Arch Coal, Inc. (ARCH) Q1 2019 Earnings Call Transcript

Arch Coal, Inc. (ARCH 0.65%)
Q1 2019 Earnings Call
April 23, 2019 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Arch Coal first-quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Deck Slone, Arch's senior vice president for strategy and public policy. Please go ahead, sir.

Deck Slone -- Senior Vice President for Strategy and Public Policy

Good morning from St. Louis. Thank you for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.

On the call this morning, we have John Eaves, Arch's CEO; Paul Lang, Arch's president and COO; and John Drexler, our senior vice president and CFO. We will begin with some brief formal remarks. And thereafter, we'll be happy to take your questions. John?

John Eaves -- Chief Executive Officer

Thanks, Deck. Good morning, everyone. I'm pleased to report that Arch is off to an excellent start in 2019, with every intention of continuing that strong momentum as we progress through the year. During the quarter just ended, we made significant headway on each of our core objectives: delivering impressive levels of free cash from our high-performing asset base, returning robust levels of free cash to shareholders and getting a terrific start on the build out of Leer South.

Hitting on the highlights of Q1. We achieved record coking coal realizations of $133 per ton and record margins of nearly $51 per ton in the Metallurgical franchise. We returned $86 million to shareholders, exceeding by 10% the average amount returned on a quarterly basis during 2018 despite the expenditure of $18 million of growth capital at Leer South. We bought back nearly 900,000 shares of stock, bringing total buybacks to nearly one-third of our initial shares outstanding in just eight quarters time.

We announced the board's authorization of additional $300 million for buybacks, bringing the total authorization to date to $1.05 billion and leaving us with available capacity of $388 million. And we made very significant strides at Leer South where we completed initial slope work and even produced a modest amount of development coal. In short, these are exciting and eventful times at Arch, and we look forward to continuing to deliver on the company's great promise. Let me say that I'm particularly excited about the tremendous progress we've made in our capital return program in a period of just two years and the great potential we have to build on that success going forward.

Since launching our capital return program in May of 2017, we have returned a total of $726 million to shareholders through share buybacks and dividends. We view this systematic return of capital as highly impactful and highly value creating, and we further believe that it's sustainable over a wide range of market environments. On the buyback front, we have now repurchased more than 8.1 million shares, and in doing so, reduced our share count from 25 million to 16.9 million. We believe that buying back one-third of our shares outstanding in such a short span of time is an exceptional feat and expect the markets to take further note of our progress as we hit future milestones.

We're also pleased that the board is signaling its continued strong support for sustained progress in the capital return program with the authorization of an additional $300 million of buybacks. In short, we believe the program will continue to be an excellent vehicle for value creation well into the future. Now let's spend a few minutes on the coal market before I turn the call over to Paul Lang for further commentary on our operating performance. As you know, global coking coal market are proving to be exceptionally resilient, and we see good reason for sustained strength through the remainder of this year and into next.

As we pointed out many times in the past, investment in new mines and logistic capacity continues to lag in Australia, in the U.S. and every other supply basin of consequence. At the same time, steel demand and steel pricing are holding up nicely, which is translating into solid demand growth for seaborne coking coal. As a result, coking coal prices remain quite healthy, with prices for our primary High-Vol A coal hovering around $200 per metric ton FOB the vessel on the U.S.

East Coast. Moreover, we see good support in the market going forward. Global economic growth remains above 3% despite some recent weakening. Stimulus spending is supporting steel demand in China, U.S.

steel mills are operating at levels of 82% and Australian investment and output has yet to respond to the stronger market environment. Other market data suggest ongoing support as well. While thinly traded, global coking coal indices show Queensland prices for delivery in 2020 at $185 per metric ton and $175 per metric ton in 2021, both of these figures, it's interesting to note, are below the inflation-adjusted 9-year average of $190 per metric ton. Moreover, seaborne prices remain at a very significant discount to Chinese domestic prices, which should keep the Chinese actively engaged in the seaborne marketplace.

