.
We saw an exceptional performance from our Other Thermal segment during the fourth quarter. Cash costs decreased 4% from the third quarter on strong cost control. Sales volumes were steady as we continued to benefit from good demand in the seaborne thermal markets and a stronger year in terms of shipments to Viper's baseload customer.
As discussed, we ran West Elk above capacity for a better part of 2017, so that we could capitalize on robust New Castle pricing. As a result, West Elk's volumes will be about 10% to 15% lower in 2018 as we catch up on development mining at the operation. That said, we have committed approximately 3.6 million ton for export from West Elk and Coal-Mac as we continue to take advantage of the current strength in the international thermal markets.
For 2018, we expect cash costs in this segment to be higher than 2017, ranging from $27.50 to $31.50 per ton, due primarily to the sales mix between the mines.
Given our heavily contracted position and cost structure, we should see another strong contribution from this segment in the coming year.
Turning now to capital spending. We expect CapEx, including land, to be between $80 million and $90 million in 2018. We continue to remain disciplined in our capital spending and this range is in line with the progression laid out last year.
Finally, I would like to highlight the performance of our mines as it relates to 2 very important operating metrics. Arch employees continued their focus on workplace safety and environmental stewardship during 2017 with 2 mining complexes completing the year injury and violation free.
While this is something we're extremely proud of, 8 days ago, we experienced a fatality at our Sentinel mine. This tragic event reminds us yet again that we can never let up on our goal of an injury-free workplace.
In all, we feel good how Arch performed in 2017. As with every year, we experienced some operational setbacks but we're able to overcome them and build a stronger company. Looking ahead, we remain intensely focused on executing our commercial strategy, controlling our costs and operating safe and environmentally responsible mines.
With that, I'll turn the call over to John Drexler, Arch's CFO, to update us on our financial results, liquidity and the remaining full year guidance metrics. John?
Thanks, Paul, and good morning, everyone. As indicated, 2017 was a positive and productive year for Arch Coal. We remain highly focused on our plan to generate healthy cash flows, maintain a strong and flexible balance sheet and execute aggressively on our capital return program.
We continue to make great strides on each of these fronts during the quarter, wrapping up a strong year of solid execution.
In addition, the passage of the Tax Cuts and Jobs Act late in 2017 resulted in a significant improvement in our already strong tax position.
Cash generation continues to be strong with $94 million of operating cash flow during the quarter despite the bad weather, logistical challenges and missed shipments that occurred late in the fourth quarter.
For the year, we generated close to $400 million of operating cash flow with all of our operating segments making solid contributions and demonstrating the capability, flexibility and balance of our low-cost asset base.
As we have discussed in the past, the operating portfolio is positioned to serve 2 distinct markets and built to excel when coal markets are strong and sustained, while still generating cash in times of market weakness.
During the quarter, we furthered our capital return activities, rewarding you, our shareholders, through ongoing share buybacks and quarterly dividend payments. Since its authorization on May 2, we invested $300 million to buyback approximately 4 million shares under our share repurchase authorization. This represents 16% of our outstanding share balance at an average price of $75.96 per share.
As of December 31, we had approximately $200 million of capacity under the $500 million repurchase authorization. In addition to the share repurchases, we have paid $24 million in cash dividends to shareholders since the initiation of our quarterly dividend.
Further demonstrating an ongoing commitment to our capital allocation program, the Board of Directors has approved an increase in our quarterly cash dividend, with the next payment of $0.40 per common share. That dividend will be paid on March 15 to stockholders of record at the close of business on March 5.
That is an increase of $0.05 per common share or more than a 14% increase in the quarterly dividend. This increase highlights the confidence the Board has in our ability to continue to execute on our plan as well as the long-term outlook for our business. We expect to continue to pay at the increased level quarterly throughout the course of 2018.
We remain intensely focused on maintaining a healthy balance sheet and ample liquidity. We recognize that we operate in an industry that will experience cycles, and as we have learned, a strong balance sheet is the best protection during the bottom of those cycles.
