May 2, 2017
Executives
Logan Bonacorsi - Director of External Affairs John Eaves - Chief Executive Officer Paul Lang - President & Chief Operating Officer John Drexler - Chief Financial Officer & Senior Vice President, Treasurer Deck Slone - Senior Vice President, Strategy and Public Policy
Analysts
Mark Levin - Seaport Global Securities Lucas Pipes - FBR Capital Markets Jeremy Sussman - Clarksons Platou Securities Michael Dudas - Vertical Research Paul Forward - Stifel Nicolaus John Bridges - J.P. Morgan Wayne Cooperman - Cobalt Capital
Operator
Good day and welcome to the Arch Coal Incorporated First Quarter 2017 Earnings Release Conference Call. Today’s conference is being recorded.
And at this time I would like to turn the call over to Ms. Logan Bonacorsi, Director of External Affairs.
Please go ahead.
Logan Bonacorsi
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 may be 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; and John Drexler, our Senior Vice President and CFO and Deck Slone, Arch’s Senior Vice President of Strategy. We will begin the call with some brief formal remarks and thereafter, we’ll be happy to take your questions.
John?
John Eaves
Good morning, everyone. Today I’m pleased to report that Arch turned another very strong quarterly performance.
In the first quarter 2017, the company reported earnings per share of $2.03 and adjusted EBITDAR $120.5 million marking a meaningful sequential quarter-over-quarter improvement. Revenues reached $601 million, even with lower sales volumes and two longwall moves in the metallurgical segment.
These results are demonstration of our ability to execute upon our long-term strategy and a testament of our balance lines of business, the size and scale of our operations are well cost asset mix, our impressive financial condition and of course our committed and talented workforce. Arch generated a strong free cash flow during the quarter, a function of incremental earnings to prudent capital spending approach and even stronger balance sheet.
In addition, after thoughtful and extension evaluations of the company’s balance sheet capital needs and ongoing strategic initiatives and given our confidence in the company’s future cash flow outlook. Arch announced today a comprehensive plan to responsibly return cash to our shareholders.
We are initiating our quarterly dividend of $0.35 per share as well as the initiation of a share buyback policy with the initial authorization for Arch to buy up to $300 million of common stock. Turning now to our current outlook for coal markets.
Although we’re seeing high-vol A coal prices declined nearly 20% from the peak levels reached after Cyclone Debbie made landfall, we expect global met markets to remain tight throughout 2017. Moreover we continue to believe domestic thermal market should also tighten as the year progresses.
Beginning with the met market; Cyclone Debbie has captured everyone’s [ph] attention over the last several weeks. Prior to the disruptions in Australia, it was our view that the global met markets were already in relative balance.
So it was no surprise that the storm related supply disruptions in the Queensland sent the global coking coal market sharply higher. And while the effect of the recent storm did not rivaled longer term impacts caused by Cycle Yasi.
It reminded the marketplace just how dynamic to see, what met market can be. As you know the principal Queensland rail carrier our zone is projecting shipment impacts of around $20 million of predominantly coking coal.
While the actual number remains to be seen, it’s clear that ongoing shipment shortfalls due to haulage and speed restrictions are still in place and could linger impact the global supply and demand balance for the next several months. Offsetting the Queensland losses to some degree are the forecasting and moderate supply response to the recent coking coal market strength from other region.
The US represents bulk of that response is evidenced by the rise in the US coking coal exports in the first quarter, which were up nearly 25%. But even with these supply increases we believe met market should continue to well-balanced even after the impacts of Cyclone Debbie are passed.
While the cyclone has been the dominant driver in the met markets in the recent weeks, there are other factors worth noting. Deal demand has continued to hold up and Chinese metallurgical imports remained strong throughout the first quarter up 6 million tons year-over-year.
On a global scale, year-to-date steel productions are 5.8% through March and the World Steel Association now expects global steel demand to grow at 1.3% in 2017. Shifting gears to domestic thermal markets still inflated utility stock piles continue to represent a significant overhang for demand and pricing and will likely continue to do so in the coming months.
However there is a couple positive developments on the thermal front. In particular, we’ve been encouraged by the persistent strength in natural gas prices which continue to hold up well despite the exceptionally mild winter and significant increases in drilling activity in recent months.
Prompt month NYMEX is currently trading over $3.20 per million Btus which as you know is a favorable level for our PRB mines. Consequently, coal burn is stronger than we anticipated and several large coal consumers have entered the market looking to show up their positions ahead of the summer burn season.
As previously indicated, we do expect further reductions in stock piles as 2017 progresses and if the weather normalizes we believe stock piles could approach target levels by year end. This should spur generators to re-enter the market in a more significant way.
