Arch Resources - Q3 2024

Executive Summary

• Q3 2024 was operationally challenged: Arch posted revenue of $617.9M, an adjusted EBITDA of $44.2M, and a net loss of $6.2M (-$0.34 diluted EPS), driven by a three-week Curtis Bay shiploader outage (~200K tons impact) and throttled longwalls during geological transitions.
• The company discontinued formal guidance due to the pending CONSOL Energy all-stock merger, which progressed materially (HSR waiting period expired; all necessary international approvals obtained); closing targeted for Q1 2025 with $110–$140M annual cost synergies.
• Thermal segment returned to profitability amid PRB cost alignment and West Elk development; Arch ended Q3 with $255.9M cash and short‑term investments and net cash of $127.7M; fixed dividend $0.25/share payable Nov 26.
• Management expects a “step-change” in coking coal execution starting mid‑Q4 and through 2025 as Leer/Leer South transition into more advantageous geology; however, Q4 shipments/earnings still tempered by extended longwall moves and market softness.

What Went Well and What Went Wrong

What Went Well

• Merger progress and strategic positioning: HSR waiting period expiry and international approvals secure; management emphasized integration readiness and identified $110–$140M annual cost synergies (logistics, blending, procurement, corporate streamlining).
  • Quote: “We remain focused on ensuring a speedy, efficient, and successful integration… unlocks the significant synergistic value of the combination.”
• Thermal segment profitability improved via PRB cost cuts and better stripping/sales alignment; West Elk operated well despite legacy contract headwinds and continued BC-seam development.
• Balance sheet resilience and capital return continuity: cash/short‑term investments $255.9M, net cash $127.7M; declared $0.25 fixed dividend; ongoing debt reduction ($5.1M).

What Went Wrong

• Logistics outage constrained shipments: Curtis Bay shiploader outage reduced coking coal shipments by ~200K tons; Q3 shipments 2.1M tons; met longwalls throttled back during reserve transitions, elevating unit costs.
• Profitability compression: Adjusted EBITDA fell to $44.2M from $126.3M YoY; diluted EPS swung to -$0.34 vs $3.91 YoY; merger ($7.0M) and severance costs ($6.6M) weighed on GAAP results.
• Guidance visibility curtailed: formal guidance discontinued amid merger—reduces near-term estimate anchors; Q4 volumes remain cautious due to extended longwall moves and soft pricing.

Transcript

Operator (participant)

Welcome to the Arch Resources Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Deck Slone, Senior Vice President of Strategy and Public Policy. Please go ahead.

Deck Slone (VP of Strategy and Public Policy)

Good morning from St. Louis, and thanks 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 investor section of our website at archrsc.com. Joining me on this morning's call will be Paul Lang, our CEO. After Paul's formal remarks, we'll be happy to take questions. With that, I'll now turn the call over to Paul. Paul?

Paul Lang (CEO)

Thanks, Matthew. Good morning, everyone. We appreciate your interest in Arch and are glad you could join us on the call this morning. The third quarter marked a period of significant transition and change for Arch. Since starting Q3, we have seen the position of the company for long-term value creation and growth in two fundamental ways. First, through the announcement of our transformational merger with CONSOL, and second, through the near completion of a multi-quarter transition in a more favorable geology of both of our metallurgical longwall mines. We expect the culmination of these two processes in Q1 2025 for the merger and mid-November of this year for the operational transitions to both draw a tremendous value for our shareholders going forward.

During Q3, the company also continued to make strong progress in the development of the favorable B seam reserves in our West Elk Mine, where we produce a high-rank thermal coal focused on the seaborne market, managed through a three-week outage of the shiploader at the Curtis Bay Coal Terminal that reduced our coking coal shipments by approximately 200,000 tons, and declared a $0.25 per share fixed dividend for a total payment of $4.6 million payable on November 26th. While I plan to devote a large portion of my prepared remarks to the pending merger, given the transformative nature of the deal, let me start with some color on our Q3 results as well as our views on the current state of the global coal markets. As you know, we spent much of 2024 transitioning through difficult reserve areas at Leer and Leer South.

