Jul 27, 2017
Executives
Logan Bonacorsi - Director of External Affairs John Eaves - CEO Paul Lang - President and COO John Drexler - SVP and CFO Deck Slone - SVP of Strategy and Public Polic
Analysts
Michael Dudas - Vertical Research Partners Mark Levin - Seaport Global Ed Beachley - FBR & Company Jeremy Sussman - Clarksons Daniel Scott - MKM Partners Paul Forward - Stifel John Bridges - J.P. Morgan Patrick Marshall - Cowen & Company Wayne Cooperman - Cobalt Capital Lucas Pipes - FBR & Company
Operator
Good day, everyone and welcome to this Arch Coal Incorporated Second Quarter 2017 Earnings Release Conference Call. Today’s call is being recorded.
At this time, I would like to turn the conference over to Ms. Logan Bonacorsi, Director of External Affairs.
Please go ahead, ma’am.
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; 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?
John Eaves
Thanks, Logan and good morning, everyone. I'm pleased to report that Arch has turned in another strong operational performance during the second quarter.
We remain on track to achieve and in some cases, improve upon our previously announced guidance on key volume and cost metrics. In the second quarter 2017, the company reported earnings of $1.48 per share and adjusted EBITDA of $95.4 million.
While those numbers were dampened by the delayed timing of our coking coal shipments, we fully expect to move all our turns in the year’s second half, and in fact, we've raised the midpoint of our annual coking coal sales guidance by 100,000 tons. We also made excellent progress on several other important fronts, each which are driving value for our shareholder.
For instance, we returned nearly $60 million to our shareholders during the quarter via recently instated dividend policy and even more significantly through a robust stock buyback program. As you know, on our last call, we announced that the Board had authorized the repurchase of up to $300 million worth of Arch Coal’s stock and we've acted quickly and aggressively on that authorization.
During the second quarter, we bought back 711,000 shares of common stock or 2.8% of our shares outstanding at a total cost of $51 million at an average price of $71.82 per share. At quarter end, we still had $249 million available under the authorization.
Moreover, we ended the quarter with $490 million of cash on our balance sheet and we anticipate generating significant levels of additional free cash flow as the year progresses. Consequently, we’re well positioned to continue with a robust repurchase effort.
In addition, we recently signed a definitive agreement to sell our Lone Mountain Complex, our highest cost and lowest quality Appalachian operation. This transaction further streamlines our operational structure and intensifies our focus in Appalachian on our four core coking coal operations.
As you will recall, Lone Mountain produces a pulverized coal injection and thermal coals, which needless to say are lower value products in those produced at our coking coal operations. Moreover, in light of the increasingly challenging cost pressures at the complex, the margins have been thin or negative in recent quarters.
As part of the transaction, the buyer will assume all future reclamation liabilities and ultimate mine closure expenses. With this transaction, we’ve continued to sharpen our focus on large modern coking coal complexes in Appalachia and a PRB anchored portfolio of low cost thermal operations.
Turning now to coal markets, we've been encouraged by the rebound in coking coal prices in recent weeks. After a dramatic rise to $300 early in the quarter, followed by weeks of retracing, the market has finally stabilized in late June and have since bounced back.
At present, plans assess this High-Vol A, Arch’s primary coking coal product in $167 per metric ton [indiscernible] on the East Coast. Low Vol and High Vol B coals are assessed at $164 and $140 per metric ton respectively.
Given the highly competitive cost structure of our coking coal portfolio, those marks translate into very strong margin for us. Moreover, coking coal fundamentals continue to appear positive.
Blast furnace output is up 2.3% globally year-to-date and that's driving increased coking coal demand in multiple regions. In addition, China appears on pace to increase coking coal imports by 20% or more in 2017 and several other high profile mine outages have bolstered the market recovery.
On the flip side, there's also supply additions to be considered and those tons will need to be absorbed. Higher coking coal prices have spurred increased output in North America and volumes from Mozambique are increasing as well.
All told, we expect 15 million tons or more of supply to enter or return to the seaborne market in 2017. Even with these additions, we continue to believe that the market is in a relative healthy balance at present and we would expect such balance to persist in the year’s second half, assuming continued sound economic activity globally.
The thermal side is still in recovery mode, but we believe there's cause for optimism. Our stockpiles at US power plants remain inflated, they're well below the highest experienced at the start of last year.
Natural gas continues to trade at levels above $3 per million BTU, both from Prompt amount and further out on the curve. At those levels, we would expect solid demand for PRB coal with a vast majority of PRB served plants dispatching in front of natural gas served plants.
Hot weather is also improving coal consumption. Cooling degree days are up 2% year-to-date and most forecasts are still calling for at least a normal summer.
Finally, strong international markets are spurring increased thermal exports, which is also helpful in restoring balance to the domestic markets. Arch is taking advantage of those higher prices in a direct way as well, particularly at our West Elk operation, where we committed vessels for delivery in to Asia in the second half of the year.