Now I’d like to focus on a few things that Arch is doing to capitalize on the current market dynamics. First, we’re prioritizing our met sales.
We have modestly raised our coking coal volume guidance for 2017 increasing the midpoint by roughly 150,000 tons. We’re strategically layering in PRB and other thermal volumes particularly West Elk for current and future periods.
Higher prices from competing fields and declining generator, stock piles are supporting this effort and should provide the catalyst for improvement our domestic thermal coal operations. Third, we’re focused on maintaining a strong balance sheet and appropriate levels of liquidity to run our business effectively and efficiently which will serve us well through the full market cycle.
In closing, I’d like to reiterate global met markets are strong. Domestic thermal markets are improving, we’re sharply focused on delivering continued strong financial results for our shareholders.
With that, I’ll now turn the call over to Paul Lang for some additional comments on the quarter. Paul?
Paul Lang
Thanks John and good morning, everyone. In light of recent market trends, I’d like to begin by highlighting Arch’s sales position going to discuss cost performance for the quarter.
Starting with the metallurgical segment, we were pleased with our first quarter results, where real innovations were up significantly versus the fourth quarter across all products. For our coking coal shipments specifically, realization increased 40% to $105.51 per ton and illustrate higher prices on index based tons which converted during the quarter as well as new sales.
Coking coal shipments in the first quarter totaled 1.5 million tons reflecting scheduled longwall moves at both Leer and Mountain Laurel as well as lighter shipments due to the seasonality of Great Lake deliveries. And as John indicated, based on the midpoint of our guidance we now expect to sell 7.7 million tons of metallurgical coal in 2017 with 10% of the total to be PCI sales.
This volume is slightly higher than previously guided and reflects our ability to add incremental volumes of coking coal as we worked around our existing assets more efficiently. Since our last update, we priced in or sold at fixed price 860,000 tons of coking coal that an average net back of approximately $120 a ton, with the majority of these tons being our high-vol B product.
In addition, we committed 510,000 tons of coking coal on indexed based prices for full year 2017, we now have 6 million tons of coking coal committed of which 4.1 million tons are priced at $96.06 per ton and 1.9 million are committed but unpriced. Based on the midpoint of our sales guidance, we also have approximately another 1 million tons of uncommitted sales the vast majority of which are the higher quality, high-vol A and low-vol products.
Looking ahead, we expect our coking coal shipments to rise over the remaining quarters of 2017. While pricing has declined in recent weeks, we continue to have a positive view of global metallurgical markets and expect to achieve continued strong and value creating margins, while remaining unpriced and unsold volumes.
Turning to formal side of the business, in the Powder River Basin, we committed about 3.8 million tons of Black Thunder coal for 2017 delivery at an average price over $12 a ton. We also priced 550,000 tons of index sales during the quarter.
Additionally, we sold about 3 million tons of Black Thunder for 2018 delivery at pricing levels favorable to current marks. Looking ahead, we have open volumes for the segment ranging between 9 million and 13 million tons in 2017.
We believe that further correction in domestic power producers coal stockpiles and reasonably strong natural gas prices could translate into improved pricing in future quarters. In the other segment, realizations rose over 4% when compared with the fourth quarter of 2016 due to a favorable mix of customer shipments and the ability to capitalize on international pricing.
We built upon our strong contracted position during the quarter by committing modest volumes for 2017 delivery the vast majority of which were for the West Elk mine. Notably, there continues to be solid demand for West Elk in the seaborne thermal market place and we currently have approximately 1 million tons committed to export at prices favorable to the domestic market.
In addition, we’ve recently seen renewed interest in West Elk for the Eastern US customers wanting this high quality product. Importantly, this new demand should enable us to operate the mine at a higher run rate for the year, which should improve the cost structure for the segment.
Moving to the operating side of the business. In the metallurgical segment, cash cost increased $4.69 per ton as compared to the fourth quarter.
Over 50% of this increase was due to higher sales sensitive cost and the balance was due to lower volumes associated with two planned longwall moves in the region. Looking ahead, we’re maintaining our cash cost guidance of $51 to $56 per ton for the segment, highlighting that our mines remain in the low end of the US cost curve.
In the Powder River Basin operating cost were up due to the impact of lower volumes and coming off an outstanding performance in the fourth quarter. First quarter costs were also impacted by higher fuel prices and large maintenance project.
As we look at the remainder of the year, we’re maintaining our cash cost guidance of $10.20 to $10.70 which we view as a solid and sustainable level, consistent with Black Thunder’s expected run rate with 70 million to 80 million tons a year. With the anticipated drop in shipments usually seen in the shoulder season, we expect the second quarter to be the highest cost of the year.