During Q3, both of the metallurgical segments' longwalls were throttled back while development work was completed in the more favorable reserve areas, which depressed production volumes and led to slightly higher normal operating costs. We expect both longwalls to start back up within the next several days after extended moves that were needed to complete this work. These extended moves will in turn temper the results in the fourth quarter, but we still expect a positive step change in execution for these operations after that and continuing well into 2025. Turning to the thermal assets, the segment saw a significant turnaround during Q3. Here, the results benefited from an improved performance of the legacy thermal basin operations, where cross-cutting measures and alignment between stripping activities and sales volumes contributed to stronger results.

As for West Elk, the mine operated well, although its results were again dampened by lower realizations related to legacy contracts, the vast majority of which will expire at the end of this year. Also, as noted before, we're still seeing higher costs at the mine associated with additional continuous miner work required for the development of the B seam reserves. Like the metallurgical segment, we're anticipating a significant step up in the thermal segment's performance in the coming year. At West Elk, we expect to benefit from the roll-off of low-price contracts previously noted. In addition to this, we expect a further strengthening of our operating results at the mine with the completion of the development work in the B seam and the transition into those thicker and lower-cost reserves in mid-2025.

In the Powder River Basin, we expect the improved performance stemming from our recent efforts to right-size the operation to also continue into the new year. As for global coking coal markets, we continue to believe that supply and demand are closer to balance than current pricing seems to suggest. I say that for several reasons. Our global customers continue to want their committed volumes on a timely basis, and we've even been asked to accelerate shipments in select instances. Second, global hot metal production, excluding China, remains close to flat year-to-date. Third, global coking coal supply remains constrained, as evidenced by the flat production levels in the high-quality supply basin. Fourth, China's seaborne imports of coking coal are up nearly 30% year-to-date, with most of that growth in supply coming from high-quality regions.

And finally, we're starting to see the closure of smaller coking coal operations as pricing has started to impact marginal mines. In summary, intermediate and long-term coking coal market fundamentals remain constructive in our view. We believe that even a modest improvement in economic activity in key steel-producing regions has the potential to lift coking coal markets quickly. Meanwhile, the high-ranked seaborne thermal market continues to appear tight, benefiting from many of the same dynamics, such as years of underinvestment in new and replacement supply that underpins the coking coal story. With that, I'll shift my remaining marks to our merger with CONSOL. First, I'm pleased to report that we're making excellent progress in bringing the transaction to completion. In recent weeks, we've seen the expiration of the Hart-Scott-Rodino waiting period while also securing all the needed international antitrust approvals. Clearly, these were significant steps.

It's also important to note that since the announcement of the merger, the teams have been driving forward with efforts to deliver an efficient integration process following the completion of the merger that should, in turn, unlock significant synergistic value in the combination. Basically, we plan to hit the ground running following close. The next step in the merger process is stockholder votes for both companies. In preparation for this, we're currently working to finalize the Form S-4 document. The closure of the merger remains subject to approval by both stockholders of both companies and the satisfaction of the remaining customary closing conditions. We expect to complete the merger in the third quarter of 2025 and then to move full speed into the integration.

To reiterate many of the projected benefits of this tremendous merger, we expect combinational joining best-in-sector operating platforms anchored by world-class, high-quality, low-cost, and long-life longwall mines. Create a broad, diverse portfolio of coal qualities and blends capable of serving multiple growth markets and geographies. Expanding North American logistics and export capabilities, including ownership in two East Coast terminals and long-standing relationships with West Coast and Gulf Coast ports. Create a visible revenue stream with meaningful upside opportunities, balancing CONSOL's seaborne industrial business with Arch's exposure to higher-value metallurgical coals and associated demand dynamics. Enable robust Adjusted EBITDA and Free Cash Flow generation. Unlock additional value creation from $110-$140 million of annual cost savings and synergies, and create the potential for robust capital returns and investment in innovation and growth, underpinned by industry-leading cash generation and a strong balance sheet.