And Indian steel output remains on a steady upward trend. On the thermal side, domestic activity continues to recover after an extended period of weakness. Generator stockpile started the year with an estimated 60 days of supply and the recent rail challenges could result in a further correction. Moreover, buying activity for the Powder River Basin coal during the first quarter was the strongest we've seen in over five years.

We believe these conditions should support an ongoing focus on free cash generation against a very modest capital investment in our thermal portfolio. Looking ahead, we're enthusiastic about Arch's future prospects for growth and value creation. We believe the outlook is excellent for strong free cash generation for the balance of the year, which should enable us to drive forward on each of our major financial objectives: returning robust levels of cash to shareholders, sustaining our existing portfolio of world-class mines, constructing another powerful cash-generating asset at Leer South and maintaining our exceptional and rock-solid balance sheet. With that, I'll now turn the call over to Paul for additional color on the first-quarter results.

Paul?

Paul Lang -- President and Chief Operating Officer

Thanks, John, and good morning, everyone. As John noted, we are very pleased with our operating performance during the quarter. We achieved record realizations with our coking coal sales, delivered record margins in that segment, managed our metallurgical costs effectively even with two longwall moves and turned in a solid cost performance at our Powder River Basin operations despite rail issues. In my view, the ability to overcome external challenges as they arise is critical to long-term success in our business.

That's exactly what our people did in the first quarter, and I'm extremely proud of our team for once again displaying that hard winnability to deliver under a wide range of operating conditions. I'm also pleased to report that we're off to a great start in the development of Leer South. In a brief span of time, we've completed the initial slope work at the site and are now producing development tons, albeit at modest levels. While we're just getting started, I'm satisfied with the work to date and remain confident we'll be producing coal off the longwall before the end of 2021.

In addition to the work at Leer South, we're continuing to prove up additional longwall panels for the Leer mine within our 200 million ton Tygart reserve. At present, Leer's mine plan is expected to support longwall mining into the early 2030s when we -- and we expect that to be extended as we move forward with additional drilling, engineering and permitting. As a reminder, we will be progressing into the heart of the mine's reserves in 2020, at which point the average seam thickness of the operation will increase by roughly one foot. The higher mining height should drive both an increase in output and a reduction in costs of the operation.

I'm also encouraged that the marketing team -- encouraged with the progress the marketing team made during the quarter to build out our book of business. In the Metallurgical segment, we signed agreements to deliver almost 800,000 tons of coking coal during the balance of 2019, virtually all of which was committed at index based or prompt delivery fixed pricing. I might add that we continue to be very comfortable with the fixed volume, floating price agreement structure for our coking coal sales. Our customers prefer it, we've been well served by it, and we have the balance sheet to accommodate it.

With these recent transactions, we've committed nearly 95% of our 2019 coking coal volumes, assuming the midpoint of our guidance range. I would also note that our -- that interest in our Leer brand High-Vol A product continues to be particularly strong and in fact has outstripped the amount of volume we actually have available. I believe the fact that we're oversubscribed at Leer underscores the strategic value of adding three million incremental tons of High-Vol A coal to our portfolio through the development of Leer South. As noted in the release, the number of solicitations for Powder River Basin coal have been quite strong, stronger, in fact, than we've seen during any comparable period in the past five years.

We attribute that high level of interest to a number of factors. For one thing, the three-year utility stockpile correction appears to have finally brought inventories back to target levels. For another, low shipping volumes during the first quarter due to flooding in the Midwest have started to have an impact. During the first quarter, we moved aggressively to capitalize on this strength, committing an additional 10.2 million tons for 2019 delivery, increasing our committed thermal position by almost 95% for the year.

In addition, we committed approximately 3.5 million tons for delivery in the out-years with prices beginning at levels above our average 2019 realization. I would also note that we've continued this trend by locking up significant volume in April for the 2020 to 2023 period. Looking ahead, we expect higher volumes and lower costs in our Metallurgical segment during the second quarter, even though we again have moved schedule at both longwall mines that will temper those improvements. However, we still expect the back half of the year to be particularly strong.