In the other thermal segment, cash cost trended up due to the impact of lower volume shift during the quarter and the sales mix between the mines. Going forward, we’re lowering the cash cost target for the segment to range of $25 to $29 per ton, reflecting a higher anticipated volume contribution from our low cost West Elk operation.
In closing, I’d like to recognize the employees of Sentinel and Coal-Mac in the east and West Elk in the west for receiving high honors by third parties for excellence in safety and environmental performance. Also in the quarter, four of the operating complexes achieved a perfect record for both safety and environmental compliance.
This is a tremendous achievement and one we remained focused on replicating company wide. With that I’ll turn the call over to John Drexler for an update on our Arch’s financial position.
John?
John Drexler
Thanks Paul. As John and Paul noted earlier.
The ongoing execution of our long-term plan is going remarkably well. During the first quarter, we generated significant cash flow, reduced our debt levels and meaningfully lowered the cost of our debt.
Additionally in April, we amended our existing accounts receivable securitization facility and entered into a new inventory only Asset Back Lending or ABL providing increased liquidity. As expected, during the quarter we generated healthy levels of cash.
In addition to using some of that cash to reduce our term loan our cash and short-term investment balance grew $77 million to $470 million at the end of the quarter. With regard to our capital structure in March, we successfully refinanced our term loan decreasing its size, meaningfully reducing its interest rate and extending its maturity.
The term loan was reduced from $326 million to $300 million and pays interest at LIBOR plus 400 basis points an improvement of 500 basis points from the previous facility. In addition, the maturity was extended two years and now matures in 2024.
The transaction will reduce our already low interest expense by $18 million on an annual basis. Similar to the previous term loan, the new term loan has no financial maintenance covenants and is pre-payable at par.
Post the transaction the combination of the reduced leverage and growing cash balance leaves us with negative net debt of $137 million an improvement of $107 million since year end. Subsequent to the end of the quarter, we successfully amended our existing accounts receivable securitization facility and entered into an inventory-only ABL.
This combined transaction will increase our borrowing base under the combination of the facilities and will reduce our cost. As a reminder the accounts receivable securitization facility which we had prior to and through the restructuring process is instrumental in providing capacity for letters of credit to support a portion of our financial assurance requirement.
The new $40 million inventory-only ABL along with the amendment to the accounts receivable securitization facility results in a combined $200 million facility. Importantly, on a pro forma basis had this facility been in place at March 31 to issue letters of credit our unrestricted cash balance would have been $30 million higher at $500 million.
As John addressed earlier, given our expectation to continue to generate strong cash flows as we progress through the year. We are initiating a recurring dividend as well as a share buyback program.
As we’ve discussed in the past, we’re sharply focused on maintaining a healthy balance sheet and ample liquidity through all points in the market cycle. Given our modest capital requirements, exceptionally low interest expense and limited legacy liabilities.
We believe that our cash balances ample to meet expected and potential cash requirements throughout the market cycle. Our dividend policy and share repurchase program will be implemented in a way such that we do not impinge on our strong balance sheet.
Moving forward, we would expect to maintain cash level similar to the levels we’ve seen over the past two quarters and would expect that, once we’ve contemplated capital needs for the business and absent other strategic opportunities we will be looking to return cash to shareholders through other mechanisms. I don’t plan to reiterate guidance for 2017 which is included in the press release, but I will highlight a few items.
We continue to expect our S&A expenses to between $85 million and $89 million this includes $9 million of non-cash equity compensation resulting from equity grants made shortly after emergence. Approximately $2.4 million of this was incurred in the first quarter.
As we discussed during our last update associated with taxes as results of the bankruptcy and the substantial reduction in debt, we utilized a significant amount of our deferred tax assets. However, we continue to have in excess of $1 billion in deferred tax assets.
Under the accounting rules despite the fact that we’re utilizing and expect to continue to utilize our deferred tax assets these remaining deferred tax assets must have a full valuation allowance applied against them. As required by the accounting rules, we will continue to evaluate the valuation allowance at an ongoing basis as our profitability profile changes.
We have further refined our expectation of the utilization of the impact of the remaining deferred tax assets and as a result, when combined with the continuing benefit. The industry receives from percentage of completion as well as the impact of timing differences we now expect to have cash taxes and a tax provision between 0% and 3% in 2017.
We expect that that rate to grow to between 6% and 10% in 2018 gradually increasing to an ultimate range of between 15% and 20% over the next several years. In conclusion, we continue to execute on our long-term strategies of operating large scale low cost complexes prudently managing our balance sheet and maintaining healthy liquidity and generating meaningful cash across the full market cycle.