Once the transaction closes, we'll turn our full attention to realize the potential of the combined company. With a strong focus on capturing the significant quantifiable synergies we've identified in the areas of logistics, blending, marketing, procurement, and streamlining of the corporate structure, as well as aggressively pursuing the harder-to-quantify but equally compelling opportunities in areas such as sharing best practices across an extensive longwall fleet. I'm going to say again how enthusiastic we are about the excellent progress the two companies are making to bring the merger to a successful close and the way in which the Arch operations are aligning themselves for a strong 2025. While we're confident that the pending merger will create a global industry leader, well-equipped to capitalize on promising market dynamics in both of its core lines of business, global metallurgical and high-rank seaborne thermal coal.

With that, we'd be happy to take your questions, operator.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your headset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster, and our first question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes (Analyst)

Thank you very much, operator. Good morning, everyone. Happy Election Day. Paul, my first question is on contracts for 2025. And apologies if I missed it, but could you speak to domestic or North American met coal contracts for next year, tonnage and price? And then on the thermal coal side, would you be able to provide an update as it relates to the PRB and West Elk and pricing expectations for those operations as well? Thank you very much.

Paul Lang (CEO)

I think I'll repeat the same thing I probably said the last five years, which is we really appreciate the North American business. There's a lot of value to it as far as logistics and that, but we've been quite willing to walk away from it if the pricing is too low compared to what we think the international markets will be. I think what you're going to see in 2025 is that very thing. I think if I think back six years ago, we did about 50% of our coking coal business in North America. If I look at 2025, I think that number could be down much lower. And right now, we have committed about 500,000 tons, and we're just under $150 on that price. So if that's where we end up, that's where we end up. I'm fine with it, Lucas.

Matthew Giljum (CFO)

Lucas, I just add one final point to that. That includes about 20% Mountain Laurel, so about 20% High-Vol B, which weighs on that a little bit. So given that fact, we thought that that $150 price was a fair price given today's current soft market environment for that small amount of tonnage.

Paul Lang (CEO)

Yeah, we'll do the PRB, Lucas. We haven't given a lot of detail, but we're still plus $15 on our average price, and we call it in the low 40s or 40 committed right now.

Matthew Giljum (CFO)

We've been able to maintain that, Lucas, at that level. Right now, that market is pretty soft, but because of the way we've managed deferrals with customers and been willing to sort of blend and extend, we've been able to keep that pricing at that higher level for 2025 and beyond. So really managing the book carefully despite the fact that right now the published prices are lower. Then when you look at West Elk, look, I think we've done a really nice job there as the existing legacy contracts that are scheduled to roll off start to come due. So we've got legacy contracts in the industrial space at around $40 on average that roll off at the end of this year, and those are getting replaced with prices that are as much as $30 higher.

Now, we haven't committed all the volume yet, but so far that's where it's shaking out. That's a scarce product. We're able to capture really good value, so that's that first step up we would expect to see in terms of West Elk's contribution in 2025 is the roll-off of the legacy contracts and then sort of these newer commitments kicking in, and then mid-year 2025, again, would reiterate the fact that we also then see costs step down as development work on the B seam and as well as our transition to thicker coal in the B seam and higher quality coal, so an additional step up in mid-2025 related to the cost side if you think about it from a margin perspective, so enthusiastic about how things are shaping up for West Elk for next year.

Lucas Pipes (Analyst)

I appreciate all the detail. Question on the High-Vol A markets. A few of your peers noted that kind of the High-Vol markets are oversupplied. What's your take on that? Any ability to quantify the oversupply if you agree with that take? And for a product like Leer in today's market environment, what are good netbacks to kind of think about? Thank you very much for your color.