In the Powder River Basin, we expect the ongoing flood-related rail disruptions to persist throughout much of the second quarter. As a result of this and the typical shoulder season impact on shipments, we anticipate volumes to be even lighter in Q2 than Q1, which is likely to pressure costs and lead to compressed margins in the coming quarter. As with the Metallurgical segment, however, we expect shipments to rebound significantly in the back half of the year. Overall, given our strong start to the year and continued positive outlook, we are reaffirming all sales, cost and capex guidance for full-year 2019.

Finally, I'd like to take a moment to highlight our excellent safety and environmental performance during the quarter, and more importantly, to thank the Arch team for their dedication in both of these critical areas. During the first quarter, our Leer operation was honored with top safety award for underground operations in the state of West Virginia, and our Coal-Mac mine won the same honor for surface mines. This is the second consecutive year that we've swept the state safety awards. At the same time, Arch won the top state environmental award for its reclamation work on the Vindex operation.

In closing, let me echo John's sentiments. These are exciting and eventful times at Arch. Our mines are running well, our products are in high demand, our capital return program is delivering excellent value to our shareholders and we're building a powerful foundation for future success and growth with Leer South. We're looking forward to continuing that positive momentum and to delivering on the company's great promise.

With that, I'll turn the call over to John Drexler. John?

John Drexler -- Senior Vice President and Chief Financial Officer

Thanks, Paul, and good morning, everyone. As John and Paul have indicated, we are out of the gates in a positive fashion after a strong finish in 2018. I plan to give you an update on our strong start in 2019 and the execution of our financial plan as well. First, a brief update on our capital return program and liquidity position.

During the quarter just ended, we used our strong cash flow and liquidity profile to buy back 872,000 shares or 3.5% of our initial shares outstanding for $78 million. Through March 31, we have spent a total of $662 million buying back 8.1 million shares or almost one-third of our shares outstanding in just eight quarters. That's a truly remarkable achievement and a testament to the cash and value-generating capability of the portfolio. And we were able to achieve that while making initial capital expenditures of $18 million at Leer South.

During the quarter, we also paid our normal recurring dividend of $7.8 million. The board also approved the next quarterly cash dividend payment of $0.45 per common share, which is scheduled to be paid on June 14 to stockholders of record at the close of business on May 31. As John indicated, between our repurchase program and recurring dividend, we have returned in excess of $725 million in eight quarters to our shareholders. Looking ahead, we will constantly evaluate which uses of cash provide the best risk-adjusted return over the longer term.

Having said that, we continue to view our stock as an excellent value. Given the recent approval of an increase in our share repurchase authorization to $1.05 billion and given our current capital resources and the expectation of strong free cash flows for the remainder of the year, we expect to continue to return cash to shareholders while simultaneously funding the build-out of our Leer South operation. As we look at our liquidity, we indicated on the last call that we were comfortable allowing our cash balance to drop below $400 million. We ended the quarter with $383 million.

And when combined with our borrowing capacity on our accounts receivable securitization facility and inventory asset-backed lending facility, we have $490 million of liquidity. As we look at our liquidity for the remainder of 2019, we would expect to have availability under our borrowing facilities in the range of $80 million to $120 million based on current market conditions. As we have stated, we like to maintain our liquidity in the range of $400 million to $500 million, with a substantial component of that being cash. And we are very comfortably positioned at the high end of that range.

One further item I'd like to report on regarding the exciting build-out at Leer South relates to development production in the lower Kittanning seam, the seam in which the longwall will ultimately operate. Under current accounting rules, we are required to recognize costs on the sales of those development tons at an average rate of what we expect to experience once the longwall is up and running. As a reminder, under previous accounting rules, the revenues associated with the development tons were recognized as a direct reduction of the capital deployed for the project. As you know, we are expecting cash cost for Leer South to be in the low $50 per ton.