Over the course of the past two quarters, that plan has allowed us to generate substantial cash flow, access the capital markets to further strengthen our balance sheet and set the stage for returning value to our shareholders in the form of recurring dividend and a share repurchase plan. We continue to be excited about Arch and it’s opportunity to generate value, as we move forward.
With that, we’re ready to take questions. Operator, I’ll turn the call back over to you.
Operator
[Operator Instructions] our first question comes from Mark Levin from Seaport Global. Please go ahead.
Mark Levin
Well congratulations, great start to the year and on the capital return program. I wanted to highlight a couple of really [indiscernible] questions around a couple of comments John you just made.
One; was around returning cash through other mechanism. I think you alluded to that in your remarks and then you mentioned also the three [ph] strategic option.
So maybe you can elaborate about what you were referring to, with those two statements.
John Drexler
Mark, I think clearly as we’ve completed the first quarter and worked in closely with our Board of Directors we’re clearly sending a strong signal here and our confidence in the company and its ability to execute and generate cash flow with the initiation of the recurring dividend and the share repurchase program. I think we’re always going to be looking at ways to generate value for the shareholders that can take a wide variety of means those options are always out there, but clearly I think we’ve signalled here with the conclusion of the first quarter, the initial direction that we’re heading here.
John Eaves
Mark, it’s John. Let me jump in here.
I think as we communicated to the investment in the community since the first quarter. We said, we wanted to reduce our debt and lower the interest expense, we’ve done that and as John indicated, we took it $300 million and reduced our interest spent about $18 million.
We also said, we’re going to have conversations with our board on how to responsibly return cash to our investors, we’ve done that with the dividend program, share repurchase. As John said, we’re always looking at strategic options we think, where we are right now this is the right business decision.
This management team looks for the balance of the year, there is a couple of things that we’re going to be focusing on. We’re going to continue to try to maximize what we see in the met markets in the short-term, we’re seeing some opportunities on the thermal side that will participate whether it’s PRB or West Elk and then to manage our balance sheet and make sure that we’ve got plenty of liquidity for any kind of market cycle that we could go through and we think, we had done that and we think, we’re well positioned right now and going forward.
So not to say that we won’t be looking at things, but right now we’re pretty comfortable with what we have and if you look longer term, our ability to grow organically is probably second to none.
Mark Levin
No, that’s a good point because it was leading me to Leer and possibilities about developing that reserves and maybe some updated thoughts as you went through the process of considering buybacks, dividends versus the development of Leer.
John Drexler
Mark, I think as we look at the development opportunity beyond Leer on the Taggart reserve as John indicated, we couldn’t envision a higher returning opportunity that would be available to us. So it is something we’re focused on as we’ve indicated through several calls.
We’re actively out there working to permit the opportunity, but that’s going to take a little bit of time here as we move forward. So those will be decisions that will be presenting themselves to us in the future, but as we sat here today right now and looked over the course of 2017, we felt this was the appropriate direction to head as we sit here today.
John Eaves
And Mark on Leer, as John said we’ve probably got 12 plus months permitting to do mine planning, so it’s not a decision we have to make in the near term and given where we right now in the cycle. We thought returning cash to our shareholders was the appropriate thing to do.
John Drexler
We evaluated all the opportunities, you look long-term and once again with the way the company is positioned with tier 1 low cost assets. Our ability to generate cash moving forward, we think we’re well set for as we move into the future.
Mark Levin
I tend to agree. Thank you guys very much, appreciated.
Operator
Our next question comes from Lucas Pipes for FBR Company. Please go ahead.
Lucas Pipes
Great way to start the year. I also wanted to follow-up on the capital return story and John Drexler, if I understood your prepared remarks correctly, it sounded to me like you built a comfortable cash position and cash that you generate from here on out, well that can be returned to shareholders.
Is that the right way to think about it, in terms of a cadence of share buyback program or which maybe refined or elaborate on the way I put it? Thank you.
John Drexler
Lucas, that’s good question and yes I think as we described in my prepared remarks. Over the last two quarters, we’ve had reported cash balances of $393 million, let’s call that $400 million and today it’s $470 million as of March 31.
So I think as we’ve looked at it, that puts us in a negative net debt position generating cash. Obviously if share repurchase program is one, that we’ll evaluate on a day-to-day basis it will based on a number of factors on whether we’re participating or not.
We won’t get into a whole lot of details from that perspective, but clearly at this point we think there is an opportunity. We think our share price is undervalued and so we’re comfortable with the liquidity and we’re going to be generating additional cash beyond that.
Lucas Pipes
Yes, that’s my expectation as well. Great and then on the met coal side if I understood it correctly and this is fairly simplistic question.