Given these developments, Arch currently expects generator stockpiles to end the year below 70 days of supply, nearly 40 days of supply lower than where we were 18 months ago. In summary, Arch has a superb operating portfolio and a rock solid balance sheet.
We continue to generate significant amounts of free cash, coking coal markets are strong and thermal coal markets are slowly, but steadily improving. We have an excellent plan to return excess cash to shareholders and we're moving aggressively on that plan.
We're enthusiastic about our ongoing prospects for cash generation and value creation and fully expect to end the year strong. With that, I'll now turn the call over to Paul Lang for comments on our operating and marketing performance in the second quarter.
Paul?
Paul Lang
Thanks, John and good morning, everyone. As John mentioned, metallurgical markets were quite volatile during the second quarter.
Seaborne East Coast pricing assessments for all metallurgic products ran up to near record levels over nine trading days and pulled back over the next six weeks to levels achieved in the early part of the quarter. Since that time, prices have rebounded, the market appears to have found a level of support and we continue to believe premium quality high vol A coals such as [indiscernible] remains scarce in the marketplace.
To date, we’ve committed 6.4 million tons of coking coal for delivery in 2017, of which 5 million are priced at about $97 ninety per ton. At the midpoint of our sales guidance, we expect to sell approximately 7 million tons for the full year.
This volume is slightly higher than our previously stated guidance, demonstrating our confidence and ability to place higher quality products in to the seaborne market. This past quarter, we shipped 1.5 million tons of cooking call at an average price of approximately $103 per ton.
Overall pricing on metallurgical shipments during the second quarter were anchored by index linked volumes that converted during the period. Average pricing on those index sales was around $125 per ton at the mine.
Volume levels and expected new sales during the period were directly impacted by a limited amount of spot buying that took place during the quarter and the timing of shipments. Global steel producers effectively stepped away from the market for a period, choosing to rely on previously purchased volumes and existing stockpiles to the extent they could.
During the quarter, we sold around 400,000 tons of coking coal for delivery in 2017, of which 300,000 were at a fixed or fixed at an average price of $107 per ton and about 100,000 were sold on an index basis. Just over 75% of these tons were low vol and high vol A and the remainder was high vol B.
Looking ahead, we expect our coking coal shipments to increase in the back half of the year. We continue to be encouraged by the strength and depth of the global metallurgical markets.
For the remainder of the year, at the midpoint of our guidance, we’re showing approximately 1.4 million tons committed but unpriced and 600,000 tons uncommitted. Turning to the thermal side of the business, in the Powder River Basin, we committed and priced about 6 million tons of Black Thunder coal for 2017 delivery at an average price of $11.75 per ton, a pricing level well above the indices that prevailed during the second quarter.
Additionally, we selectively layered in 2.6 million tons for delivery in 2018. As John indicated, generator stockpiles are still on the high side, but the liquidation is ongoing and we're encouraged by the continued interest from customers who want to supplement their two 2017 commitments.
We currently have between 5 million and 7 million tons open for 2017 at Black Thunder. Additionally, we have approximately 50% of our volume committed in 2018, based on current run rates.
While we continue to believe there's upside in the current markets, the commitments we’ve layered in during the shoulder season are consistent and prudent with our sales approach. In the thermal segment, realizations were down about 6% when compared to the first quarter of 2017, mainly reflecting the mix of customers between the operations.
International fundamentals remain supportive and there continues to be solid demand from West Elk as well as increased enquiries for Coal-Mac’s high quality products in the seaborne thermal marketplace. In fact, we currently have about 1.7 million tons of thermal coal committed for export at prices that provide a solid let back to the operations.
During the quarter, we improved our already solid contracted position for the segment by committing an additional 1.5 million tons to international domestic customers at an average price of about $30 per ton, the vast majority of which were for West Elk. As a result of this ongoing demand, we've elected to run both operations at higher production rates for the year, which should improve the segment’s overall cost performance.
Turning to the operating side of the business, in the metallurgical segment, cash cost increased $3.28 per ton as compared to the first quarter. This increase was driven in part by higher costs and increase PCI shipments from Lone Mountain.
Additionally, during the quarter, we experienced challenging operating conditions in the last panel of the Alma seam at Mountain Laurel, which translated into higher costs at the operation. We recently completed the transition back to the seeder gross seam, where we are in the final stages of set up to start mining.
Looking ahead, we expect the divestiture of Lone Mountain will benefit the metallurgical segment’s cost structure over time. Despite the increase in cost in the second quarter, we’re confident in our cash cost guidance of $51 to %56 per ton for the segment, which now excludes Lone Mountain.
We believe this is an extremely competitive cost structure that places our metallurgical franchise well below the US industry average. In the Powder River Basin, as indicated last quarter, operating costs were up due to the impact of lower volumes, driven by typical shoulder season trends and higher repair and maintenance expense.
Of note, Coal Creek had a major unplanned repair to its drag line that took the machine out of service for four weeks. Given the solid cost control in the segment and expectation of increased shipment levels in the second half of the year, we’re lowering the top end of our cash cost guidance.