Therefore, now that we have begun producing coal out of the seam, we will immediately recognize EBITDA associated with those tons sold. For 2019, we expect to sell between 125,000 and 175,000 tons in the last three quarters of the year. And in 2020, we expect that to ramp to in excess of 400,000 tons. Then in 2021, those volumes will more than double, particularly with the start-up of the longwall toward the end of the year.

And in 2022, of course, the contribution of Leer South becomes game changing. While it is hard to predict where market pricing will be in future years, using today's current market pricing for High-Vol A, it would imply $36 million of additional EBITDA in 2020 using 400,000 tons of sales and the more than doubling of that in 2021. Of course, the substantial earnings power of Leer South becomes even more evident once the longwall is up and operating at levels in excess of three million tons a year. In summary, we are pleased with our performance in the first quarter of 2019.

We will continue to focus on executing on our plan of consistently generating substantial cash out of each of our segments quarter-after-quarter. That strong cash-generating platform will allow us to fund our 2019 maintenance capital needs and the Leer South development project while still affording us the capability to drive forward rapidly and aggressively on our capital return program. With that, we are ready to take questions. Operator, I'll turn the call back over to you. 

Questions and Answers:

Operator

[Operator instructions] Thank you. Our first question will come from Mark Levin, Seaport Global.

Mark Levin -- Seaport Global Securities -- Analyst

Yes. Congratulations, gentlemen, on a great start to the year. A couple of -- just start with some modeling questions and then maybe a bigger picture one or two. As you think about Q2 versus Q1, I think, Paul, you alluded to the fact that met would be better with more volumes, lower cost, but PRB volumes might be a little bit worse from a volume and cost perspective.

So when you think about just kind of earnings or EBITDA Q2 versus Q1, how does all this -- or how do you expect this to all kind of net itself out?

Paul Lang -- President and Chief Operating Officer

Mark, first of all, appreciate the comments. Just without getting into direct EBITDA, let me just kind of give you a sense of the tons. So we did about 1.5 million tons in the met segment in Q1. I think we'll be about 10% higher than that.

So that will put us at about 1.6 million, 1.7 million. In the back half of the year, I think you'll see us banging around about 1.8 million per quarter last half of the year. PRB, it's a little bit of a moving target. I think Q2 will be slightly worse than Q1, but I don't think it's going to be much below that.

And in the other thermal segment, I think we should be slightly better because a lot of what happened in Q1 was just timing, particularly out of West Elk.

Mark Levin -- Seaport Global Securities -- Analyst

Got it. That's great. That's great color. And then in terms of -- just because this is written about a lot, maybe you guys can remind people about your exposure to the API-2 price.

Meaning, in 2018, how many millions of coal did you guys price off of API-2? I think you referenced in the press release that you locked in a bunch of tons in 2019 maybe before the price started to come down. And then what are your -- so maybe an '18 baseline and what you think 2019 might look like from a volume -- export steam API-2 volume-linked perspective.

Paul Lang -- President and Chief Operating Officer

Yes. Just kind of in general, on the hedge commentary, as prices moved higher earlier this year and late last year, we layered in financial hedges in 2019, primarily to protect the margins at West Elk and Coal-Mac on export sales. We added to those hedges through early this year. And currently, we have about 1 million tons hedged for 2019 and about 200,000 tons hedged for 2020.

Just kind of round numbers, we estimate those netbacks kind of in West Elk about $30 to $32. And I think you saw that what happened in Q1 with -- as global prices fell dramatically, both on Newcastle and ARA, which is why we came up with that $13 million of mark-to-market income. As you look at the other part of your question on volumes, last year, we shipped about 11 million or 12 million tons export. We're thinking this year that it will be down about 1 million ton, and most of that is going to come out of the thermal group.

John Eaves -- Chief Executive Officer

And Paul, most of our Coal-Mac have been committed for the year, right? We got that priced.