You have 1.9 million tons unpriced and then at midpoint of your guidance I would assume for 2017, you have an additional 900,000 tons that are both uncommitted and unpriced. And I was wondering, if you were to commit and price additional tons today what sort of price would you be looking at.
Is it near where you price during the first quarter or in the aftermath of Debbie substantially above that. I would appreciate your perspective and I think lastly, you also mentioned that, tons that you did sell during the first quarter where majority high-vol B.
If you could maybe elaborate a little more on the quality breakdown of the remaining tons, I would appreciate that color as well. Thank you.
Paul Lang
Lucas, this is Paul. As I said, we committed about 860,000 tons.
We priced or sold at fixed price and I think what’s important to understand is 480 of these were new sales which were virtually all high-vol B, so a lower quality product. You know the range of pricing we saw was pretty wide on this product, it was from mid 90s to the upper 140s.
And the remaining 380 that we converted were from index pricing to sold [ph]. And the vast majority of that was, our 65% was high-vol A.
If you think about what we’ve done strategy-wise, we fixed the price on our lower quality high-vol B product which is in the greatest supply in the US and if you think about it. What we have remaining which is the 1.9 million and the 1 million of unsold that 80% of that remaining unpriced and committed but unpriced coal is high-vol A and low-vol coal, so we’ve left our highest quality coal which should have the highest price open for the rest of the year.
And as you know, as I look at it we’re definitely looking at the East Coast assessment for the pricing of those coal.
John Drexler
Yes, Lucas just going to follow on Paul’s comments. I mean as we talk about best way to assess our capabilities is to look at that plants East Coast index and we’ve seen some pretty wild swings and that pricing end of the first quarter, the prices for high-vol A were about $162 after the Cyclone Debbie hit those prices ran $295 and as of yesterday I think high-vol A was about $237, but when you look at low-vol off the East Coast, the high-vol A is actually still about $25 premium to the low-vol and that gives back to that scarcity premium we’ve been talking about, we still think it’s there, we still think a lot of our customers need that in our blast furnace from a fluidity standpoint and as Paul said, we’ve got 1.9 million tons that we need to unprice, which will be priced in the seaborne market and then they’re 900 to 1 million tons that’s fully uncommitted that should be priced in that market as well.
So we’ll see, the transactions have been fairly thin, over the last couple of weeks. We would expect that to pick up as we move through the year.
But clearly we think, we’re well position to capital on those prices as they evolve.
Paul Lang
Yes, I think the only other thing I would add is that, if you look at the difference between high-vol A and high-vol B at the end of April, it’s almost $52.
Lucas Pipes
Yes. Gentlemen, this is fantastic color.
I really appreciated and best of the luck for the rest of the year.
Operator
Next question comes from Jeremy Sussman of Clarksons. Please go ahead.
Jeremy Sussman
So just on, looking for maybe a little bit more color on the buyback if you can provide some. I mean, I think it probably equates to about 70% of your current market cap and if I do just do some quick calculations.
Theoretically, if you were to do the whole buyback from just current cash on hand. I’d get to just around 0.3 times net debt-to-EBITDA just bases on consensus numbers.
So I guess my point is, it doesn’t seem like you need to wait on anything to begin executing this and maybe wondering, if you can talk a little bit about the sort of timeframe that you see on this front, the share price kind of stayed where it’s at.
John Drexler
Jeremy, our plan is to as we’ve announced today. We’ve been authorized, we plan to have it implemented in fairly short order and would expect kind of given our view that the company’s undervalued and maybe an opportunity, will evaluate that literally on a daily, weekly basis as we move forward, but there’s real opportunity.
We agree we’re in a great position with cash, with liquidity with the protective balance sheet, with strong cash generation as we move forward. So our view is, if there is an opportunity and we think we can buy the shares that are undervalued, we will execute on that opportunity.
Jeremy Sussman
I appreciate that John and just a follow-up on the dividend, the newly implemented dividend of [indiscernible] about 2% base field. Is this sort of a base number that we should think about kind of recurring quarterly basis, would you look to grow this, would you look at special dividends that kind of top this off in years with strong cash flow.
Since this is a bit new for us, maybe a little bit of color on that would be very helpful.
John Drexler
Jeremy I think as announced, we expect this to be recurring quarterly dividend and we would expect, we’ve set it at initial rate here $0.35 a share we’ll move that forward, we think overtime we’ll continue to evaluate the market, cash generation etc. and ultimately have opportunities to increase that at some point in the future, but at this point right now we’re comfortable with the initiation at this level and expect that to continue for the foreseeable future, but then we look at opportunities beyond that.