We ended the year with $429 million of cash and short-term investments, well within our expectation to maintain a cash position of between $400 million and $500 million.
We also ended the year with $336 million of debt, leaving us in a net cash position of $96 million.
One other major development during the quarter was the passage of the Tax Cuts and Jobs Act. As many of you already are aware, the passage of the act reduced the corporate rate from 35% to 21% and also eliminated the alternative minimum tax requirement.
In fact, AMT credits are refundable under the act by 2022. Our net tax benefit of $35 million in the quarter is primarily a result of the release of the valuation allowance associated with those AMT credits. We were able to file carryback claims in the fourth quarter associated with the AMT credits and a $24 million refund was received in January. The remaining $11 million of credits will be refunded between 2018 and 2022.
Going forward, the combination of the reduced corporate tax rate, the elimination of the AMT requirement and our large deferred tax asset base should keep our cash tax rate at effectively 0 for the next decade under most scenarios for future performance.
Our 2018 guidance is reflected in the press release and Paul has provided thoughts on our operating cost performance for 2018.
An items to note, we expect our SG&A expenses to be between $83 million and $90 million. This includes $15 million of non-cash equity compensation expense.
During 2017, our $87 million of SG&A expense included $9 million of non-cash equity compensation.
Net of the non-cash equity compensation, from the 2018 midpoint of guidance, we are expecting a decrease of cash SG&A spending of $7 million as we continue to be focused on reducing cost across our platform.
In summary, it has been a powerful year for the company. Our portfolio of high-quality, low-cost complexes generated healthy cash flows throughout the year. We were able to refinance and reprice our debt, ultimately reducing annual interest expense by $20 million.
With the benefit of a strong balance sheet and healthy cash flows, we were able to reduce collateral held by third parties and enhance our borrowing capacity with the implementation of an inventory-only ABL facility. The combination of lower collateral and increased capacity resulted in the return of $100 million of collateral held by third parties.
Finally, we were able to return healthy amounts of capital to our shareholders via both dividends and share repurchases. We are excited about our future, and specifically, what 2018 has to offer.
With that, we are ready to take questions. Operator, I'll turn the call back over to you.
Thank you. [Operator Instructions] And we'll take our first question from Lucas Pipes with B. Riley FBR.
Hey. Good morning, everybody.
Good morning, Lucas.
I wanted to follow up a little bit on the met coal side. And I appreciate the bad weather late there in 2017. But as you look here in 2018, when I think about your guidance, the sales guidance, the range is fairly wide. And does that include all of those carryover tons? Or - where would they fit into the picture?
Yes. Lucas, the - I think the way to look at it is the 200,000 tons of carryover are included in our guidance. And frankly, the range is a little bit out of our experience in the last couple of weeks. As we've gotten more and more into the seaborne market, we see these things particularly at year-end that can swing the volumes 200,000 or 300,000 tons. So that's kind of the basis for the range.
Lucas, this is John. Certainly, if you look at our met portfolio and how we've repositioned it from domestic to international, as Paul said, we got 82% exposed to the international market, so every quarter we're going to have boats that are kind of straddling the quarter. So you're going to have some movements there.
The range is a little bit wide at 6.4 million and 7.0 million. I suspect that we'll narrow that range as we move forward. But right now given where we are, we thought that was appropriate.
Got it. I appreciate that. That makes sense. And then, Paul, I think you mentioned in the prepared remarks that the year is going to have shorter panels, and obviously, that the portion of the lower contribution of High-Vol A from here, your mix will change a little bit. How long will that condition persist? Is this more like a 2018 event or is this something that Leer is maybe getting a little bit older? How do you think about that? I would appreciate the color?
Yes. This was - Lucas, this was a known area that we're headed into. And I guess, I want to keep it in context. If you look at 2017, we did about 15% of our product as Low-Vol and about 60% was High-Vol A. That leaves 25% High-Vol B. What we're heading into at Leer is pretty localized and should last about 12 months. So it'll span most of 2018. With that, we'll still produce about 15% of our product as Low-Vol in 2018, our High-Vol A will drop to 55% and our High-Vol B will go up to 30%.