Paul Lang -- President and Chief Operating Officer

Yes. We're virtually completely committed out of Coal-Mac, and we have just cleanup tons at West Elk.

Mark Levin -- Seaport Global Securities -- Analyst

Got it. No, that's very helpful. And then just thinking 2020-ish, I know it's a ways out, and your thermal coal position, how much -- I think you referenced that you guys put to bed some tons in the quarter. I can't remember the direct number off the top of my head, but how contracted are you for 2020 at this point from a thermal perspective?

Paul Lang -- President and Chief Operating Officer

We haven't given those numbers out yet. But I will tell you that just we started off Q2 pretty strong. We put to bed about 16 million tons of PRB coal for the 2020 to '23 period.

Mark Levin -- Seaport Global Securities -- Analyst

Got it. No, that's great color. And then just one last question on the met market in general. How do you guys feel -- I mean what are you seeing in the market? I know that the Chinese have implemented some custom delays, maybe some import restrictions.

I think on the Contura call, they were referencing maybe some price aggressiveness down in Brazil. Obviously, net prices are still -- at least spot met prices are still well above $200. But I'm just curious how you see the market right now, tight, softer than what it was before, tighter than what it was? What's sort of maybe your general thoughts on the met market today?

Paul Lang -- President and Chief Operating Officer

I'll start off and maybe let John finish it up. A couple of weeks ago, I had the opportunity to hit just about all of our thermal customers, both U.S. and Europe and Asia. Good conversations with all of them.

I think we're expecting comparable year to slightly up as far as demand. Look, they understand the pricing and the mechanisms, and there isn't anybody that's blinking at these numbers.

John Eaves -- Chief Executive Officer

Mark, this is John. I mean, I continue to be cautiously encouraged by what we see in the met market. I mean as Paul indicated in his opening comments, I mean we're seeing a lot more demand for our High-Vol A than we have coal. So certainly feel good about the Leer South project coming on.

As I talked about last quarter, I mean when we looked at bringing on Leer South, I mean we did a pretty deep dive on the world markets. And conservatively, that 1.5% demand growth for met and then depletion rate of 2%, we think there's at least 75 million tons that are needed over the next five to six years. And we just don't see those investments being made. If you look in North America, even with prices where they are today, there's no additional volumes coming on.

So we feel pretty good about our position now and going forward.

Mark Levin -- Seaport Global Securities -- Analyst

That's great color. Well, congrats again on a very strong start to the year.

John Eaves -- Chief Executive Officer

Thank you, Mark.

Operator

Thank you very much. [Operator instructions] Our next question will come from Dan Day, B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

This is actually Lucas Pipes calling from B. Riley. Congratulations on a great quarter. I wanted to follow up on kind of the cadence for met coal volumes over the next couple of years.

Obviously, this Leer South is starting up -- that it will be significant growth, but then -- and I think we discussed this a quarter ago, but I just wanted to hone in on that a little bit, but then Sentinel will be coming off. So can you walk us through those steps one more time? And then importantly, when Leer South is fully up and running, how many years of kind of nine million tons of met coal output will we have at that time? Thank you.

Paul Lang -- President and Chief Operating Officer

Yes. Lucas, let me take a shot at this. So in 2019, as you know, we're expecting a slight uptick in production at Leer, and that's purely coming from the increase in coal seam thickness. Beckley and Sentinel should hold their own while Mountain Laurel will drop a little bit.

But with all that, 2019, we're looking at about 200,000 ton pickup over 2018. 2020, we'll see a slight drop as Mountain Laurel transitions from a longwall mine to a CM mine. And in 2021, we should be starting to see the thicker coal and Beckley should be about the same. So depending on the exact date of longwall at Leer South and the final integration, it could be a toss up in 2021.

In 2022 is when Leer South really starts to hit its stride. Our coking coal volumes should average about 9 million tons. And of that, call it round number, 6.8 million to 7.2 million could be High-Vol A. Effectively, our product mix will change and about 75% of our production will be High-Vol A coal.

