Arch Resources, Inc. (NYSE:ARCH), a premier producer of high-quality metallurgical products for the global steel industry, reported its second quarter 2024 financial results, showcasing solid operational performance despite facing significant logistical challenges.
For the full year 2023, Arch Resources reported annual net income of $464,038,000, annual revenue of $3,145,843,000, annual operating cash flow of $635,374,000, and annual free cash flow of $459,337,000. These strong financial metrics demonstrate the company's ability to navigate the dynamic market conditions and deliver consistent results.
In the second quarter of 2024, the company reported net income of $14.8 million, or $0.81 per diluted share, compared to net income of $77.4 million, or $4.04 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") of $60.0 million in the second quarter of 2024, compared to $130.4 million in the second quarter of 2023. Revenues totaled $608.8 million for the three months ended June 30, 2024, versus $757.3 million in the prior-year quarter.
The decrease in net income and adjusted EBITDA was primarily driven by lower revenue, which was impacted by the extended closure of the Baltimore shipping channel following the tragic collapse of the Francis Scott Key Bridge. Despite these logistical challenges, the company was able to ship 2.0 million tons of coking coal during the quarter.
Business Overview
Arch Resources is a premier producer of high-quality metallurgical products for the global steel industry. The company operates large, modern, and highly efficient mines that consistently set the industry standard for both mine safety and environmental stewardship. Arch's primary business is the production of metallurgical and thermal coal from underground and surface mines located throughout the United States, for sale to steel producers, utility companies, and industrial accounts both in the United States and around the world.
The company currently operates mining complexes in West Virginia, Wyoming, and Colorado. Arch's metallurgical segment, which includes the Leer, Leer South, Beckley, and Mountain Laurel mining complexes, contributed adjusted EBITDA of $87.3 million in the second quarter. The thermal segment, which includes the Black Thunder, Coal Creek, and West Elk mining complexes, effectively broke even for the second straight quarter.
Operational Performance
During the second quarter, Arch overcame significant logistical challenges and drove forward with key strategic priorities and objectives. The company shipped 2.0 million tons of coking coal despite the extended closure of the Baltimore shipping channel, achieved record production levels from its metallurgical segment, and continued to progress towards District 2 at Leer South, where mining conditions are expected to be more advantageous.
In the metallurgical segment, the company's cash cost per ton sold increased primarily due to the decrease in shipment volume, which was impacted by the Baltimore bridge collapse. However, the segment benefited from a $12.8 million severance tax rebate from the state of West Virginia, which helped offset the higher costs. Arch expects the segment's cash cost per ton sold to benefit significantly when the excess thermal byproduct tons are monetized in the year's second half.
The thermal segment effectively broke even for the second straight quarter. Arch's West Elk longwall mine operated efficiently and generated a solid cash margin, while the Powder River Basin assets were cash negative for the quarter as they continued to operate at a stripping rate in excess of shipment levels, which were further reduced by typical seasonal weakness in the spring quarter. The thermal segment expects to benefit from cost-cutting initiatives as well as the excess stripping levels in the year's second half, when shipped volumes are expected to exceed stripping rates markedly.
Financial and Liquidity Update
During the second quarter, Arch deployed $19.6 million in its capital return program, including the repurchase of 94,367 shares of common stock for $15.0 million and the declaration of a fixed dividend of $0.25 per share, with a total payment of $4.6 million. The company generated discretionary cash flow of $12.3 million, which reflected the impact of a $15.2 million working capital build.
Arch ended the quarter with $279.3 million in cash, cash equivalents, and short-term investments, and a net cash position of $146.0 million. The company paid down $12.5 million in debt during the quarter, bringing its total debt level to $133.3 million.
Outlook and Guidance
Looking ahead, Arch remains focused on driving continuous improvement in execution across its entire operating platform to support strong, value-generating capital returns for its stockholders, even in today's subdued market environment. The company has maintained its full-year guidance for coking coal sales volumes of 8.6 to 9.0 million tons and expects an average per-ton cost for the metallurgical segment of $87 to $92.
In the thermal segment, Arch expects a significantly stronger performance in the year's back half, driven principally by the expectation of an improving contribution from its Powder River Basin operations in the third and fourth quarters. The company is currently sitting on more than 8 million tons of pit inventory in Wyoming, which is twice as much as it would typically have, and expects shipments to exceed production, allowing it to monetize some of this inventory balance.
Arch's corporate guidance includes depreciation, depletion, and amortization of $165.0 to $175.0 million, asset retirement obligation accretion of $23.0 to $25.0 million, cash SG&A of $70.0 to $74.0 million, non-cash SG&A of $19.0 to $22.0 million, net interest income of $0.0 to $5.0 million, and capital expenditures of $155.0 to $165.0 million. The company expects to pay approximately 0% in cash taxes and have an income tax provision of 11.0% to 13.0%.
Risks and Challenges
Arch Resources faces several risks and challenges, including:
1. Loss of availability, reliability, and cost-effectiveness of transportation facilities and fluctuations in transportation costs. 2. Operating risks beyond the company's control, such as mining conditions, equipment failures, weather, and natural disasters. 3. Inflationary pressures on and availability and price of mining and other industrial supplies. 4. Changes in coal prices, which may be caused by numerous factors beyond the company's control, including changes in the domestic and foreign supply of and demand for coal and the domestic and foreign demand for steel and electricity. 5. Volatile economic and market conditions, including the effects of foreign and domestic trade policies, actions, or disputes. 6. The loss of, or significant reduction in, purchases by the company's largest customers. 7. Risks related to the company's international growth and competition from producers of competing energy sources. 8. Cyber-attacks or other security breaches that disrupt the company's operations. 9. Inaccuracies in the company's estimates of its coal reserves and the loss of a leasehold interest. 10. Extensive environmental regulations that impose significant costs on the company's mining operations and could result in litigation or material liabilities.
Conclusion
Arch Resources has demonstrated its ability to navigate challenging market conditions and logistical disruptions, delivering solid operational performance in the second quarter of 2024. The company's focus on cost control, capital discipline, and shareholder returns through its capital return program has positioned it well to capitalize on the expected recovery in the global steel and coking coal markets. With its cost-competitive asset base, high-quality product portfolio, and recognized sustainability leadership, Arch Resources remains well-positioned to drive long-term value for its shareholders.