That's very helpful. And in terms of the tons that you have contracted thus far, is that maybe tilted a little more towards the High-Vol B spectrum?
So if you look at Q4, the 1.2 million tons we committed, just kind of round numbers, about 500,000 tons were into the North American market and 85% of that was High-Vol B. If you think about it, as John mentioned, last year we were about 45% in the North American market and this year we'll be about 18%. The 300,000 that we sold into the seaborne market were at about $113. This was a mixed bag of about 10% Low-Vol, 65% High-Vol A and 25% High-Vol B.
It's very helpful. I really appreciate this color and good luck. Thank you.
Thank you, Lucas.
And we'll now take our next question from Daniel Scott with MKM Partners.
Hey. Good morning, everyone.
Morning, Dan.
As a follow on to Lucas' questions about coking coal, when we think about this guidance that includes a couple hundred thousand tons carried over, is - back that out, you're kind of looking at about 6.5 million ton run rate. Is that the kind of the new way to think about nameplate capacity for you guys? Or is the impacts on the Leer shorter panels maybe holding back from what you might achieve in 2019?
I think it's the latter, Luke - Dan. It's - we expect Leer to get back to a more normal run rate in 2019.
Okay. And so that would maybe push it up towards the 7 million ton rate?
Yes. I mean, it's - about like where we headed out last year, about 6.8 million to 7 million.
Okay. Great. And then my follow-up would be about - it's a good problem to have lots of cash and things to do it with. My model have a similar free cash flow number this year to last year. And that's, I think, a pretty conservative coking coal price deck in there.
At what point do you start - with that cash on hand that you say you need at all points in the cycle, debt obviously under firm control, dividend has been increased, share repurchases are ongoing. At what point do you start thinking about bringing on Leer? Pre-funding it or going to capital markets? Or do you think more about M&A or special dividends?
Dan, this is John. Certainly, we're excited about the potential projects we have at Tygart Valley. As we've said, we got 130 million tons out there that are owned in fee and we can employ 2 additional longwalls that’s producing pretty low-cost High-Vol A.
With that said, I mean, we're not in any hurry to do anything. We like our position. We continue to look at external M&A. Quite frankly, we've got a pretty high bar when we look at external opportunities and compare that to what we have at Tygart Valley.
It's a pretty tough comparison. We're tough - we're pretty pleased with our business plan right now, I think. As we think about the dividend, the share repurchase program, as John mentioned, we got about $200 million left on that. I think we're comfortable executing our plan right now. I think in terms of the Tygart Valley and when we decide to make that decision, it'll be driven by the market conditions, business environment, et cetera.
We've got about another call it 12 months Paul of getting the permit in place and we'll keep pushing that forward. Obviously, it's something we continue to talk to the Board about, but really comfortable with where our business plan is currently.
I appreciate that. And I agree, it should be a pretty high bar to look at externally versus the Leer option. And then just quickly, could you tell us the longwall move schedule for this year?
Yes. As we go into the year, we got Mountain Laurel that should happen in mid Q2 and we could have another move late in Q4, could roll into Q1 of '19. Leer, we have another one in late Q2 and another one in late Q4 '19. Never fail, they move together. Then West Elk, we may not have one this year. If we do, it'll be late in the fourth quarter.
All right. Thanks very much, guys.
And we'll now take a question from Michael Dudas with Vertical Research.
Good morning, gentlemen.
Good morning, Michael.
John, I think, given your - I think, certainly shareholders [indiscernible] the patience you've got and rewarded were relative to your changing of mix on the met side, international and having the exposure for '18. Compared to like what you're thinking - seeing the market a year ago, obviously, you pointed out there's some pretty decent future pricing that's in the marketplace.
Do you sense that your customers are changing their views a bit of the tightness in certain of the markets that you guys serve pretty well? And are - may look to accelerate locking in and getting some of their business or replenishing their inventories here over the next several months?