We now expect cash cost to be in the range of 10.20 to 10.60 per ton, which we view as the solid and sustainable level, consistent with Black Thunder’s anticipated run rate of 70 million tons per year. The other thermal segment recorded an outstanding cost performance in the second quarter.
Cash cost declined 7% from the first quarter, benefiting from higher volume contribution from our low cost West Elk operation as well as strong cost control at Coal-Mac and Viper. Going forward, we're lowering the annual cash cost guidance for the segment by $2 to a range of $23 to $27 per ton.
Lastly, I want to reiterate that we’ve continued to focus on our core values. Over the last three months, we've turned in strong safety and environmental performances and we even had three facilities achieving the perfect zero, which is no reportable injuries or environmental violations.
In addition, every mining complex completed the quarter with a perfect environmental record. Across our operating platform, we're deeply committed to achieving our goal of operating the world’s safest and most environmentally responsible mines and to foster best-in-class practices at all of our operating complexes.
I would like to thank all of our employees for their hard work, focus and outstanding effort. With that, I'll turn the call over to John Drexler, our CFO for an update on Arch’s financial position.
John?
John Drexler
Thanks, Paul. This morning, I plan to focus my comments primarily on the cash flows for the quarter and provide further detail on our capital return activities.
We finished the quarter with cash and short term investments of more than $493 million, an increase of approximately $23 million from the end of the first quarter. While that was a relatively modest increase, there were several significant contributors to the end result.
First, cash generated from the operations along with continued low levels of CapEx contributed approximately $35 million, despite negative working capital changes of nearly $32 million. Second, we achieved reductions in collateral requirements of more than $55 million during the quarter.
And finally, as indicated, we returned nearly $60 million of cash to shareholders in the form of $51 million of share repurchases and $8.6 in dividends. The board of directors has approved the next quarterly cash dividend payment of $0.35 per common share that will be paid on September 15th to stockholders of record at the close of business on August 31st.
With respect to collateral, we benefited from two items in the quarter. First, as we discussed in our first quarter earnings release, we entered into a new inventory only ABL in April and during the quarter, moved some of our outstanding letters of credit to the facility, freeing up restricted cash.
In addition, based on our strong balance sheet and operating results, we were able to negotiate lower collateral needs with several counterparties. Most of the benefit from the collateral reductions totaling $55 million occurred late in the quarter and we expect additional positive impacts to our cash balances in the back half of the year.
One other item to note during the quarter was that we entered into several interest rate swaps of various sizes and maturities to fix the floating rate on a portion of our term loan. Our existing $300 million term loan pays interest debt LIBOR plus 400 basis points with a LIBOR floor of 100 basis points.
With LIBOR recently rising above 100 basis points, we felt that it was prudent to lock in a portion of the floating rate debt. The swaps, which required no upfront cash have fixed rates that mirrored the forward curve.
There is full disclosure in the 10-Q we plan to file later today, but for the next 12 months, we have fixed the LIBOR portion of the term loan interest for $250 million at a fixed rate of 1.37%. As we have discussed in the past, we are 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 balance is ample to meet expected and potential cash requirements throughout the market cycle. Moving forward, we would expect to maintain cash level similar to the levels we have seen over the past three quarters and would expect that once we have contemplated capital needs for the business and absent other strategic opportunities, we will be looking to continue to return capital to shareholders.
I don't believe -- I don't plan to reiterate guidance for 2017, which is included in the press release, but will highlight an item outside of the operating cost guidance that Paul has addressed. As a reminder to our previous discussion regarding our taxes, we continue to have in excess of $1 billion in deferred tax assets.
Under the accounting rule, despite the fact that we are 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 on an ongoing basis as our profitability profile changes.
With the continuing benefit the industry receives from percentage depletion as well as the impact of timing differences, we expect to have cash taxes and a tax provision between 0 and 3% in 2017. We expect 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 summary, 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. That plan has allowed us to return capital to our shareholders in the form of a recurring dividend and share repurchase plan.
We will continue to focus on executing our plan and generating returns for our shareholders. We continue to be excited about Arch and its opportunity to generate value as we move forward.
With that, we are ready to take questions. Operator, I will turn the call back over to you.
Operator
[Operator Instructions] And we'll take our first question from Michael Dudas with Vertical Research Partners.
Michael Dudas
My first question is relative to met markets. Certainly, trends have been better, especially for the high vol A products that you sell.
Maybe you can share a little bit of thought on what's going on in the US with Section 232. Do you think there's any indication, discussions, some hope that some of the change in the metallics in the balance of where the steel is going to be needed or produced could give Arch maybe other US players a bit of advantage for more volume and better pricing?
John Eaves
Michael, we’ll see. I think US Steel had their call yesterday.
I guess, they got asked a lot of questions about it. I think time will tell.
Certainly, steel prices have been relatively strong recently. If you look at the earnings in the steel companies, they’ve been pretty good.
I think we'll have to see what happens with 232. Deck, you’ve got any comments among what you see things going in Washington?