So on an incremental basis, if you're kind of running the numbers, we pick up about four million tons -- or we hit about four million tons in 2019 of High-Vol A, and we should hit seven million tons in 2022. So that's where the incremental three million tons come from.

Deck Slone -- Senior Vice President for Strategy and Public Policy

And then, Lucas, to build on that, as Paul said, and we expect that to continue at least at those levels -- this is Deck, at least at those levels through the early 2030s and as we indicated in the press release, we continue to prove up additional reserves at Leer as we do drilling, engineering, permitting. So we expect that even though it's early 2030, Leer is likely to add reserves beyond that. So indefinitely is probably the right way to think about that seven-plus million tons of High-Vol A.

Lucas Pipes -- B. Riley FBR -- Analyst

Thank you very much for all the color. Very helpful. When you say to the early 2030s, is there major capital spending associated with that? Or what sort of maintenance capital should we plug into our models for that sort of long-term production outlook?

Paul Lang -- President and Chief Operating Officer

Lucas, the mine plan that we're operating off of right now for Leer is basically just maintenance capex through 2030.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. Excellent. Thank you. And just last one, switching topics.

What's your outlook for the PRB at this time from a demand perspective, specifically stable? Declining? What do you think is a reasonable expectation from demand and then also your volumes as you look out over the next couple of years? Thank you.

Paul Lang -- President and Chief Operating Officer

I think we have what I'd call a sober view of the PRB. We think it's going to continue to decline somewhere around 1% to 3% per year. And within that, we think the higher-quality mines will tend to stay a little bit better than the 8,400 quality mines. But it's a great story as far as cash generation, but I just don't see any expansion or any growth possible out there.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. OK. Well, thank you very much for your perspective and all the details, and continued best of luck.

Paul Lang -- President and Chief Operating Officer

Thank you, Lucas.

Operator

Thank you. Our next question will come from Michael Dudas, Vertical Research.

Michael Dudas -- Vertical Research -- Analyst

Good morning, gentlement. Maybe for John Drexler. Maybe you could elaborate a little bit more on the West Virginia tax rebate that you mentioned in the press release. How that impacted how you're thinking about Leer South prior or how this adds to IRR and what type of medium, longer-term investments that could drive as you're planning out the additional Leer tons from the original Leer and the expansion that you might see with other panels in the Leer South?

John Drexler -- Senior Vice President and Chief Financial Officer

Michael,'s John Drexler. Thanks. I'll go ahead and kick this off and then others may have some comments as well. Look, we've been excited about the opportunity with Leer for some time.

We think given its cost structure in Leer South, its cost structure and quality that it's just -- it's a home run opportunity. And we kind of laid that out last quarter. And then with the recent legislation that was passed incenting additional opportunities, as we've indicated in the press release, the opportunity to recover some of that capital that we're spending is just outstanding. Mechanically, the way that the -- that it works, it's a reduction in severance tax.

And it will be recovered -- the capital will be recovered as Leer South, the asset in the longwall come up and started mining coal. So recoveries in future years, but it's a direct reduction essentially of the severance tax or the cost that Leer South will incur. As we've indicated, given our expectation in the range of $360 million to $390 million of capital to be spent, we think there's an opportunity, dependent on market conditions, to recover in excess of $100 million. So all of that, just an additional kicker on what we already thought was an outstanding opportunity as we move forward.

John Eaves -- Chief Executive Officer

And Michael, this is John. I mean as we look beyond Leer South and other projects, certainly, this is a great thing that the state of West Virginia has done to incent investments. So clearly, it will have us looking at how we make investments over the next five to 10 years.

Michael Dudas -- Vertical Research -- Analyst

No, that makes a lot of sense. And maybe just to remind us or just a thought on the cadence of Leer South capital spend without getting into general details, but like just percentages of the total spend in sort of this year and through to 2021 just as we kind of calibrate that dynamic relative to free cash and potential for other growth capital investments, if you have any that you'd like to share or certainly you're going buy -- going back relative to the investment into the company in the equity.