Matthew Giljum (CFO)

Yeah, Lucas is back. And what I would say about the High-Vol A market is obviously right now it's generally a little soft out there overall. Look, I think the High-Vol A market is not different than the market for other products. As Paul said, at this moment, the market seems fairly finely calibrated. Now, maybe it's a little bit oversupplied and a little soft, but it doesn't seem like we're far from balance. And so it's not going to take much, I think, to tip things into sort of a more virtuous sort of segment of the cycle. So if you think about, as Paul indicated, look, hot metal production globally for the world, excluding China, relatively flat. You've got aggregate supply from Australia, the U.S., and Canada relatively flat right now, so no change on that front. Chinese steel exports are up, so that's a negative.

On the flip side, Chinese seaborne coking coal imports are up as well. So again, relatively finely calibrated here. We continue to see significant appetite for all our products in the marketplace. There's not urgency in terms of buying. It's not like we're seeing pricing being lifted by that, but Asian buyers are very focused on finding where the supply is going to come from for next year and very interested in our products. We've had really good uptake for all of our products in the Asian market. And I would say for High-Vol A in particular, and that's because, look, we're providing that Leer brand is providing both a very high CSR quality, so a CSR of around 70, but also all those plastic properties that make it such a good blend stock. So the high fluidity, the wide temperature range, the strong Arnu.

All those things that also mean that when you put it into a blend, the result is more homogeneous coke at the back end of the coke oven. I would say this. Look, the Asian buyers buy our High-Vol A product for lots of reasons. It's not necessarily just the fluidity. It's also for the high CSR. We couldn't be more happy in terms of the uptake there. We continue to build new customers in places like Malaysia. Indonesian demand continues to climb for the merchant coke production there. The big Chinese buyers are very eager to increase the amount of Leer volume that they're able to access. We can only talk about so much because we only have so much volume, but we're pleased with that.

We think the High-Vol A dynamics are really, again, not dissimilar to the other products, but for our Leer product in particular, we think there's a really strong enthusiasm out there.

Paul Lang (CEO)

There's two other small points I think we should make, and that is one of my best indications, I think, of the market is if customers are pushing back on volume. As I said in my prepared remarks, we're not seeing any of that. So we're still seeing what I would call normal demand. And I was also surprised by the fact that we had some customers trying to accelerate shipments. I think the other point I'd like to make is, as I noted in my prepared remarks, we had to suffer through about 200,000 tons of lost shipments because of the shiploader incident at Curtis Bay. As I look at it, we ended up the quarter with about 500,000 tons of inventory. And I just don't feel a lot of necessary means to just go out and push that coal out into the market right now either.

Look, I think the market is fine where it's at. I think another quarter or two of being flat like this should help things in general on the supply-demand balance. And I think we're going to be patient heading into the new year.

Lucas Pipes (Analyst)

Thank you for all the color. I'll try a quick one, and sorry if I missed it. Is there a date for the shareholder vote?

Paul Lang (CEO)

Not yet.

Lucas Pipes (Analyst)

All right. Well, thank you very much for all the color. Best of luck, and yeah, look forward to the merger. Thank you.

Paul Lang (CEO)

Thank you.

Deck Slone (VP of Strategy and Public Policy)

Thank you.

Operator (participant)

Our next question comes from Nathan Martin with The Benchmark Company. Please go ahead.

Nathan Martin (Analyst)

Thanks, operator. Good morning, guys.

Deck Slone (VP of Strategy and Public Policy)

Morning, David.

Nathan Martin (Analyst)

Maybe just to follow up on the second part of one of Lucas's questions regarding a netback deck, I don't know if you could give us kind of an idea of what that looks like right now. Again, it seems like some of the price realizations you and your peers are seeing are maybe reflecting higher than normal discounts, so that might be helpful.

