Oct 31, 2017
Executives
Logan Bonacorsi - Director of External Affairs John Eaves - CEO Paul Lang - President and COO John Drexler - SVP, CFO and Treasurer
Analysts
Mark Levin - Seaport Global Lucas Pipes - FBR & Company Paul Forward - Stifel Michael Dudas - Vertical Research Partners John Bridges - JP Morgan David Lipschitz - Macquarie Capital Wayne Cooperman - Cobalt Capital
Operator
Good day, everyone and welcome to this Arch Coal Incorporated Third Quarter 2017 Earnings Release Conference Call. Today's call is being recorded.
At this time, I would like to turn the call over to Ms. Logan Bonacorsi, Director of External Affairs.
Please go ahead.
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 related 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 turned in another solid financial performance in the quarter just ended despite rail and geologic challenges that dampen the contribution of our met operations.
These solid results in the face of suboptimal operating conditions underscores yet again the quality of our mine portfolio and the value of our strong and complementary mix of met and thermal business segments. In the third quarter 2017, Arch reported net income of $2.83 per diluted share and adjusted EBITDAR of $104.3 million that EBITDAR totaled does not include $21.6 million gain resulting from the completion of the sale of Lone Mountain complex which closed on September 14.
Our strong free cash flow generation during the quarter allowed us to continue to deliver on key strategic objectives principally our capital return program. We believe our progress on this front is delivering exceptional value to our shareholders and is poised to generate still more in the quarters ahead.
During the quarter just ended, we bought back 2.2 million shares of stock at a total cost of $167 million bringing the total buybacks to 2.9 million shares or nearly 12% of the shares outstanding since the launch of our capital return program. In total, this share buyback program combined with the dividend paid to-date has resulted in approximately $235 million being returned to shareholders since the start of the program.
In addition, the board has authorized the purchase of up to an additional $200 million of Arch stock on top of the $82 million of capacity remaining on the initial authorization at quarter end. This development further underscores the confidence the board has in the company's future prospects and its strong focus on creating value for our shareholders.
We ended the quarter with more than $450 million of cash on the balance sheet which we believe provide sufficient level of liquidity through all points in the market cycle and we would expect to generate substantial free cash flow in the fourth quarter as well. As indicated we currently expect to return excess free cash flow to shareholders be our capital return program absent any unexpected developments.
Each of our operating segments contribute significantly to our third quarter results and is well positioned for success as we complete 2017 and head into 2018. In the met segment we achieved cost at the low end of the US cost curve and generate attractive margins despite the challenges mentioned previously, with those challenges now behind us we expect a significant improvement in the performance going forward.
In the PRB segment, we increased volumes, reduced costs and expanded margins by 30% sequentially and in our other thermal segment we had another strong quarter supported by strong international sales at our West Elk and Coal-Mac operations. Turning to coal markets, we continue to be encouraged by the solid fundamentals in the global met markets eve with the ongoing recovery in the Australian exports post Cyclone Debbie as well as modest supply growth in other producing countries, demand in pricing for seaborne coking coal markets remains healthy.
In addition, the future markets for 2018 delivery appears to be stabilizing recently at levels that would deliver solid margins for a low cost operation. Supporting these sound market fundamentals global steel and hot metal production continue to expand, global hot metal demand up 2.3% through September and steel prices well above last year levels in all key regions, the World Steel Association is forecasting reasonably solid growth in steel markets for 2018 as well.
Looking ahead we believe that resurgent steel markets strengthening Chinese manufacturing activity and a strong global economic outlook should translate into another constructive year in met markets in 2018, moreover we believe that most of the new production capacity that has been announced has entered the market carries a high cost structure which should support strong pricing overtime. Arch continues to believe that over the longer term global met markets will find support in 130 to 150 per metric ton range which we believe is breakeven level for 10% or more of the global coking coal production capacity and a level should provide Arch with healthy cash margins.
On the thermal front, strong international markets were providing good support to a domestic market still in recovery mode, with New Castle prices in the upper 90s and Northern European prices in the lower 90s, more US coal is moving into global thermal markets which is favorable development for domestic fundamentals. Moreover Arch is participating directly through increased export movements from our West Elk mine in Colorado and our Coal-Mac mine in West Virginia.