Paul Lang -- President and Chief Operating Officer

Yes. I think what I laid out last quarter was think of 2019, about $90 million. Then the balance of the investment pretty well evenly split between 2020 and 2021.

John Drexler -- Senior Vice President and Chief Financial Officer

And Michael, I'll weigh in here as well. Obviously and you alluded to it, there's very healthy free cash generation that we expect to generate from our portfolio. As we've indicated in the course of our comments and how we've also demonstrated in execution, a big component of that is focused in the capital return program. So we did up the program by an additional $300 million.

It gives us $388 million of capacity. I think we've indicated that, at least over the course of '19, we can fund initial capital at Leer South and continue the repurchase program and the capital return program. As we step into 2020 and '21, when those capital needs do step up, they're so much dependent on where markets will be, etc. So as we indicated on the last call, we'll watch that all very closely.

But this management team, our board, very focused on capital return. We expect that to continue. And as we indicated, we would even be willing to consider some modest levels of additional leverage to help fund Leer South, but all of that in the frame of it's an appropriate investment. It's all about generating value for our shareholders, and we'll make those decisions as we continue to evaluate the market and step through the development time period of Leer South.

Michael Dudas -- Vertical Research -- Analyst

I would think the market is starting to share in the confidence and enthusiasm of the board than you guys are relative to the opportunities here. Appreciate your time, gentlemen. Thank you.

John Drexler -- Senior Vice President and Chief Financial Officer

Thanks, Michael.

Paul Lang -- President and Chief Operating Officer

Thank you, Michael.

Operator

Thank you. [Operator instructions] Our next question will come from Wayne Cooperman, Cobalt Capital.

Wayne Cooperman -- Cobalt Capital -- Analyst

Hey, guys. Just a question on thermal coal and gas. And I know in Texas, gas prices have been sort of negative because they can't get it anywhere. But eventually, that will change.

Is that affecting demand for PRB coal today? And do you see that as a headwind going forward?

Deck Slone -- Senior Vice President for Strategy and Public Policy

Yes. Wayne, it's Deck. I would say that right now and as Paul highlighted, demand has been pretty strong. We are seeing good, solid demand really across the board for our various operations but particularly in the PRB.

And we've seen higher levels of activity in Q1 than we've seen in the past five years. And so clearly, the fact that stockpiles have come down to now close to target levels is helpful. We're seeing utilities out looking to shore up their positions, not just for '19 but for outer years. And so certainly, we watch that carefully.

We are -- it's -- we're constantly battling that with natural gas, there's no doubt. But right now, it feels like demand is quite solid and stable. And we really haven't seen much change, in fact, from the small movements we've seen in gas prices. Clearly, there can be basis differential.

So in some regions, it can be more challenging at times. But at present, we feel pretty good about what we see for 2019 and even at the outer years.

Wayne Cooperman -- Cobalt Capital -- Analyst

And how much of your coal would you say you ship to Texas?

Deck Slone -- Senior Vice President for Strategy and Public Policy

So it's a big market for us still, Wayne, so there's no doubt. And obviously, the intrusion of wind continues to have an impact. But we just haven't seen meaningful reduction there or pushback from committed volumes.

Wayne Cooperman -- Cobalt Capital -- Analyst

All right. Thank you very much.

Deck Slone -- Senior Vice President for Strategy and Public Policy

Thanks, Wayne.

Operator

Thank you very much. [Operator instructions] Our next question will come from Lin Shen, HITE.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Hey, good morning. Thanks for taking the call. I want to just ask if you think about the current market for High-Vol A premium versus maybe a year ago, what is the most important reason why High-Vol A is traded premium versus like historical average?

Paul Lang -- President and Chief Operating Officer

I'll start this conversation. I think one of the things we're seeing is that as we've introduced the product, particularly in Asia, they found that it's been a very good blending product for helping with other coals. They're able to basically take one and one and make three out of it. It's a very flexible coal.