Deck Slone
Yeah. Michael, I guess, I'd say that we don't know about the timing of 232 at this point or how aggressive it's going to be, but clearly this administration is supportive of the domestic steel industry and clearly that's an important market for us.
So we do believe that the US market is going to be well supported. In the meantime, you talked about the balance.
I mean, it does look like international markets are fairly strong at present and with sort of Chinese consumption where it is with overall hot metal demand up to the degree it is, we still feel positively about international markets as well. So again 232 seems like it will be a positive support here domestically and we feel good about that.
But with hot metal up 2.5% globally, with Chinese consumption where it is today, Chinese steel consumption has been very strong year-to-date, as you know, Chinese imports continue to be very robust, some of that’s from Mongolia, but also on the seaborne side, we continue to see significant purchasing from China, Chinese domestic coking coal prices are strong. So all of those things I think suggest that internationally, we should continue to see a healthy balance in the steel markets and certainly are positive about the fact that this President wants to support the domestic steel industry, which of course is going to continue to be a cornerstone of our market.
John Eaves
And Michael, just to follow on, I mean you’ve seen a number of domestic RFPs come out recently, I think the domestic guys are starting to think about their fuel supply for 2018 and so we’ll see where that goes. But as Deck said, everything we see domestically as well as globally is positive.
I mean, you’ve had 35 million tons of met imports into China through June. So that’s certainly about 70 million ton annualized clip, which is about 10 million or 12 million higher than we've got in our internal forecast currently.
So, we hope we're wrong and they’re right.
Michael Dudas
You must enjoy these nice stable markets, huh, John?
John Eaves
Yeah. I think it’s the new world that we live in.
Operator
And we’ll take our next question from Mark Levin with Seaport Global.
Mark Levin
Quick question related to the quarter and how to think about the back half of the year. So it looked like you referenced some geologic issues at Mountain Laurel that caused some cost -- the cost to spike there, coal creek issues that you had there, I think you referenced met coal shipments picking up in the back half of the year and then obviously in the PRB, you are impacted by the shoulder season, just a lower volume quarter leading to less fixed cost absorption.
So given all of these factors against, I guess the met price has come down a little bit, how should we think about like sequentially what EBITDA might look like in Q3 versus Q2. I mean, is it reasonable to assume that it should be meaningfully higher for the reference -- for the issues that I just mentioned?
John Drexler
This is John. Certainly, we don’t guidance for EBITDA, but if you look at the way the volumes are kind of allocated, obviously on the met side, you can see what we did first and second quarter, it’s about 3 million tons.
If we hit our midpoint of seven, we’ve got to ship 2 million tons in the third quarter, 2 million tons in the fourth quarter, which would indicate a more positive EBITDA in the back half of the year.
John Eaves
So, yeah, Mark we, in our guidance and Paul talked about operating cost guidance, we provide committed sales volumes and committed pricing. So hopefully we've provided enough direction there that you can -- you have what you need to interpret that, but --
Mark Levin
I mean, it just seems like there are a lot of different issues that kind of hit you in the second -- hit you in the second quarter and is it reasonable to assume like the cost issues that impacted you at Mountain Laurel in the second quarter, the cost issues that impacted you with coal creek in the second quarter are unlikely to have a residual effect in Q3 and beyond, is that fair?
Paul Lang
Mark, this is Paul. I could kind of take those one at the time.
The issue at Coal Creek was typical coal mine stuff, we had a boom issue. I think that repaired by itself equated to about $0.09 a ton in the quarter.
So, obviously it had a huge impact in the quarter, but for the year, it was a one-time event. We really don't see that coming back.
Mountain laurel was a little bit different story. We’re in the last panel in the Alma seem, I guess obviously, the last panel of the seam is usually, you’re worst and it was.
We struggled the entire quarter. It was a tough quarter at Mountain Laurel.
Really had a drag on our cost in the second quarter, but we're down in the Alma seam now or excuse me, the seeder growth seam now and we are expecting conditions to improve.
Mark Levin
Let me ask you more, I’ll stick to one more Arch specific. With regard to the sale of Lone Mountain, and trying to think about the impact on what your ongoing cash cost will be in 2018, any color you can provide there.
I know, you referenced it being the highest cost property, met property in the portfolio?
Paul Lang
Yeah. To give you a little color, Lone Mountain in Q2 had a cash cost of $77.11.
If we excluded it from our segment cash cost, we would have dropped $3.92 to $56.74. Obviously, it's been a huge drag on our cash in the segment.
It's the highest cost and lowest quality as John said.
John Eaves
Mark, Lone Mountain is something, the PCI market really hadn't gotten a traction that we've seen on the met side. The margins just weren't good there.
We weren't really generating any kind of cash margins at all. They weren't making much of a contribution on EBITDA and as you well know, we've been very consistent in saying that we have an operation that's not generating cash, we're going to do one or two things, we're going to close it or we’re going to sell it.
And we had an opportunity here to monetize that asset, we think it makes sense for the company to allow us to focus on really the four operations it really created value moving forward.