Deck Slone (VP of Strategy and Public Policy)

Yeah, Nathan, I would say that, look, I understand how you get there. When you look at the average price of HVA during Q3, it looks a little light from a netback perspective. But I would say, look, there are a couple of reasons for that. The first is that during Q2, we shipped a fair amount of volume, particularly in June, that ended up getting priced in Q3 in a declining market environment. So even though you look at the average realization in Q3 as being somewhat higher, some of the provisional pricing that we had committed to in Q2 ended up coming in lower. So that did weigh a little bit on those netbacks, but also point to the convergence of premium low-volume HVA pricing. As you know, as we ship tons into Asia, there is a transportation differential.

And so in recent quarters, that stronger pricing for premium low-volume had really served to counterbalance that transportation differential for those tons that were committed based on PRB prices. So both those things weighed somewhat on our average netback. I would say this. The good news is that all that will right itself over time. But the good news is we're not having to discount. The good news is, as discussed, there's really good appetite out there for our products. There are lots of different structures that we use without a doubt. But in terms of going out there and having to discount our products just to move them, even in this soft market environment, we're simply not having to go there, which I think really does bode well for the future and further underscores the great success we're having in getting these tons placed in Asia.

Nathan Martin (Analyst)

Thanks for that, Deck. Maybe kind of shifting over to the fourth quarter. I mean, I appreciate you guys don't want to give updated full-year guidance due to the merger. But given some of the challenges in the third quarter, obviously the shiploader outage, you called out, lost about 200,000 tons of shipments there. Is it reasonable to assume that Metcoal shipments could increase sequentially in the fourth quarter? Or do you think other headwinds such as the extended long-haul moves you guys called out, and as well as the weaker markets we're talking about, might make that not the case?

Paul Lang (CEO)

I think the way to look at Q4 is we're coming through what I would call one of the roughest couple of months that I've had in a long time. It was a difficult period for lots of reasons. And the good news is that we set ourselves up very well. Both Leer and Leer South have come through some very difficult areas. And the Leer South longwall is expected to start up later this week in District 1, excuse me, in District 2. And we still believe that that panel looks very good and have a lot of optimism. The Leer also had a stretch here in the last couple of weeks where we had an extended longwall move due to some of the conditions we were encountering. Look, I've got huge faith in the team at Leer, and they've delivered constantly year after year.

If you look back at the history of Leer the last 13, 14 years, about every couple of years, we'll hit a bad quarter. And that's pretty well what we did in Q3. But as I look at Q4, some of those residual pains carried on into October. But as I said in my prepared remarks, I am expecting a step up in performance in the back half, starting really later this week, early next week. And the way I would look at Q4 just for simplicity and just kind of in general is I would start with kind of a very similar quarter to what we had in Q3 volume-wise. And part of that is the market doesn't respond. We're just not going to push a lot of coal into it.

Second, I think we can come up better than I anticipate, but I want to be relatively cautious in what we're saying on startup in both panels. I think just in general, if you look at the rest, we didn't give explicit guidance on the rest of the quarter. I think you can infer from the silence on everything else that we're going to be pretty much as we've said before.

Nathan Martin (Analyst)

Thanks for that, Paul. And then maybe just one final one. You guys gave a pretty thorough discussion and prepared remarks about your thermal coal business. I guess just how do you think about the role of those thermal assets kind of heading into the closing of the proposed merger with CONSOL?

Paul Lang (CEO)

I'll start with the easiest one, which is West Elk. West Elk fits clearly in our strategy of pursuing a high-quality seaborne thermal business. West Elk is going to be a big player in that business for the next 10 years plus. So clearly, West Elk has a place. You move on to PRB, it's a tougher discussion. I've been very open the last couple of years about whether it fits longer-term in the portfolio and what we can do. And look, we've made no bones about talking to people about our alternatives with it. And we will continue to do so. But at the end of the day, we've set aside the reclamation fund, and we have a view of what the value of that money is. If someone's willing to give that to us upfront, we'll listen to them. But it has to be a clean exit.

By that, I mean we would get out of it with no bonds, no permits, no leases, a truly clean exit. And if somebody could do that with the value brought forward, we'd definitely listen to them.