And particularly, it keeps -- it stays fluid during a very large range, which helps -- has a very strong -- high strength, which helps in the blast furnace. The value appears to be greater than what you would see at the sum of the parts.

John Eaves -- Chief Executive Officer

And let me jump in. This is John. I mean the other piece that we found is there appears to be a real scarcity of value associated with High-Vol A. If you look around the globe, there's about 25 million tons or less of true High-Vol being produced.

Once Leer South is up and operating, Arch will have about 30% of that. So we think the High-Vol A product will continue to have a value in the marketplace. As Paul said, they need it in their blast furnaces. It allows them to lower their costs with other coals.

So we certainly like the way we're positioned with High-Vol.

Deck Slone -- Senior Vice President for Strategy and Public Policy

One other comment, it's Deck again. What we've seen over the last 24 quarters is that High-Vol A has traded at a premium to low vol. But that's increasingly the case, in fact, all last year in each quarter, High-Vol A traded at premium and in fact was a $12 premium on average. And so not only is that -- we view that as sort of the new normal, but that margin is increasing as customers realize the benefits the Leer brand in particular has, as Paul pointed out, that advantage of not only the very high fluidity and high plastics property that have been so advantageous for blending, but also a very high CSR.

It will be equivalent to really the best coking coals in the world. So clearly, we see a significant advantage for the Leer coal. But High-Vol A generally seems to have moved into a position where it's going to earn a premium going forward.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

So great. So I just want to clarify. So in your first quarter, how much your met coal was High-Vol A and -- versus like maybe low, High-Vol B or others?

Paul Lang -- President and Chief Operating Officer

Yes. In the first quarter, our sales mix was about 16% low vol, about 58% High-Vol and about 26% High-Vol B.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Great. And do you think this ratio is going to continue for the rest of the year?

Deck Slone -- Senior Vice President for Strategy and Public Policy

I mean the right way to think about it is probably to think about 4-plus million tons of High-Vol A. Out of the 6.8 million, 4-plus million tons of High-Vol A, so 60% or so High-Vol A, 30% -- 25% High-Vol B, 15% low vol. I realized my math doesn't quite work, but roughly that, a little heavier on the High-Vol A even than what I described.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Great. And last question. Paul, the share buyback program, you've been buying shares in the first quarter. Are you buying most share in the open market or most of the transaction is between you and the big shareholders? Because I noticed some of them sold shares in the first quarter.

John Drexler -- Senior Vice President and Chief Financial Officer

Lin, I think what we've described is we're out in the market buying on the open market. I think in 2017, we had some block transactions that we disclosed with one of our shareholders. Other than that, we've been out in the open market buying back shares.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Great. Really appreciate. Thank you very much. Good quarter.

John Drexler -- Senior Vice President and Chief Financial Officer

Thank you.

Deck Slone -- Senior Vice President for Strategy and Public Policy

Thank you.

Operator

Thank you very much. Speakers, at this time, we have no further questions in the queue. So I'd like to turn this conference back over to you for any final comments.

John Eaves -- Chief Executive Officer

I want to thank everybody for their interest in Arch Coal today. The management team continues to be laser-focused on returning cash to shareholders, making sure that our costs remain on the lower end of the cost curve in each of our operating segments, executing on the construction of Leer South and maintaining our strong balance sheet. Look forward to updating you in July on our second-quarter results. Thank you.

Operator

[Operator signoff]

Duration: 43 minutes

Call Participants:

Deck Slone -- Senior Vice President for Strategy and Public Policy

John Eaves -- Chief Executive Officer

Paul Lang -- President and Chief Operating Officer

John Drexler -- Senior Vice President and Chief Financial Officer

Mark Levin -- Seaport Global Securities -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

Michael Dudas -- Vertical Research -- Analyst

Wayne Cooperman -- Cobalt Capital -- Analyst

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

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