Mark Levin
Last question is market related to the PRB, you referenced some of the inventory situation. I want to think more specifically now about the 8400 market, which I know you guys aren’t a big player and you do have one mine, but with regard to the 8400 market and prices where they are today, I think I was looking at the curve and maybe around like $9, where do you think 8400 production would go next year in the PRB if prices don't recover.
I mean, can producers make money in the PRB at current 8400 prices or and if they don't recover, do you think production in the 8400 market will get cut next year?
John Eaves
Let me jump in here Mark and I’ll let Deck and Paul jump in. Certainly, if you look back over the last five years, the market share has really gravitated more to the higher Btu coal.
I think as we move forward, it’s going to continue to be challenging for the lower quality guys and we would expect moving forward that the higher Btu coal and the fact that Arch is producing close to an 8900 Btu coal, we feel like we’re pretty well positioned to grab some of that market moving forward. I don’t know Deck, if you’ve got any add-on?
Deck Slone
Yeah. Just clearly Mark that that differential between the 8800 and 8400 has widened out and we do think that at these current prices that a number of the producers are likely to be struggling.
Those are clearly depressed prices. As we look out over the next few years, we do see this continuation of 8800 increasing its market share relative to 8400.
We'll see if that plays out, but certainly we think that that’s likely that there will continue to be more value placed on the higher Btu PRB coals, which are going to tend to move further and better and be more economic in locations more distant from the PRB. So that continues to be our view.
We do expect some step down next year in 8400 and then in the years thereafter.
Operator
And we’ll take our next question from Lucas Pipes with FBR & Company.
Ed Beachley
Hi, Ed Beachley here for Lucas. So I assume that 2017 met coal cost guidance includes Lone Star Mountain for the first half but excludes Lone Mountain in the second half of the year, is that correct?
And in addition what is the cost range of your remaining four met coal lines.
John Eaves
Look I think the way to look at the guidance, a little bit complicated, we took Lone Mountain out of all the guidance, but it does include Mount Laurel. So effectively we kept the price or the cost the same for the segment.
I think the simple way to look at it is moving Lone Mountain about offset the cost impact at Mount Laurel.
Ed Beachley
And then one quick question, will you put current net back prices for high-vol A and high-vol B at the mine based on recent [indiscernible] port numbers that you mentioned?
John Eaves
Well the current mark through for high-vol A are around 160. Freight rates obviously raised generally with the indexes though you're freight is going to be in the 30 to 35 range.
So keep the bath simple if you’re 155 convert it to short tons that 140, takeaway $35 for port fees and rail, you're at 105.
Operator
And we'll take our next question from Jeremy Sussman with Clarksons.
Jeremy Sussman
Just to follow up on Mark's question on Lone Mountain, did you - did I hear you right, did you said the costs were $77 bucks a ton this past quarter?
John Eaves
Yes, $77.11.
Jeremy Sussman
So with PCI pricing at sort of $72 bucks a ton, can I infer that you generated negative cash there this past quarter?
John Eaves
I think the best way to look at it is between Lone Mountain and the other two idle segments we sold. We were flat to slightly negative.
Jeremy Sussman
And just following up, what are the liabilities that are being transferred in terms of magnitude?
Paul Lang
Kind of around numbers, we had about $20 million in reclamation bonds posted though those obviously go to the buyer. There were some employee liability that went along with the deal.
I don't know that we've quantified those exactly to the disclosure but it was a pretty clean break.
John Eaves
Jeremy, we did indicate in the earnings release that we do have a range of an expected gain of $15 million to $20 million when you take into account all of the components of the transaction including the liabilities that were transferred. We'll have more detail for that once the transaction closes.
Jeremy Sussman
And just last question, it sounds like from your comments and then from some others that a number of the domestic steel mills are already out for 2018 business. I guess first is this earlier than normal at least from an order of magnitude of the number of mill that seem to be out and then second from a pricing standpoint?
Directionally would you expect your 2018 domestic annual business to be up for Arch I guess given that at least at this point with negotiations beginning, international pricing is obviously a lot higher now than it was this time last year. Thank you.
Paul Lang
There's no question that we're seeing more RFPs earlier than we had before. As I look back to last year, I think this time last year we only had really one serious RFP and I think we've received three now.
So clearly the domestic guys are trying to get a jump on the market. Relative to pricing, I view the domestic market as very important.
There are good customers and historically the domestic market is better than the international if you look long term, but that's not at any price which would stay in that market. I think we're expecting to see pricing at least clearly with parity to the international markets on an annual basis.
The difficulty always in price the domestic coal is that it's fixed price for the entire year. That’s why most of our international sales are index based.
So that’s the beginning. The RFPs are out early, my sense is I'm not sure they're going to conclude much before they normally do though.
John, do you any…
John Eaves
Jeremy, we’ll see, I mean this could go on for a few months, it may get settled fairly quickly. It will be interesting to see.
I think we've been pretty open about our position and the importance of having a domestic piece of our business and an international piece. And we're not married to any percentages.
I think we said 40% to 50% that's something that we're always looking at as we move forward. But Paul said we’re certainly not willing to discount our product to keep in the domestic market.