I'll take the first shot at that, Michael, and I'll let John finish up. I think you did see us commit about 300,000 tons seaborne coal on a fixed price basis. And that was - it was equal to the marks at the time. And I think it represents some customers little nervous about future pricing. Whether that's a trend or not, I think it's yet to be seen.
Michael, I think something interesting about this business, I mean - I guess, as we look at it today, we think supply and demand are in relative balance right now. If you go back last couple of years, it really hadn't been a lot of capital employed in this business, whether it's in North America or globally. So we've said that we think prices can stabilize around that $130 to $150 range.
But with that said, if you're short 3 million to 5 million tons, you're going to see these extreme price movements. And I think buyers that really understand that are probably a little bit more willing to lock down some of that volume and price it out. And we actually think that works to Arch's advantage because of our low cost structure.
We certainly can create real value on the up cycles, but when we hit those dips, we think some of the higher cost production that's come on recently is really going to struggle in those down dip.
So we like the way we're positioned. If customers want to lock some volume in with pricing, we're pretty comfortable with that. But we're also comfortable with tying our pricing to the index-linked pricing.
Michael, it's just - Michael, its Deck. Just to jump in a little bit. Obviously, the system is looking - production system is looking pretty fragile out there. With Australia down 17 million, 18 million tons in terms of metallurgical exports last year, continuing to see logistical and operational challenges. It certainly does feel like the market is beginning to recognize that.
As John said, there's been underinvestment. It's going to take a while to sort of get back to - to keep up with the kind of robust demand that we're seeing. And so it does feel like there is a different tenor in the expectation. If you look at the swaps market for 2019 even, you're still up at $180. So we're looking at some real link [ph] in these prices.
And I think once upon a time, there was the expectation that, "hey, we'll run through some of these supply blips and then things will normalize." I think now there's a better appreciation for the fact that we're likely to see the system a bit stressed and struggling to keep pace for a while.
Deck, those are excellent points. My follow-up question is, now turning to U.S. thermal, a year from now, if your expectations of inventory levels achieve 100 million to 110 million, will that market seem a bit more interesting relative to pricing and will utilities look to - maybe start to think differently about contracting their coal going forward?
Michael, I think there may be a little bit of that coming. We're - our natural market is in the U.S. and typically, as you know, that's where we supply. But the price differential is just too great this year. We have heard back from some customers all the concerns about - particularly from some of the smaller operators getting deliveries of all tons.
And I think that dynamic could change heading into next year a little bit. But at the end, it's going to come down to the value of the product. If we can't get close to parity domestically, we'll push the coal overseas.
Thanks, Paul. Appreciate it.
We'll now take our next question from Mark Levin with from Seaport Global.
Hey. Thanks very much. First question, when you look at the remaining met coal that needs to be sold or is unpriced - I guess, the better way of putting it, that is left to be priced in 2018, what's the mix of that? How much of that is High-Vol A versus Low-Vol versus B?
All right, Mark, for the uncommitted and unpriced, 9% is Low-Vol - excuse me, for the committed and unpriced, 9% is Low-Vol, 76% is High-Vol A and 15% is High-Vol B. For the uncommitted and unpriced, 17% is Low-Vol, 43% is High-Vol A and 40% is High-Vol B.
Got it. Appreciate that color. When you think about the PRB in '18 versus '17 - I don't know that you guys gave specific guidance for the PRB. I think I interpreted on the call that the expectation is for volume to be flattish in '18 versus '17 or is that not right?
That is correct.
Okay. I just wanted to make sure I understood that. Third point is more of a - or a question, just more of a big picture question. Would the Board or the Johns, I guess as it were, consider putting half a turn of leverage or a turn of leverage on the company at this point?
As you guys alluded to, the cost structure is in excellent shape. The balance sheet is obviously in terrific shape and you're generating a lot of free cash, even if met prices came down considerably. Has there been any discussion about that? Would you consider putting a half a turn or a turn in either buying back more stock or paying a dividend?