These export opportunities are particularly important given the fairly mild summer temperatures that resulted in both lower coal burn and lower natural gas prices. In total, Arch estimates that the coal burn for June through September was down approximately 20 million tons compared to the same period of 2016.
Despite that fact, we believe that utility stock piles continue to come down just at a slower pace. At present, we still expect utility stock piles to fall below 75 days of supply by year end 2017 and to reach average target levels of 55 to 60 days in mid-2018.
In summary, we remain enthusiastic about the prospects of a strong finish to 2017 and another strong year of value creation in 2018. With our solid cash flows, balance operating portfolio, strategic marketing approach and efficient and responsible method to capital returns, Arch is well positioned to build upon our improvement record of returning capital to shareholders and further capitalizing on dynamic global coal markets and still improving domestic thermal markets.
With that I'll now turn the call over to Paul Lang for comments on the operating and marketing performance in the third quarter. Paul?
Paul Lang
Thanks, John. This morning I'd like to spend a few minutes discussing the opportunities we see in our business as well as the challenges we face during the last three months.
And more importantly how we overcame these challenges and still delivered strong overall results. In the thermal segment during the third quarter, Arch shipped 1.8 million tons of coking coal at an average net back price of $99.21 per ton, volumes were lower than expected due to rail disruptions at our coking coal operations in July and August coupled with difficult conditions at both of the longwall operations in the segment.
In particular at Mountain Laurel we confronted start up issues during the transition to the Cedar Grove seam but had generally worked through them by the end of September. At Leer, we encountered an acute roll in the coal seam that forced the longwall to mine through an area rock towards the end of the panel.
This issue in turn impact mechanical availability and slowed our rate of advance pushing the longwall move into October. Currently we're finishing the setup of the machine in the new panel and should have the system back in operation like this weekend.
We are expecting improved performance of both operations heading into the fourth quarter. However, while these issues were offset in part with higher production from Sentinel, in total we lost approximately 400,000 tons of production of which we believe when we make up about 100,000 tons by the end of the year.
As a result of this, excluding Lone Mountain a cash cost for the period were $62.04 per ton and we've raised our full year guidance to $56 to $60 per ton. While higher than previously expected this is still a solid cost structure that we believe places Arch to purely near the low end of the industry cost curve.
During the quarter we sold for 2017 delivery an additional 275,000 tons of coking coal at an average price of about $106 per ton and we priced approximately 700,000 tons at about $120 per ton. We now have six million tons of coking coal committed for delivery in 2017 at an average price just over $100 a ton.
We also have another 600,000 tons committed but unpriced. As noted in the release, with our Q3 challenges we have reduced our metallurgical volumes targets for 2017 to between 6.6 million tons to 6.8 million tons leaving us over 98% committed for the year at the midpoint of the range.
Looking ahead during the quarter we also sold approximately 850,000 tons for 2018 delivery. Of these new sales about 500,000 tons were sold as a result of the annual domestic negotiations at a fixed price of $105 per ton.
The balance of the new sales was contracted with global steel producers generally at index pricing. With these sales we now have 2.9 million tons committed for next year of which 2.4 million tons are subject to index pricing.
In 2018, we expect less than 20% coking coal sales will be with North American steel producers. While we continue to view the domestic market as an important outlet for our metallurgical volumes, the discounts we were being asked to consider were simply too great to justify our traditional 40% to 50% participation.
Each year we'll evaluate our cokign coal sales portfolio and work to strike a balance that garner's the best value for our products. Turning to the thermal side of the business, starting with Power River Basin, we had a busy quarter as customers were actively in the market showing up near and intermediate term volume needs.
As a result, we committed and price 4.7 million tons for 2017 delivery at an average of $12.03 per ton with these new sales we now have 82 million tons committed of which 81 million tons are priced at $12.47 per ton. The new sales effectively sell out our Wyoming mines for the year.
Additionally for 2018 delivery, we committed and priced nearly 11 million tons at an average of $11.64 per ton, the recently committed volume mix for 2018 is largely representative of our production profile between the two mines in the segment including these volumes Arch now has 50 million tons committed of which 47.5 million are priced at $12.05 per ton with the balance subject to index pricing. Based on our 2017 sales volume, we were about 62% committed next year, with virtually all of our open position at Black Thunder.