As far as special dividends, things like that once again we’re in that great position to continue to have excess cash flows. We’ll evaluate everything that’s in the market, but once again as John as we’ve indicated with this earnings announcement today this is clearly the direction we’re heading out on here with the recurring dividend and with the share repurchase program.
Jeremy Sussman
Thank you very much and good luck.
Operator
Your next question comes from Michael Dudas from Vertical Research. Please go ahead.
Michael Dudas
Good morning, gentlemen. Logan.
What a concept? The US coal company returning capital to shareholders.
Let’s hope there more that are listening out there. My question for you Johnny or maybe Paul a year ago at this time no one could have dreamt, what the met market provided your company and others in the US.
Looking maybe from a year from now, you sound more encouraged about the direction of the US thermal market. Maybe you could, maybe elaborate a little bit more on some of those drivers and are you going to manage the sales processes differently in your high quality coals, out of Black Thunder given that you’ve got such a great cash and margin position out of your metallurgical business.
John Eaves
Michael, let me start out and Paul can jump in here. I think as I indicated we’re always going to be in the market.
I’ve said many times we are not smart enough to catch the top of this thing, we came into the year with pretty high inventories we’ve been actually pleasantly surprised that where natural gas prices were, we think, that we’re going to drawing those inventories through the summer with any kind of normal weather and would hope that we could approach normalized inventory levels by the fourth quarter, but even with that said I mean we’re seeing some real interest in our PRB coal from some pretty large customers currently. So I’m encouraged with any kind of normal weather that we could be setting up for pretty significant buying season for 2018.
The other place that we’ve seen some encouragement is our West Elk coal, we’ve been pretty pleased with the demand that we’re seeing internationally but recently we’ve seen some domestic interest in that product as well and as Paul indicated it’s going to allow us to run that mine at a little bit higher level. So I think we feel good about where we are right now.
I think our marketing strategy works. I think we need to always be in the market.
I mean we miss, we’ll adjust, if we hit, we’ll adjust on business and that’s a prudent way to approach it. Paul, you got anything to add.
Paul Lang
Michael, I think the one thing I would add is that we entered this year and as you looked at our guidance we gave a pretty wide guidance on our thermal, it’s was mostly because we were little concerned about the buying activity we were seeing and we got burnt forecast like everybody else that were pretty [indiscernible]. The last couple weeks we’ve seen several of our large customers, [indiscernible] burnt forecast and coming out for volumes.
I think the one big change we’re seeing is that, these are all short-term deals, month, two-month, three-month. We’re seeing single and two and three train deals, which you know is pretty unusual for the Power River Basin.
So clearly I think the customers are starting to look at where gas is and they’re starting to look at their inventory, so as John said we think this could be setting up. I don’t think it’s going to be Q2 event, but clearly hoping the back half of the year into 2018 we’ll see a correction in pricing.
Deck Slone
Mike, it’s Deck and I’ll add one other point here. Which is, look since the end of ‘15 we’re going to see if John’s right - if we’re right by the end of this year we’re going to be back to sort of close to target levels.
We’re going to abstain about 75 million to 80 million tons pulled out of stock piles over the course of last two years. Those tons have to be made up, so we’re going to have to see increased shipments.
If stock piles are not going to normalize and we’re going to see this liquidation and you’re going to see some increase and shipments into 2018 that’s certainly attractive. One of the things we don’t know is, we can talk about target by the end of the year but as we know utilities are sort of on a distribution in terms of where they are with stockpiles and so certainly even as we get into the fall, you could see certain group of generators maybe a significant flood start to buy again.
As John said, we’re already starting to see that with the much higher gas prices for the rest of the year, the strip is about 339 for natural gas for next year 313 those are great numbers for our Powder River Basin asset. So certainly we think that the dynamic is going to evolve and we’re already starting to see some indication even though right now stockpiles are still barely inflated, so we do see positive direction there into 2018 and are encouraged by what we’re seeing.
Michael Dudas
Deck, that’s very helpful. Thanks John.
Thanks Paul. Appreciated.
Operator
Next question comes from Paul Forward from Stifel. Please go ahead.
Paul Forward
You had a slight raise to the coke and coal volume guidance for the year 150,000 I think you said at the midpoint and I think Paul Lang you talked about running the assets more efficiently to get there. Just maybe if you could provide a bit more color on that.
How are you running the assets more efficiently? Is there any overtime involved?
Any additional capital being deployed in response to these really strong markets? I guess, I’d say how are you getting there and then as a follow-up, as you look into 2018, is that a sustainable level around 7 million tons.