Mark, this is John Drexler. There's always thoughtful consideration for all of those items there. I think given the plan that we've laid out and the plan that we've executed and executed on aggressively over the course of the year, it's clear that the excess cash flows we've been targeting towards a capital return program that includes both the quarterly dividend and a share repurchase program.
We are very comfortable with the position that the balance sheet is in. We're very comfortable with the cost structure of our operations. And so right now, I think, as we look forward, as we move ahead, as where we see market's going, I think we're - we continue to expect to generate ongoing very healthy cash flows.
And at this moment in time, I just don't see a need to put that additional leverage on the balance sheet. Not to say that, that's not something that could be considered in the future. But from where we sit here today, I think we continue to execute on our plan. And looking forward, that will be very similar to what we've done so far through the course of 2017.
Great. Yes - I'm sorry, go ahead.
Okay. No, go ahead.
No. I was just - my final question was just around M&A. As you guys alluded to, I think, in response to one of Dan's question, obviously you look at M&A versus the returns that you can get on Leer, which is obviously a very, very good project. But when you think big picture about the met market in Appalachia, do you think - is your kind of big picture view that the market or the U.S. domestic production market for met coal needs to consolidate? And would you guys be willing or would you be looking to play a role in that if ultimately, you think that's what's going to happen?
Well, certainly, I don't know that it's our role to do the consolidating. I think - as I said earlier, I think we're pretty comfortable with our position. We're always looking externally. We like our organic opportunities a lot. With that said, I still think the U.S. met market is somewhat fragmented and probably needs to consolidate over time. Who and how that evolves will be anybody's guess. But yes, I think there's probably an opportunity for that somewhere.
Got it. Great. Well, thanks and congratulations on all the - great, accomplish this year.
Thanks, Mark.
Thank you, Mark.
We'll take our next question from Jeremy Sussman with Clarkson.
Yes, hi. Thanks for taking my question.
Morning, Jeremy.
Morning, Jeremy.
Morning. So just let me dig in into the met side a little bit more. Based on my math, I guess 75% of your met coal production for '18 has yet to be priced. And I guess, you gave us some percentages where the majority of what you have left is High-Vol A, presumably going exports, so - when I think about Q4, I think the Platts High-Vol A index was somewhere in the $160 to $165 range per metric ton FOB port.
And it sounds like, I think - if I heard you correctly, you signed your new sort of fixed price export business during the quarter at about $113 per short ton at the mine. So if I look today, the High-Vol A index is $215, which is about $55 above the Q4 level.
So I guess, first of all, can we use the same conversion, relatively speaking, kind of that we saw in Q4, which would imply something north of $150, $160 today per short ton on a $215 index?
And second, I guess, either way, if that's too much detail, is it safe to at least say your new commitments are going to be - should be done at a much substantially higher pricing than kind of the $104 average that you guys are currently fixed at?
Yes, I think - no question. We price off - we've tried to price everything off to Platts East Coast indexes. I think what gets confusing for people is those are looked at differently by different customers and that some of those are the index before the vessel shipped sets the price.
Some customers price on the average index in the bath and we also use the trading average of maybe 15 days before and after the vessel load, so there's a pretty wide range to interpret those prices, but - effectively, we are selling at the East Coast prices, less conversion to short tons and transportation. And on average, our transportation is going to hit about $30 to $35 a ton.
Okay. So it sounds like my math isn't too far off them at today's levels.
That is correct.
Okay. And maybe an easier one. Based on the midpoint of your cost guidance for met coal and - in the met coal segment in 2018, I think expectations imply sort of $3 per ton year-over-year decline. How much is just simply the removal of Lone Mountain versus kind of the other cost-cutting initiatives that some of what you've talked about?
Clearly, a big chunk of that is the removal of Lone Mountain, but you also go to remember even at our fixed price taxes and royalties, our fixed price contracts are going up about $15. So taxes and royalties are going up $1.50 of that. So there is some embedded cost increase, which is a high-class problem.