Looking at the operating results, we had a solid quarter in the segment with our total cash cost dropping to $10.27 per ton on increased shipments and good cost controls. With this, we'll maintain our previous cash cost guidance for the segment at $10.20 to $10.60 per ton for the full year.
In the other thermal segment, despite a longwall move at West Elk shipment levels were on par with previous quarter and we turned in a strong operating performance. Ongoing demand and good seaborne thermal pricing continue to pull the high quality West Elk and Coal-Mac products into the international markets for export, a trend we expect to continue into 2018.
This year we expect to export 2.7 million tons of thermal coal from this segment to power generators in Asia, South America and Europe. During the quarter we sold about 900,000 tons for 2017 delivery at an average price of $36.08 per ton.
As John mentioned, given the ongoing strength in the international thermal markets and stable domestic market, we've raised production at both West Elk and Coal-Mac to match that demand. Along with this, we've slightly lowered our 2017 cash cost guidance for this segment to a range of $22.50 to $26.50 per ton.
We now have 9.3 million tons sold through this segment all of which is priced. With the production increase in the other thermal segment, we now expect our total 2017 thermal shipments for the company to range from 90 million to 96 million tons which is an increase of 2 million of our overall previous estimate.
Even with this, using a midpoint of our guidance we're essentially sold out for the year. In closing, I want to recognize our entire workforce for their continued commitment to our core values of safety and environmental compliance.
In particular, I want to congratulate our Coal Creek mine for surpassing four straight years of operating injury-free. In addition, I'd also like to highlight the dedicated employees who provide their time and efforts to our mine rescue team.
This includes the employees of Leer, Viper and West Elk who placed in the top 10 of the National Mine Rescue Competition and were the top performers from their respective states. 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. Good morning, everyone and Happy Halloween.
During the third quarter we continue to execute on our plans to generate healthy cash flow, maintain a strong and flexible balance sheet and execute aggressively on our capital return program. On the cash generation and liquidity front, during the quarter our operating cash flow has exceeded $100 million despite the operational challenges in our metallurgical segment.
We believe our performance this period highlights the strength of our balanced operating portfolio which is made up of low cost, cash positive operations in both our metallurgical and thermal segment. During the quarter we continue to make progress on reducing cash collateral it is required in our business.
First during the quarter we were successful in negotiating the release of $19 million of collateral. Second we've issued additional letters of credit from our inventory only ABL that we implemented last quarter bring up cash that had been restricted to support those LCs.
Both of those items allowed us to eliminate $42 million of restricted cash, as a result and for the first time since 2015 we do not have any restricted cash posted to support the issuance of collateral. In fact, our strong operational performance combined with our pristine balance sheet has allowed us to secure the return of approximately $100 million of collateral since our public relisting in October 2016.
As John referenced, we have returned approximately $235 million to shareholders since the capital return program was introduced in early May. Breaking that down further, we have spent the total of $218 million buying back 2.9 million shares representing close to 12% of the company's outstanding share balance.
In addition, we've paid nearly $17 million in cash dividends to our shareholders. Furthermore the Board of Directors has approved the next quarterly cash dividend payment of $0.35 per common share that will be paid on December 15 to stockholders of record at the close of business on November 30.
Even with our capital return activities we finished the quarter with cash in short-term investments of more than $453 million. Our cash balance combined with our total debt balance of $328 million leaves us with negative net debt of $125 million at September 30.
As we have discussed in the past, we are intensely focused on maintaining a healthy balance sheet and ample liquidity. Given our modest capital requirements exceptionally low interest expense and limited legacy liabilities we believe that our cash balance is sufficient and appropriate to meet expected and potential cash requirements throughout the full commodity market cycle.
Moving forward, we would expect to maintain cash level similar to those levels we have seen since the beginning of the year. During the quarter, we took a modest but important step to lower our cost of capital further.
We leveraged our balance sheet and took advantage of supportive debt markets to reprice our $300 million term loan dropping the interest rate from L plus 400 basis points to L plus 325 basis points. The rate reduction will save Arch in excess of $2 million on an annual basis.
