Arch Resources Inc. reported a net loss of $191.5 million in the third quarter of 2020, compared with net income of $106.8 million in the prior-year period. Revenues totaled $382.3 million for the three months ended September 30, versus $619.5 million in the prior-year quarter.
“During the third quarter, Arch’s core metallurgical segment maintained its strong, consistent track record of operational excellence and first-quartile cost performance,” CEO Paul A. Lang said. “Just as importantly, the Arch team continued to make excellent progress in the development of Leer South, which should greatly enhance the cash-generating capabilities of our already high-performing metallurgical portfolio through the cycle and solidify our position as the world’s leading producer of high-vol A metallurgical products when it starts up in less than a year’s time.
While the coronavirus continues to represent a serious concern, Arch has only had 37 positive tests among more than 3,400 employees and no extended hospital stays as of quarter-end. While Arch estimates it incurred additional costs of $4 million during the third quarter related to enhanced cleaning protocols, operational changes and temporary quarantines, the company said it did not experience material impacts on its ability to produce or deliver its products or on development work at Leer South.
Lang said the company continues to evaluate strategic alternatives for its thermal operations, including possible divestiture. The company is also finalizing plans to shrink the operational footprint at these operations, with a particular emphasis on the Powder River Basin (PRB) assets, where the company is focused on reducing asset retirement and related mine closure obligations.
Arch’s PRB mines produced nearly 75 million tons in 2019 and are expected to produce less than 55 million tons in 2020. Arch is pursuing a plan that could reduce production levels by an additional 50% over the course of the next two to three years.
“We view this systematic winding down of our thermal operations — in a way that allows us to continue to harvest cash and to fund long-term closure costs with ongoing operating cash flows — as the right business solution in the event we are unable to find an appropriate buyer,” Lang said.
On July 2, Arch completed a $53.1 million bond offering in the U.S. tax-exempt market through the West Virginia Economic Development Authority. Proceeds are being used to fund the construction of the Leer South’s preparation plant and other facilities associated with waste management. Arch received approximately $30 million of cash on the closing of the issuance, reflecting the amount of qualified expenditures that had been completed at that time, and another $8 million as work progressed during the third quarter. The company expects to receive the remaining $14 million over the next few quarters.
“While we consider our balance sheet to be one of the strongest in the U.S. coking coal industry, we continue to explore opportunities to further enhance our liquidity position as we drive forward with the final stages of the Leer South buildout,” CFO Matthew C. Giljum said. “We plan to maintain our careful and conservative approach to managing our balance sheet, which we believe is prudent given the continuing, pandemic-related uncertainty in the broader, global economy.”
During the third quarter, Arch was required to post approximately $32 million in collateral, with $20 million related to reclamation surety bonds for its legacy thermal operations and the remainder related to workers’ compensation obligations. In the fourth quarter, Arch expects to post approximately $16 million of additional collateral related to prior self-insurance of certain workers’ compensation obligations.
During the quarter, Arch recorded a non-cash impairment of $163.1 million at its thermal operations, excluding Black Thunder, as a result of projected negative cash margins at the operations and changing expectations about the projected operating rates and overall longevity of these operations.
“During the quarter, our core metallurgical segment continued to exhibit tight, disciplined cost control while ramping up shipping volumes in response to a gradually improving market environment,” COO John T. Drexler said. “Once again, the Leer mine set the tone, with cash costs in the mid-$40 per ton range, demonstrating yet again why we remain highly focused on getting the Leer South longwall online at the earliest possible date.”
Longwall production is expected to commence at Leer South in the third quarter of 2021. When fully operational, the mine is expected to produce up to 4 million tons of high-vol A coking coal annually for sale into global metallurgical markets and to operate in tandem with Arch’s Leer mine for the next 20 years or more.
Arch expended approximately $45.8 million on Leer South’s development during the third quarter and said it expects to invest a total of $360 million to $390 million on the mine’s buildout. As of September 30, the company had expended a total of $256 million on the project.
During the quarter, Arch secured commitments totaling 1.7 million tons for delivery to North American customers in 2021, at an average fixed price of more than $90 per ton. Of that total, 1.3 million tons were high-vol A quality that garnered more than $93 per ton.
“As we have stated in the past, we believe there is good, strategic rationale for maintaining a solid presence in the North American marketplace, but only at the right price,” Drexler said. “Despite the challenging market environment, we were able to lock in commitments for more than 20% of our projected 2021 output, at fixed pricing well above the assessed marks.”