Right. Okay. Well, thank you very much and good luck.
Thanks, Jeremy.
We'll now take our next question from Paul Forward with Stifel.
Thanks. Good morning.
Morning, Paul.
On the - shifting over to Other Thermal segment and the guidance that you've given, it sounded like the big change is going to be anticipated lower 10% to 15%, I think lower production from West Elk. Just wanted to ask a little bit about the, I think, 2017 cash costs there were $24.20 per ton. The high end of the cost guidance range that you gave for 2018 was $31.50 per ton.
And it sounded like you were not anticipating any longwall moves at West Elk, may be 1 at the end of the year. Just wanted to ask about - that's a big step up. I wanted to ask what have to happen to kind of reach that high end of that cost guidance range for '18? What was your thinking in setting the number that much higher than what you did in '17?
Yes. Paul, this is Paul. I think the way I was looking at it was, as you look at West Elk, we can run the mine harder, produce more coal in the short term, but bringing the longwall move forward. And we may not have any more net tons than we would have. We just ran it kind of ratably.
So if we look at that guidance, I'm assuming that we just kind of pace ourselves through the year and that we've got an average of development rate. Where I think there's upside and where I think we can bring in that top end of the guidance is, if we do well on our development work and are able to move that longwall move forward into Q4 without impacting production following that, we'll do it.
Paul, just to reiterate - it's Deck. Just to reiterate that a big part of this is clearly the mix there. The fact that on a percentage basis, we'll have more Coal-Mac tons and obviously higher cost tons and fewer West Elk tons pushes that up. So some of this is just mix issue. As we indicated, we ran West Elk very aggressively in 2017 in an effort to take advantage of really strong new capital prices.
And as a result, we caught up with development. So we can't be - we can't run quite as - at the same level in 2018. West Elk will also make a big contribution, but it'll be small - it'll be a lower component of the mix. And so as a result, the average costs will be higher, even though - on each - for each mine, you won't necessarily see those higher costs. It's just a mix issue.
And Deck, just following up on that point. I guess if Coal-Mac has a greater share in 2018, can you give us a sense of - like, might there be some significant uncommitted tons that could bring the average price up? May be to offset some of that mix effect on the cost?
Yes. We are expecting a little bit of a pop in the realization due to the sales mix. The difficulty with this segment, as Deck said, is there's 3 mines in the segment and those 3 mines have about 100% difference in cost. So you tweak the volumes between those 3 mines at all, it can skew the numbers.
Right. Okay. And shifting over to the PRB, it looks like new signings in the fourth quarter were down around $11.60 or so per ton. And it sounded like product mix had something to do with that number being kind of sub-$12.
We have seen just over the last few days a pick up into the upper $12s kind of spot pricing in the PRB. Just wondered if you can talk a little bit about what's going on with that? And your ability to capture that type of pricing kind of $12.50-plus for the 8800 coal for the balance of the year for the uncommitted tons?
I think as we head into the year, we clearly have what I think is a pretty good position should the market strengthen in the PRB. It's a common theme you usually hear we talk about, we put to bed our lower quality tons and have left ourselves open on the higher-quality tons
And as we look at the market, although the indices I would say at this time don't reflect the physical. They're not quite in sync. I think they are directional and correct. And - look, I think if things continue the way they are and we get a little help on gas, I think you could see rising prices in the PRB.
But Paul, as Paul said earlier in his script, I mean, if we don't see the market improve, we're not going to force volume into the market where it does want it. So we'll back up and do something different.
Paul, Mike Dudas asked earlier about what happens when we get down to 110 million tons or so in stockpiles. I mean, the one thing I guess we've done definitively is that when we finally [indiscernible] overhang we've seen since really the beginning of 2016, the stockpile overhang, that should be a positive in terms of market fundamentals.
We don't know what kind of inflection point that might induce but certainly, it will be a positive. As we move down, it is encouraging to see some of this upward movement. But as we indicated as well, it still feels like there's some work to do in the PRB. So we'll see how the year plays out. But certainly, we're moving in the right direction there.