As a reminder, last quarter we entered into interest rate swaps for a portion of the term loan fixing the LIBOR rate for the next several years. For the next nine months, we have interest rate swaps in place that fix the LIBOR rate for $250 million of principal at an interest rate of 1.37%.
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 approximately $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 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 pay cash taxes and record a tax provision of between 0% and 3% in 2017. We have continued to assess our tax position and we now expect to have cash tax and tax provision similar to that of 2017 through 2019.
To wrap up, we're confident in our strategy to prudently manage our balance sheet, maintain healthy liquidity levels and generate meaningful cash from our streamlined portfolio of large scale, low cost complexes. Going forward we will continue to focus on executing our plan in creating significant value for our shareholders.
With that we're ready to take questions. Operator I'll turn the call back over to you.
Operator
[Operator Instructions] we'll go first to Mark Levin at Seaport Global.
Mark Levin
The first relates to the PRB and the 2018 contracting. Paul I want to make sure I heard you correctly, are you guys effectively sold out in 2018 on your 8,400 product so effectively the only thing left to price in 2018 is the 8,800 for [ph] the Black Thunder product.
Paul Lang
Good morning, Mark. That is correct, we purposely went out and booked up our 8,400 as I look at the markets invested segment that concerns me most and I thought best we put it to rest.
Mark Levin
Got it, that makes sense and then secondly, just around general PRB demand in 2018 over 2017. I think he referenced or may have referenced the mild summer that we had obviously preceded by a mild winter.
Is your - I realized you guys kind of produce about the same thing regardless? But is your view when you at PRB demand in 2018 over 2017 that it will be flat with this year or do you think it could be lower or I mean, just assuming normal weather guess right around where we are today.
Paul Lang
Yes Mark I think that's a pretty accurate recap of our view. I think we're looking at 2018 coming in pretty well right in line with 2017.
The only thing I may add to that is, I think there is a good change the higher quality mines will continue to chip away at the lower quality mines.
Mark Levin
Got it, that makes sense. And then just one last question, it has to do with domestic met.
I think you referenced committing I guess less than 20% into the domestic market because you didn't want to take big price discounts and then I think you also referenced an average price for what you had committed. I think it was - you booked 500,000 tons around 105, can you maybe speak to the remaining portion under that annual contract?
Would it be around that same price? Would it be less?
Just kind of mix around what you didn't referenced on that annual contract. And then generally speaking how much up year-over-year from a price perspective on the domestic component do you expect to be.
Thank you.
Paul Lang
Mark, I may have lost you a little bit in that question, but I'll start off. But we committed as I said about 800,000 of which half billion it was domestic fix pricing about 105 that was a combination pretty close 50-50 Low Vol and High Vol A.
and honestly the prices were pretty close to each other. So our open position that takes us to $2.9 million committed which is, as I said that puts us in pretty good position heading into the international contracting season.
John Eaves
Mark, this is John. Let me jump in here.
I think and spread from where we're today, we're getting to the 20% maybe it's where you where you were going on domestic met, but we'll see where the pricing comes in, if we look at where prices are at Platts East Coast I mean those prices kind of back out there 105, 1010 [ph] I would expect that any remaining domestic business we do, would have pretty much that kind of pricing associated with it.
Mark Levin
That's great, that's perfect. Yes that's what I was after.
Thanks very much guys. Appreciate the time.
Operator
We'll go next to Lucas Pipes of FBR & Company.
Lucas Pipes
Good job managing through difficult geologic quarter and all the rail issues.
Unidentified Company Representative
Thank you, sir [ph].
Lucas Pipes
I wanted to follow-up a little bit Paul. I think you mentioned in your introductory remarks the challenges at Leer and how they extended into October.
So the first question is, if you could maybe give a little bit more color as to when the issues were put to rest and then longer term, you referenced how you're still one of the lowest cost producers out there, if not the lowest cost producing I was just curious putting everything together here as we look into 2018, what's the reasonable cost range going forward. Thank you.
Paul Lang
At Leer, we encountered I think what we would call it a cute roll in the face is I think the best way to think about it, is we hit a fish bowl, it was about 300-feet by 400-feet and dropped about 25-feet, we changed it down for little bit and ultimately just decided to mine through the rock. We cleared the roll actually in early September but the rock that we bind through was a pretty hard sandstone and it really took a toll on the machine, we pretty well had things back on track for the rest of the panel in October and we finished the panel up, late last week and started the longwall move.