But at the same time when you know we're running two big long hauls in our Eastern met portfolio, we do like to ratability of have that volume for a portion of our production as well as price clarity for the full calendar year. But again it comes down to price and us getting the appropriate value for those products domestically versus internationally.
Operator
And we’ll take our next question from Daniel Scott with MKM Partners.
Daniel Scott
I want to concentrate on capital allocation a little bit here. You're just under half a billion of cash on hand and you've said I think the last two quarters that that's basically a level you could maintain throughout all points and all cycles.
And if we look at certainly with this met coal price stack out there, the free cash flow profile is very strong. And while you've done about 50 million of the share repurchase, by my model at least you could probably finish that share repurchase by the middle of next year without really changing things much.
So at that point and if markets continue to stay reasonably strong like this, can you prioritize between maybe a raise in the dividend or a new share repurchase or what would it take to actually start thinking about the [indiscernible] doing layer number two.
John Eaves
Dan, great questions there and we agree with that. We have great confidence and conviction in our business strategy and our ability to generate cash here as we move forward.
And so we do have that capital return policy in place and we continue to execute on it, we continue to expect to execute on it. You do asked some interesting questions and those are all questions that we think we're in a great position to be able to contemplate, consider and as a management team and a board make decisions upon.
We don't see a higher return opportunity than what we have with the opportunities of additional capacity on the target reserve with similar quality production to Leer in a similar cost structure. And so we're going to continue to evaluate that.
So we've got the luxury right now of continuing to watch where markets go, how they continue to develop, execute on our plan, currently continue to expect the active share repurchase activity that's been authorized and we'll move forward from there.
John Drexler
Dan, just a follow on comment, as we looked at coming out of the fourth quarter and what we wanted to get done as a management team, as a board, there were really three things that we focused on. One was lowering our debt cost, which we cut that in half.
And then looking at how we return value to our shareholders. And when we looked at the dividend, we wanted to make sure that the dividend that we put in place was, it was a level that we could continue no matter what the market cycle was so we landed on $35 million and we're very comfortable with that number.
And then the share repurchase was something that we thought was significant. We didn't have a time limit on it, but certainly you saw we're pretty active and in the second quarter we expect to be active, in the third and fourth quarter as well.
So we like the way we're positioned. John referenced our Tygart Valley, if you remember we've got about 130 million tons up there that we own in fee.
We actually had our board up there last week looking at the operation. We're very excited about it.
We've got the ability to bring on two additional longwall that you know a cost structure that mirror Leer at the same high-vol A type product. So these are things over the next nine to 12 months that we're going to be looking at certainly discussing at the board level, but think what we've done thus far makes good business sense for Arch Coal.
Daniel Scott
Great I appreciate that. Certainly you're saying that's the highest return you see out there, puts it well out of any potential M&A I would imagine.
John Eaves
M&A is always something that we're looking at, but you're right, I mean we have to compare that external M&A with what we have organically. We feel pretty good about the internal projects that we have.
Daniel Scott
And just the last thing, could you remind us of your longwall moves schedule over the next say four quarters?
Paul Lang
The Mount Laurel longwall moves as I mentioned in my opening comments. Longwall may actually start up today or tomorrow or its within days of starting up.
We have a Longwall move there late in the third quarter and we have a Longwall move at West Elk in the third quarter. So we’ll hit trifecta this quarter with all three Longwalls moving.
John Eaves
And certainly from my perspective, Dan, we’re glad to get out of that last panel at Mountain Laurel that was pretty painful.
Operator
And we’ll take our next question from Paul Forward with Stifel.
Paul Forward
Just to follow up on that last point on the same transition at Mount Laurel. I think the last four quarters you did about 1.5 million tons, just wondering as you look at the next four quarters or kind of next couple of years, is that still the approximate rate that you would anticipate producing at Mountain Laurel or the new seam offer any opportunities for more than that?
Paul Lang
No Paul, I think that’s probably the upper end. I mean, Mount Laurel is getting along in the tooth.
We still think it's a viable strong operation particularly this market, but as we continue to wind down the mine over the next five, ten years. The things are a little thinner and a little tougher.
So I don't think you're going to see a big drop at any one period on the production, but it's going to continue to decline.
Paul Forward
Just I know you've made the decision to sell Lone Mountain, but that $77 cost number, sounds like cost kind of ran away from you there a little bit. I was just wondering if you could talk about was it kind of labor turnover issues, was it geology, other issues that you might go through that caused you to make the decision that really you're better off divesting rather than kind of sinking more money into the operation?
Paul Lang
As you look at Q2 or the first half of the year in total, the cost there were about $72. So I think obviously Q2 had a spike in and I think it was predominately the conditions we ran into.
But obviously Q1 was not a great quarter either. So I can't really tell you that it was anything to do with labor or any of associated things, we've heard others talk about, we really haven't had those issues.
This was purely geologically related.
John Eaves
Paul, certainly we hadn’t been in neighborhood with the market for that coal either. As I said earlier in the call, I mean the PCI really hadn't even tracked the met prices at all.