Deck Slone (VP of Strategy and Public Policy)

Maybe I'd just add a little bit more color around West Elk and what a good fit that is. Look, as we move into the PRB in particular, West Elk will move up again in terms of heat content. And already, it's a high-quality coal. But as we move into the PRB, it'll be approaching a 12,000 BTU product, very low sulfur. When you think about West Elk and PAMC, you're talking about two of the highest-ranked coals in the seaborne marketplace. So that fit couldn't be better. We're enthusiastic, quite frankly. West Elk's been our only asset that is focused on the seaborne thermal market. The fact is that I think there'll be a greater understanding and appreciation of it being truly a core asset for us going forward and an exceptionally strong fit with the portfolio.

Nathan Martin (Analyst)

All right. Very helpful, gentlemen. Appreciate the time. Good luck here in the fourth quarter and with getting the merger completed.

Deck Slone (VP of Strategy and Public Policy)

Thank you, Dave. Thanks, man.

Operator (participant)

The next question comes from Katja Jancic with BMO Capital Markets. Please go ahead.

Katja Jancic (Analyst)

Hi. Thank you for taking my questions. I might have missed this, but you mentioned Leer was going through a bit of a challenging geology. Is that now behind? Or when should we expect it back to, let's say, more normal operations?

Paul Lang (CEO)

Hi, Katja. This is Paul. It really started in, what I'd say, kind of late September and through October. And it was a pretty rough period in both mines. The good news is both longwalls are through it. I'm expecting to start up in the Leer South longwall later this week. And the Leer longwall will be a couple of days behind that. And by all indications, the panels that we're going into are in good. And we're expecting production to pick back up kind of to what our expectations are.

Katja Jancic (Analyst)

What would be a normalized production level at Leer? Can you remind us?

Paul Lang (CEO)

Yeah. Roughly, we've been running basically about a million tons a quarter, both coking coal and met coal. And we've been slightly better than that. I wouldn't be surprised to see that at Leer going into the fourth quarter at a normalized rate after the fourth quarter. Leer South is still continuing to ramp up. I think it's got a chance of coming up to its potential. But at the end of our last panel in District 1, we saw some really good rates and a lot of optimism at that mine. I still think that operation's got some ability to grow and continue to increase production.

Deck Slone (VP of Strategy and Public Policy)

Everything we're seeing, Katja, in District 2 at Leer South is reflective of our expectations. It is nearly a foot thicker in terms of the coal seam there relative to where we've been in District 1. So a very substantial improvement there. And that should translate into higher yields, which should also translate into lower costs. And then Leer's going to be in very thick coal in 2025. So both those developments really bode well for a strong execution in 2025. As you know, we've been talking a lot about transitioning from District 1 to District 2 at Leer South. And we've put a lot of focus on that. But we feel really good about what we're seeing. And as Paul indicated, look, development was a little slower in getting District 2 ready.

So, the longwall has been down for the first six weeks or so of this quarter. But as we look at development on the next panel in District 2, we expect that to proceed and be ready to roll as we go through the first panel in District 2. So, feeling really quite positive about what we're seeing.

Katja Jancic (Analyst)

So is it still fair to assume that now that Leer South entered District 2, that we should be seeing coal production closer to four million tons per year plus?

Deck Slone (VP of Strategy and Public Policy)

Katja, we've avoided putting numbers out there and don't feel like that is appropriate here. Obviously, we're going through our own budgeting process and fully expect to integrate our budgeting process with CONSOL before too long. So we're not going to provide explicit guidance. But clearly, what we're saying is that both Leer and Leer South, we expect productivities to be higher. We expect costs to be lower. That clearly should translate into a better performance for the metallurgical portfolio overall in 2025.

Katja Jancic (Analyst)

Okay. Thank you.

Paul Lang (CEO)

Thank you, Katja.

Operator (participant)

Next question comes from Michael Dudas with Vertical Research Partners. Please go ahead. Hello, Michael. You're on the line. Oh, go ahead, please.