I'm expecting the main machine to start up probably late Sunday night, early Monday morning. I got to tell you as you know these are tough calls, I was at the mine three or four times over the space sub-five weeks, we kept debating whether we pulled out of the panel or not, in the end we stuck it out and I think it was the right decision.
Those are the joys of longwall's.
John Eaves
Lucas, I think in terms of your 2018 question on cost I mean we're in the planning stages right now over the next four to five weeks we'll be finalizing our plans for 2018 for talking with our board about that, and have a better idea on cost when we report our fourth quarter earnings in first week or two of February.
Lucas Pipes
All right that's fair enough and then maybe to switch to the capital allocation front. Obviously you've been buying back a lot of shares and have indicated this morning that you intend buyback more and I wondered has the special dividend also entered the conversation and if so, what gave the preference to continue on the buyback route?
Thank you.
John Eaves
Lucas let me kick it off here and John can jump in where he sees fair. As we thought about how we return value to shareholders earlier this year, we had a lot of good constructive conversation at the board level and we really wanted to accomplish a couple of things, one we talked about the dividend, we really wanted a level dividend that we could do in any kind of market cycle and that's how we came up with $35 million and we're still very comfortable with that.
On the share buyback, we did the initial up to $300 million as you've seen we've been very active on that program and we just refresh that program for an additional $200 million and we think given where Arch is, that's a right approach and we talk about the one-time dividend, we tend to look at those just kind of one off not that we won't continue to talk to our board about that, we think we're pretty comfortable with the dividend we got in place and $500 million of share repurchases that we put in place. John you got anything to add to that?
John Drexler
Lucas, I think only thing I will add is, once again the whole commitment to the capital return program shows our conviction and confidence and our ability to execute and operate on our plan, which we've been acutely focused on since we've emerged from bankruptcy and so I think that's the path forward for us right now, we'll continue to look at the cash generation and the opportunity to participate in the market and I think we feel real good with where we're right now.
Lucas Pipes
Great, well I really appreciate the treat on this Halloween and wish you good luck for the rest of the year.
Operator
We'll go next to Paul Forward of Stifel.
Paul Forward
So just back to the question on the capital return program and the expansion. Could you talk a little bit as you considered the desire to expand the share repurchase program?
how does the board or how do you and the board sort of stack at the various opportunities between new mine developments and we assume in metallurgical coal versus share repurchases versus acquisitions and what led to the decision to get with the share repurchase expansion rather than the other two opportunities?
John Eaves
Paul, as we look at the business. It's always driven kind of business environment M&A opportunities I mean we're always looking external assets and given where we're in the cycle, we just thought returning cash to shareholders makes the most sense right now.
If you look at our portfolio, we worked really hard to make sure that we're got the cost structure in plan on the thermal as well as on met on the low end of the cost curve, we think we've done that so as we look at external M&A, we don't want to do anything that would impair that cost structure. I think the other thing that we've got that maybe is a little unique to others is we've got a tremendous organic growth profile particularly as we look at Tygart Valley and I think I mentioned on the last call, we did have our board at the mine in July I think they were very pleased with what they saw, we continue to move those projects forward from a permitting mine planning standpoint, but we're really not to a point, where we need to make a decision at this point.
We'll continue to look at the business environment, the markets and make a decision at that point, but very comfortable with what we've done thus far on the dividend to share purchase.
John Drexler
Paul the only thing I will add to that is, it's an ongoing process it's something that will continuously and constantly evaluate, but right now we feel very comfortable with the path, we're heading down.
Paul Forward
Great and I guess just on the question of the potential expansion at the Tygart Valley. What are the - as you consider the long-term project there?
What kind of limitations would you expect over the long run or are there concerns like labor availability, rail capacity, the ability to access customer base that's going to predictable either domestically or internationally. What might cause you to decide to delay a decision to expand their if in fact that you do.
Paul Lang
Paul, this is Paul. As you look you got to remember there is two projects there.