And the industrial thermal market hadn’t been very exciting either. So, I think the geology challenges that Paul mentioned combined with kind of so-so market we say, we just thought it was the right business decision to monetize that asset.
Paul Lang
And I think the other thing that I don't think people have caught on is that the industrial market is actually better priced than the PCI market right now. The problem is the industrial market is not very deep.
Paul Forward
Well, I guess following up on another point you’d just made, you've got a number of longwall moves in the third quarter that have either already happened or will happen, I was just wondering if you could talk through. You've had some shipment delays in met coal in the second quarter.
Do you expect the inventory situation like do you have inventory at the end of the second quarter to kind plan to ramp that inventory down and contributing to the higher coking coal sales levels that are implied by your full-year guidance?
Paul Lang
As you look at our inventories, John referenced we were at Leer last week. I think in a perfect world we would have shipped about 1.8 million tons in Q2.
That coal is effectively sitting on the ground between the four mines. I do have a concern on the worst effects its heading right now.
Clearly we started seeing problems towards the tail end of Q2 and frankly the problems have gotten worse in the last ten days. Up to this point the problem was with CSX had been predominantly on the domestic sales, but I think the most troubling aspect I’ve see is that the – we’re starting to see problems on the shipments to the coast for export.
This is clearly something we’re going to have to watch over the next couple of weeks, but as far as inventory, we're in good shape and ready to ship.
John Eaves
Pau, let me just jump in on the railroad piece. Certainly as Paul said, we started at the end of the second quarter, starting to see some deterioration really more domestically and internationally and we've seen that kind of continue into third quarter.
We need and we expect the railroad to perform in the back half of the year. We’ve had a long-term relationship with those guys.
It's been a partnership and we've held up our end of the bargain, we expect those guys to hold up there end of the bargain in the back half of this year.
John Drexler
And Paul maybe just one last item to walk to the mechanics of the physical financial statements. I referenced in my prepared remarks a negative working capital adjustment impacting cash for the quarter, cash flows for the quarter.
And so a part of that is the inventory build that occurred during the quarter that Paul referenced.
Operator
And we'll take our next question from John Bridges which J.P. Morgan.
John Bridges
Just following on from an earlier question, the weakness in 8400 coal in the PRB. In the past, you've always said that you get a premium on the spot prices for the 8800 coal.
Is the same thing true in 840 or otherwise the price just looks weird?
Paul Lang
John, I’m a little confused by your question.
John Eaves
Could you repeat that last half John.
John Bridges
In the past there's always been a comment that you get a bit of a premium over the traded price for PRB prices particularly in the 8800 coal. I’m just wondering if the same thing is true in 8400 in order to try and get a better senses to what - how economic that stuff can be at the moment?
John Eaves
Well, jump in here and I’ll let Paul and Deck climb on. I think we would expect as a marketing group to always try to do better than the marks.
I mean as tough as the 8400 is, we always try to beat those. It's probably not always the case, but it's a much more thinly traded market.
Paul?
Paul Lang
I mean I think you look at Q2, the headline number was we sold an average at about 1175. I think on average we’d beat the marks by $0.25 or $0.50.
But we were completely out of the 8400 market. The other thing I’d add is that, if you look at kind of what the true value of those tons were, we were probably closer to $12 when you take into account all the adjustments for quality.
So we still see a very strong market in 8800, but clearly there was a wide variance versus the marks.
Deck Slone
John, also on the 8400, I mean we've got a pretty well established contract base for that volume, we're not active in the open market at all. We got 9 or 10 million tons that customers want, we've been able to continue it year after year.
So I wouldn’t say Arch is real active in the open market with the lower Btu coal.
John Eaves
And John, we think that also the case with a number of the other producers. So there's probably not a lot of transacting at those prices, but we certainly believe that at those prices most producers in the 8400 segment are likely to struggle those are very low prices.
And as you know we've seen some dimension in the production there and some under-investment here of late in 8400 and I think it’s a function of the fact that market has continued to the – continues to see some weak marks there.
John Bridges
And as a follow on, you've obviously got - you obviously got more eyes on the market and I got. The 15 million tons of new capacity that you referred to coming into the market from these mine restarts, when do you see that ton is coming in over the next couple of quarters.
Is that going to be Q4 loaded, is it going to start coming certain volume in Q3 what is your expectation?
John Eaves
John, I think it’s throughout the year. We've got about 15 million tons and the majority of that would be North America as well as Mozambique.
And actually year over year we've got Australia recovering some of the last volume from the cyclone but still being down about that 5 million tons year-on-year. So I mean we think during the calendar year that 15 million tons plus or minus will be in the market.
And we actually think the demand side can absorb that.
Deck Slone
We do and then obviously, John, we're also seeing a number of disruptions out there as well that they're not contemplating in that 15 million tons. So we’ll have to see how significant those are.
We've got some labor disruptions in Australia at present, some mines are struggling with geologic issues. We've seen them issues in Russia.