Michael Dudas (Analyst)

Oh, yeah. Go ahead. No, thank you. Good morning, Deck and Paul.

Paul Lang (CEO)

Hey, Mike.

Michael Dudas (Analyst)

Paul, maybe just share some thoughts on the stress on the supply side in Appalachia, given where pricing is for coking coal product. And if we continue to see some softness, will it be noticeable? And are you seeing that from whether it's the labor side or some vendors, etc.? Maybe a sense of how that's going to play out as we move into 2025.

Paul Lang (CEO)

Hey, Mike, apologies. We're struggling to hear. We got bits and pieces, but can you repeat?

Michael Dudas (Analyst)

Can you hear me now?

Paul Lang (CEO)

Oh, yeah. Much better.

Michael Dudas (Analyst)

Okay. I'm sorry. Thank you very much. Just Paul, just the supply side in Appalachia, given the weak market next couple of quarters, I would think that could see some more meaningful kind of supply pullback. And are you seeing that from vendors or labor flows or what the talk is in the marketplace?

Paul Lang (CEO)

I think you hit on what I would call some of the main leading indicators, which are people are all of a sudden not an issue. We have been in as good a shape as we've been in a long time. And the labor pressure, by that, I mean just finding the people to work the mines as well as pressure on wages has really diminished. And I think that's the first main indicator. I think the second one is that you're also starting to see the availability that's better on parts and supplies.

We're starting to hear some of the lead times on equipment dropping. I think all those indicators tell you that there is a slowdown coming. As I said in my remarks, we're seeing particularly some of the smaller mines drop offline as the cost pressure is starting to hit them. Look, these periods of weak markets aren't any fun, but in the end, it kind of cleans up the production side. I think it's good for everybody.

Deck Slone (VP of Strategy and Public Policy)

And Mike, Paul just talked about Appalachia. You asked about it. And that's probably where we're going to see the leading indication. The reality is these prices don't work anywhere, is our view. And that's not to say first quartile producers can't continue to generate cash. But you've got a lot of players out there that are struggling. And I'd say that even in Australia, when you add back things like sustaining capital, you're looking at prices that are well below a break-even, even with the big horses in Australia, particularly post the changes in the royalty structures there and the other pressures we've seen. So we do believe that the supply side is going to come under pressure. It's why we're feeling positively about 2025 and where the market might trend.

A little demand uptick would certainly be positive and I think could have a significant influence on coking coal markets and prices. But by the same token, this will fix itself as well if these prices stay down where they are for much longer.

Paul Lang (CEO)

I'll tell you, last comment I'm making, I don't want to try and make it sound any better than it was. Q3 was a tough quarter. But as bad as the quarter was at $93 costs, that's still probably $20 below the bottom of the midpoint. I mean, there's a lot of mines in the U.S. that are out of the money with these prices.

Operator (participant)

Yeah. Yeah. Duly noted, Paul and Deck, and given your improvement in operations and maybe the improvement in the market, I guess the timing on the transaction could be quite helpful for everyone. Thanks. Thanks for your time, guys.

Deck Slone (VP of Strategy and Public Policy)

Thank you. Thank you, Mike.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Paul Lang for any closing remarks.

Paul Lang (CEO)

I want to thank you again for your interest in ours, not only today but also over many years. Upon the anticipated closure of the merger, we'll be turning a page in our long and successful history, but at the same time, starting an exciting new chapter with CONSOL Energy as Core Natural Resources. As we prepare for the transition, I want to thank the people who made this new beginning possible. Throughout the process, the Arch Board, the management team, our employees, the employees of CONSOL have worked tirelessly and selflessly to bring this value creation merger to fruition, believing that it is the right path forward to ensure the company's long-term success. It's truly been an admirable show of professionalism that the organization, its shareholders, and its other stakeholders are indebted for delivery. With that, I'll conclude the call.

I look forward to the possibility of reporting to the group in Q1 as part of the first Core Natural Resources earnings call. Stay safe and healthy, everyone.

Operator (participant)

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.