We ultimately could base another two longwall's into the Tygart reserve. And as we look at that reserve base, its High Vol A which still is at a very good demand both domestically and in Europe and Asia.
So as far as the overall picture there isn't a lot of concern as far as the market or transportation and if you recall, we expanded our position at DTA earlier this year, so we have capacity to get the coal offshore. As far as the labor force, I think it's always going to tied up in that part of the world, but we've successfully staff Leer from a greenfield position and I think, as I look at what's going on around Southern West Virginia, it may be easier in a couple of years to staff those mines.
Paul Forward
Okay, thanks a lot Paul.
Operator
We'll take our next question from Michael Dudas of Vertical Research.
Michael Dudas
Going to be more and more discussion about the rail issues you had in the quarter and where you stand today, how hopeful about the company's bid and solving some of the issues? And as you plan and enter into 2018 throughout your transportation and negotiations.
Are you comfortable with where the investment has been from the industry and to meet your needs going forward?
Paul Lang
It really came to light about three months ago on this call, we started seeing problems in late June and it started off with our domestic operations, our domestic runs and started spreading in July to the international shipments. But I got to tell you, we had a lot of conversations with the railroad and once we got them engaged they were very responsive and ultimately we worked on several projects together to improve things and look at, it didn't get better till early September but after early September 4, I really can't complain about the rail service received.
I think the most prevalent thing, a lot of the shipments end up being timing issues, but probably the most difficult part we had in the quarter was demurrage on the vessels we missed and look frankly, we'd love to come back and get some of that value back from the railroads.
John Eaves
Michael, this is John. Let me just also follow-on to what Paul said with the rail road we really struggled had a lot of concerns in July and August, but after a lot of tough conversations between the parties, they really stepped up and performed and continue to do so, into the fourth quarter and we would expect them to do that into 2018 as well.
Michael Dudas
Appreciate the [indiscernible]. My follow-up would be as you're negotiating with your utility customers for your thermal shipments.
What kind of discussions are you having or planning three to five years out? Do you get a sense utilities got a better handle given all the changes with the administration and what's going with gas etc.
that, if you're feel comfortable where their mix is right now or given the net reductions and the capacity you're probably going to still see this couple years, is there still going to be pressure succulently on consumption for the industry especially some of the higher costs players.
Paul Lang
I'll maybe start off the conversation with, the conversations I've had with the customers and let John talk about the bigger picture. But look the customers heading into 2018 are they're nervous about gas or nervous about inventories they're nervous about what kind of power consumption is going to be.
I think what you're seeing and particularly is, they're pushing out a lot of buying and what we're going to see I think in 2018, is a lot of inter-year buying probably more than we've seen in the past.
John Eaves
Yes I think Mike we've alluded that in previous call. I think it's kind of the new norms as we go into the new calendar year there's going to be a lot more volume bought within that year, we kind of right-sized our operations to make sure that we can manage to that, we think we're very comfortable with that, we've got 50 million tons it's all right now in the PRB, we think it's a comfortable position for us as we look to 2018, so I think it's just kind of the new environment we're in and something that we think we can manage well.
Michael Dudas
If you look out to where your 2019 and 2020 business is, are you surprised how low or high contracted you're currently or would you just [indiscernible] that's been concerns with your customer base?
Paul Lang
I think we're actually a little bit ahead of last year for the three months outside the two windows we talk about, we placed about 30 million tons of sales for the next couple of years.
John Eaves
And Mike if we look at where we are Paul talked about it earlier, we got Coal Creek pretty much committed for 2018, so everything that we've got blacked under, which for us is approaching 9,000 BTU coal, so we feel like there's going to be major purchases made during 2018, we'll be play on most of those opportunities.
Michael Dudas
That really makes sense. Thanks gentlemen.
Operator
We'll go next John Bridges of JP Morgan.
John Bridges
Just probably on the flexibility question, I was just wondering how you manage to find the extra coal this quarter. How did you manage the different mines to keep the coal flowing?
Paul Lang
I think the team did an outstanding job. Really got to call out the guys at West Elk and Coal-Mac, but you got to remember West Elk in particularly running that mine, we started off the year thinking the sales are going to be 3-6.
That mine has been able to run as high as 7 million tons. Coal-Mac was similarly situation.