And even here in the US we've seen a couple of high profile mines are struggling with geologic conditions. So we think the 15 million tons is reasonable but as John said we think that can be absorbed given the strength we see in steel market and in hot metal demand at present.
John Bridges
Just also I was looking at the [indiscernible] and your production out of Illinois was down, but I think you were on Q2. What's going on there, I know it's not a big part of your world but just want it for modeling purposes.
Paul Lang
John, we’re almost completely to a single utility there and our production is pretty well with day burn. So if the burn is down, we’re down.
The mine had a great two quarters, it's simply an artifact of what the utilities able to burn.
Operator
Thank you. And we’ll take our next question from Patrick Marshall with Cowen & Company.
Patrick Marshall
First of all would you mind repeating the mix of coal that you sold in 2Q the met coal?
Paul Lang
The met coal, it was – the 400,000 tons, 75% was low-vol and high-vol A. so about 25% was high-vol B.
Patrick Marshall
And then also I guess it’s more of a housekeeping question. How many - do you guys how any idea how many the warrants have been exercised for your stock?
Paul Lang
If you remember we had 1.9 million warrants that were out there, it's been a relatively immaterial impact still roughly around 1.9 million warrants that are out there.
Operator
And we’ll take our next question from Wayne Cooperman with Cobalt Capital.
Wayne Cooperman
I had a pretty simple math question on the interest expense. You termed out your whole term loan, I forgot what you said like 3%.
Where is this 25 million of interest expense coming from?
John Drexler
The term loan, $300 million term loan, Wayne, is L plus 400. So it effectively at to 1% LIBOR, it’s 5%.
And then what we've done is we've locked in LIBOR for 250 million of it at 1.37%. So you still have to add the 400 basis points on top of that.
Then that should get you with our other debt back to within our guidance, which we've…
Wayne Cooperman
It still doesn’t get me to anywhere close to 25, kind of nit picking but…
John Drexler
Remember though the first quarter was still at L plus 900.
Wayne Cooperman
But if I was looking for next year, it would be back, it would be more like 10 or 15 or something like that?
John Eaves
[indiscernible]
John Drexler
Wayne, you've got $30 million of other items that are in there, right. Let's call it 5% on the $300 million as would be your basis and then add another 5 million to that for a run rate.
We've not provided guidance for 2018 on that front, but that would be reasonable for model assumptions.
Wayne Cooperman
Along as we're talking about 2018 and can you guys give a little CapEx guidance, I know, I mean you just sold one of your facilities and your PRB production is going down, what should we look for CapEx to be about the same next year as this year if you’re going to kind of straw the number?
John Drexler
No, I think as I mentioned last quarter Wayne, this year was usually low year as I look out the next two or three years, we look at going back to I’d call a normalized rate of $1 to $1.25 a ton. But it's not going to happen in one bunch, it's going to happen over two or three year period.
The fact is, Lone Mountain in the situation it was, we only spent money on health and safety and environmental things. So there wasn't a lot of capital being spent at Lone Mountain because it wasn't generating anything.
Wayne Cooperman
Other than that I mean I guess the quarter was sort of just - your costs go up when you're volumes go down, so I'm assuming when you pick up the sales in the back half of the year that's what's leading to the cost guidance actually being lower than they were before the quarter?
John Drexler
That’s the best way to look at it.
Operator
And due to time constraints we’ll take our last question from Lucas Pipes with FBR &Co.
Lucas Pipes
So John, I wanted to ask a little bit about your vision for Arch. I understand that the coal industry is coming back out from a pretty tough time and I think your focus on the share buyback and returning that value to shareholders, but if you could kind of wave a magic wand and create your Arch Coal in this new coal industry, restructured coal industry, what would it look like?
John Eaves
Lucas, I think we have. I think we've got a focus on low cost metallurgical products, we just dream that even a little bit more which over time will help our cost structure.
We certainly like our ability to expand in that arena as well. Again, low cost high quality products that we think the domestic and international markets want.
I think our low cost thermal position which is anchored by PRB is exactly where we want to be. I think those two business lines actually complement each other with our operational and our marketing expertise.
So I like where we are, I like where we're going, I like what we've accomplished as a company thus far. We've got some great opportunities that we referenced earlier in terms of organic growth.
Again, our Board get up close and touch that last week. We feel good about that and I think that you know the market will determine on how and when that project comes to market.
So I think this management teams feel very good about where we are, we're laser focused on cost control, making sure that we manage the balance sheet very effectively and we return value to our shareholders. I mean that’s you know, what a difference a year makes, but we feel good about where we are today and where we're going.
Operator
And at this time I would just turn the conference back to Mr. Eaves for any additional or closing remarks.
John Eaves
I want to thank everybody for their interest in Arch Coal. Also I want to thank the employees for Arch during the second quarter for their focus on safety, environmental performance and cost.
We are excited about the way we're headed. We look forward to executing the third and fourth quarter and look forward to updating you on the third quarter in October.
Thank you.
Operator
And that does conclude today's conference. Thank everyone for your participation, please have a great day.