Paul Lang
Paul, I’ll try to answer it for you. The increase in production we’re showing of about 150,000 tons really comes out of our two high-vol A mine, Sentinel and Leer and our low-vol mine Beckley and it really revolves around three things.
At Leer we’re increasing the shift schedule or changing the shift schedule to allow more time to operate the longwall. We had some room built into scheduling the last year and we’re simply rescheduling the employees to pick up some of that slack space.
At Sentinel we actually added a CM section to the operation late last year and picked up about 100,000 or 150,000 tons there. And at Beckley, we entered into an area with higher seeing [ph] and we could have stayed with lower profile equipment but went ahead and put in higher productivity equipment at the operations.
So kind of net-net, those are what brought the increase in production up and those are all sustainable things going into the future.
Paul Forward
Great and I think you’d mention a little bit about the reserve at adjacent to Leer. Just wondering, as you look at I think to 7 plus million tons might be sustainable for 2018.
As you look beyond 2018, I mean how important is new mine development going to be replace depletion that might occur at other mines or is that where do you see that 7 million tons approximately kind of annual production rate in coke and coal something that you can sustain for several years, without large new products that will require lot of capital.
Paul Lang
Paul as we talked about earlier the Taggert reserves is a huge asset of Arch’s and with that reserve we’ve got several options on kind of continuation of our - continuum of both capital and operating cost which we could invest in, add incremental tons or replacement tons. Leer is only in the third inning of a long game, so Leer is in pretty good shape.
What we’ve got to be thinking is these are all long-term permitting and engineering design projects. We’re going to keep a pipeline of these projects going and we’re going to particularly focus in the Shelby Run area which is part of the Taggert reserve adjacent to Leer.
You know as I said in the past, this operation is about equivalent to Leer it’s going to be a little higher cost maybe 10%, but even if it’s 10% higher this operation is going to be at the bottom of the US cost curve.
Paul Forward
Great and I think John Eaves you had mentioned 12 plus months permitting and mine planning, was just wondering just on the permitting side any help from the new administration coming in, streamlining permitting processes across the business from what you’re seeing so far.
John Eaves
We certainly hope so. Paul as we’ve a Governor in West Virginia and new administration in Washington we hope both of those will be helpful as we move forward with that project.
So obviously those communications are taking place as we speak and we’ll try to move that probably as quickly as we can, but the other thing we want to make sure that we’re comfortable from a market perspective before we make that final decision but again we’ve got 12 months or so before we have to make that decision with our board and that’s what we’ll be working towards.
Deck Slone
So far it’s going well Paul and seems to be moving smoothly. So we feel good about the process.
Paul Forward
Okay, thanks very much.
Operator
And our next question comes from John Bridges of J.P. Morgan.
Please go ahead.
John Bridges
And thanks for watching down all the accounting to a glide path for your tax rate that’s very helpful for non-accountants. I was just wondering I know the normal game is to keep your best quality coal on price, but given that we’ve had sort of two Black Swan events already in the last 12 months made me namely China and the Hurricane Debbie.
I’m just wondering have thought about locking in some of the better quality coal as well.
Paul Lang
John, I guess I’ll start that off and I think one aspect of the cyclone I don’t think many people have focused on is that, the cyclone hit in Queensland this area produces hard and semi-hard coals. It doesn’t produce the semi-soft coals that are produced in South Wales and that’s the coal that competes in Japan and Korea with the high-vol’s out of the US, particularly high-vol B’s.
so I’d say we felt it was pretty prudent to lock down our lower quality coals and leave the higher quality coal open and if you look at the assessment of the East Coast particularly at the spread between the high-vol A and high-vol B, it sure seems to have been the right judgment to make.
John Bridges
Okay, good and then, there’s a discussion going on about consolidation in the industry. And that sort of hinged I guess on the FTC’s view is wrapped.
I remembered Deck you spent a little time - [indiscernible] way I just wondered if you had any thoughts as to how government under new administration might look upon consolidated in the coal industry?
Deck Slone
That’s a tough one. I would say that for the most part there are opportunities out there to see consolidation, it’s a still relatively fragmented industry in lots of basins, so there are certainly are opportunities for consolidation we think that would be healthy, we expect to see that continue particularly continue given that thermal demand is not likely to grow it’s likely to be relatively flat over the next several years, so we expect that.
I think this administration will be supportive of that concept clearly the industry has gone through some difficult times and consolidation is one way to address that fact and so, we think it will be generally supportive. There are probably basins where there is, where it will be more of a discussion.
But overall, we think consolidation will occur and don’t see a lot of impediments there.
John Bridges
Okay and the shale gas issue, do you think that might have changed the attitude of the utilities to what’s consolidation?