John we just come to conclusion that we need to get better running our mines up and down and just not focus on running them at full blast.
John Eaves
John I think it's a perfect example, we talk a lot about having a balanced portfolio and certainly this played well during the quarter, we had two of our largest Met mines that had challenging geology, at the same time we offset with them other Met mines as well as West Elk, Coal-Mac and our PRB operations and that's why we really like our portfolio the way it sits today.
John Bridges
Just a bit of a book keeping question on Illinois because we see that the Viper numbers, but just looking at the S&L breakdown it shows production from Blackhawk, but also Hawkeye, Prairie Eagle. How does all that fits into your reporting?
John Drexler
John that's all recorded as an equity investment, our investment in Knight Hawk.
John Bridges
I'm sorry, so it's [indiscernible]. Okay.
John Drexler
Yes that's all rolling through the other income and expense line item.
Paul Lang
Viper, West Elk and Coal-Mac or any thermal.
John Eaves
That's correct.
John Bridges
Right, I know where the Viper goes. I was just wondering about all these other mines.
Okay. That's helpful.
That's great and many thanks and best of luck for the rest of year and contracting for next year.
Operator
We'll go next to David Lipschitz of Macquarie.
David Lipschitz
Just a quick [technical difficulty] build into the six to six [indiscernible] does that include PCI that you already sold this year.
John Eaves
You broke up there. Can you repeat that question?
David Lipschitz
Sorry for the coking coal guided for 2017 does that include the PCI shipments you've already shipped this year. So the 0.5, 100,000 tons of PCI is that in 6.6 to 6.8.
Paul Lang
David the PCI was always reported separately and since we sold Lone Mountain, we're out of the PCI business.
David Lipschitz
No, no I understand that. But when you gave the guidance.
John Eaves
There's a separate line if you look at the chart. It's met coal, PCI and other thermal.
Paul Lang
Yes, there is no met volume in that, excuse me [indiscernible].
David Lipschitz
When you guide to 6.6 to 6.8 historically I think that was in last quarter I think, so is that just non-PCI 6.6 to 6.8, so if I just do a run rate from your first three quarters you're going to do almost 2 million tons in the fourth quarter, is that correct?
Paul Lang
That's correct.
David Lipschitz
Okay, thank you.
Operator
We'll take our final question from Wayne Cooperman of Cobalt Capital.
Wayne Cooperman
Just clarification on the share count, can you - what was the ending quarter of share count? What would you estimate that the diluted count will be for Q4, 2018 kind of not?
And I realized you bought a lot of stock in the quarter and probably it was back end waited, I just kind of want to get a real share count.
John Drexler
Yes, so Wayne, we bought as we indicated 2.9 million shares so take that off the 25 million shares, so 22.1 million shares whereas the ending of the quarter share count. We were not going to indicate what our activity will be moving forward, but that becomes the starting point to.
Wayne Cooperman
And how much should I add in for options and stuff just on a fully diluted basis or not in fully diluted?
John Drexler
Yes, if you look at the face of the income statement it's about 400,000, 500,000 shares that is the difference in the current quarter between our basic and diluted share count.
Wayne Cooperman
Just assuming nothing else, you were probably report $22.5 million fully diluted shares for Q4 is that pretty close.
John Drexler
As I would assume, that there would be no additional share repurchases in the fourth quarter that is correct.
Wayne Cooperman
Yes that's what I was trying to get at. Okay, great.
I mean you might buy more hopefully but at least that I got that.
John Drexler
We indicated that we're confident in our ability to execute and believe that participating in the capital return program via the share repurchase program is a good way for us to go.
Wayne Cooperman
Right, so I mean buying back stock at a double-digit free cash flow multiple is a pretty good use of cash.
John Eaves
We believe it so it well.
John Drexler
We [indiscernible] great Wayne.
Wayne Cooperman
Thanks again.
Operator
At this time I would like to turn the call back over to John Eaves for any additional or closing comment.
John Eaves
Thank you. I want to appreciate everybody's interest in Arch Coal.
We look forward to finishing 2017 strongly and continuing to create shareholder value in 2018, so we look forward to updating you on fourth quarter results in the first two weeks for February. Thank you.
Operator
That does conclude our conference for today. We thank you for your participation.