Okay. Thanks a lot.
Thank you, Paul.
We'll now move to Wayne Cooperman with Cobalt Capital.
Hey, guys. To not to beat a dead horse, but first, just year-end share count, where did you actually end on December 31? And is there any guidance for share repurchase for '18? If we just took your free cash flow based on our estimates and then subtracted out the dividend, would you anticipate using the rest of the free cash flow to buy back stock? Or maybe - without being specific, may be just kind of a game plan there?
Yes. Wayne, John Drexler here. A couple of items. We indicated over the course of 2017, we bought back approximately 4 million of our outstanding shares. Our share count started at 25 million. So at the end of the year, the actual physical shares outstanding were 21 million shares.
As we move forward, as we've indicated, we continue to expect to execute on our capital return policy. We do see healthy free cash flows. I think we've not only communicated that plan over the course of '17, but I think we've executed on it as well.
Looking forward, we do expect ongoing healthy cash generation. So I don't think we're wavering from our communication on what we expect to do with that cash flow moving forward. With that said, you do have to take into consideration over the course of '17 in addition to the very healthy operational cash flow, we did have some other very favorable liquidity events. We were able to free up $100 million of collateral with third-parties and that all factored into the amount of cash we were able to consider...
My question is, a, so assuming you don't buy any shares, is 21 million the right number for your '18 diluted share count? And second...
If you were to - Yes. If you were to assume no additional share repurchases, our common shares outstanding at the end of Q4 were 21 million. If you look...
That's diluted or - is that basic or diluted?
That's basic. If you look on the face of our income statement, and it's all affected by share price, et cetera, you see the dilutive effect of about 500,000 shares. I'm rounding here. That's the net effect of the 1.9 million warrants that we have outstanding. So the dilution is relatively immaterial. So it's 21 million shares outstanding for 2018, assuming no additional share repurchases.
And just to follow up on the last. So I realize all the liquidity events and everything aside, if we just - whatever our estimate is for EBITDA, you've told us what interest is, you told us taxes are 0 and you told us CapEx and we know what dividends are. So if we end - do you expect to end the year with the same net debt position as you started the year? And if so, is the balance going to go into share repurchase? I guess, that's my simplest...
Wayne, I think - yes, I know it's a great question. So the way I'll frame that up is we've indicated that we would like to keep our liquidity - our cash position between $400 million and $500 million. And we make decisions everyday on that capital return policy and what we're going to do there. But absent the consideration of a lot of different things, we expect to continue to execute on our plan, which I think kind of plays into exactly how you've described.
So last question on PRB. I mean, the margins always aren't very good and they've gotten a little bit worse. And I know you and your competitors have pulled production down a little bit. What's stopping you guys from just slamming the brakes on harder until you get back margin going forward?
Wayne, this is John. I mean, I think I mentioned earlier, I mean, if we don't see any price improvement from where we are today, we're just not going to put additional volume in that market. I mean, we sold call it 11.8 million tons at call it $11.60. That's kind of our pain threshold. I mean, we're just not going to keep dumping coal in a market that doesn't want it and we'll back up, reconfigure the mind to whatever we need to do to operate at lower levels.
Does that…¦
Yes. I think what I'll add to that is, I think we just need to be patient. Over the longer term, I think we'll have the advantage on ratio and we've got the best quality out there. So - look, going a little slow and taking some pain now, I think we're willing to do it for the longer term.
And that's all the time we have for questions. Mr. Eaves, at this time, I will turn the conference back to you for additional or closing remarks.
Thank you very much. We certainly appreciate your interest in Arch. I want to commend all the employees of Arch Coal for their exceptional performance in 2017. We think we've positioned the company well for 2018 to continue to create shareholder value and execute on our business plan. We look forward to updating you on the first quarter results sometime in April. Thank you.
And that does conclude today's conference. We thank you all for your participation. You may now disconnect.