Deck Slone
Certainly we don’t expect the utilities to have great concern again talking broadly about some consolidation that takes out cost, allows it takes out overhead and cost. So we wouldn’t expect that and absolutely we’re competing everyday head-to-head with natural gas in the marketplace in certain regions, as you know right now in the PRB.
We win those battles at current gas prices, but there is no doubt that, it’s a much more competitive environment from the fuel perspective and so we do think consolidation again is doable and likely overtime.
John Eaves
John, this is John Eaves. I think as Deck said, we don’t see any real growth in demand in terms of power generation and industrial, thermal.
We’ve got it about 7, 725 and regardless of whether there’s consolidation or not in the Powder River Basin we think we’re well position to do well at demand level, so like that particularly from the PRB. In terms of how the consolidation, if the consolidation evolves overtime we’ll just have to see, we like the way we’re positioned today, we like our assets.
Our goal is to be on the low cost of the thermal business primarily PRB in the low cost on the metallurgical and Appalachian. We think we’ve done that, that along with our solid balance sheet.
I think we’re probably as well prepared as we could be, moving forward.
John Bridges
Thanks guys. I just wish you a nice hot summer.
Operator
And our last question comes from Wayne Cooperman from Cobalt Capital. Please go ahead.
Wayne Cooperman
Two quick ones, share count was like $25.5 this quarter that’s lower than I was expecting, is there a bunch of other options or whatever out there or $25.5, the right number. Second question just any CapEx guidance for ‘18 and beyond and third question and then I think, it’s been pretty well covered but just on the buyback, is it kind of your plan - is the cash you think going to go up and cash isn’t going to go down.
Should we think that everyday you’d earn a dollar you’re going to take a dollar and buyback stock? I mean not that obviously but something along those lines in simplistic turns.
John Drexler
So Wayne let me jump into the shares outstanding is the first question there. So 25 million shares upon emergence, if you remember we did have warrants upon emergence that were provided to the unsecured holders.
I think we did an update on the last call that those unsecured holders at the time of emergence through the bankruptcy were given the options either take cash to the warrants, so was 10% originally of the 25 million share count and we disclosed that there was essentially 1.9 million that elected the shares, so that is kind of one of the book ends. We do show there is a net settlement provision in the warrants.
So what you’re seeing on the face of the income statement, the 500,000 or 400,000 shares is essentially that net position. So I would say you know the range there is between is 400,000 and 1.9 million in that range, we would expect ultimately overtime those a lot of those warrants get net settled.
So I hope that answers the question there.
Wayne Cooperman
So what should I use for ‘17 or ‘18 for shares? Can you - do you have a number?
John Drexler
Well I think right now with what you’re seeing on the income statement that $25.4 is probably as good of anything as we have right now, moving forward.
Wayne Cooperman
Great thanks.
Paul Lang
Wayne this Paul, on the capital question. We’re forecasting CapEx for 2017 which in our case include land and reserves.
We maintained our guidance of $52 million to $60 million, it’s about $0.58 a ton for CapEx and obviously at some point we’re going to have to return to a normal CapEx cycle. But as I said last quarter, I think it’s going to take a couple of years and the way I see it evolving is probably over the next two or three years you’ll see it go up kind of in chunks of about $0.25 a ton and ultimately get to a about a buck or plus or minus a buck.
For [indiscernible] I figure that’s about 19.
Wayne Cooperman
Okay.
John Drexler
Then on the buyback Wayne, we’ve indicated that we’re comfortable on that level kind of between what we’ve experienced over the last several quarters, call it $400 million to $500 million of cash. So you’re correct things are in excess of that, this management team, this board will be evaluating what we’ll be doing with that initially here.
We’ve announced the recurring dividend and the share repurchase program, that share repurchase program is dependent on a variety of factors where the stock is trading out, what our outlook for the market is, what our near and longer term cash needs. But rest assured, the management team and the board will be looking ways to enhance shareholder value here and I think, with the initiation of the recurring dividend and the share repurchase program we’ve shown strong signal and our confidence and the company’s ability to generate cash flow moving forward.
Wayne Cooperman
Great. Thanks.
Operator
And I would like to turn the conference back to John Eaves for any closing remarks.
John Eaves
Thank you very much. We certainly appreciate your interest in Arch.
The management team continues to execute on the plans we’ve outlined. We have reduced our debt and lowered the cost, we’ve initiated a dividend along with the share repurchase plan for the balance of the year.
We’ll focus on capitalizing on met markets, internal markets and make sure we’re managing our balance sheet for liquidity. We look forward to updating you on the second quarter results in July.
Thank you.
Operator
And it does conclude our conference for today. Thank you so much for your participation.
You may disconnect.