Arch Coal, Inc. (ARCH) Q2 2019 Earnings Call Transcript

Arch Coal, Inc. (ARCH 3.89%)
Q2 2019 Earnings Call
Jul 24, 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 second-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. Please go ahead, sir.

Deck Slone -- Senior Vice President for Strategy

Good morning from St. Louis. 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 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 CFO. We'll begin with some brief formal remarks, and thereafter, we'll be happy to take your questions. John?

John Eaves -- Chief Executive Officer

Thanks, Deck, and good morning, everyone. I'm pleased to report during the quarter just ended, Arch delivered another strong operating performance while executing on it's clear and compelling strategy for long-term value creation. Hitting just the highlights for Q2, our core coking coal portfolio delivered an exceptional cost performance and record margins. We again generated significant levels of free cash.

We returned a robust amount of that cash to shareholders via a highly successful capital-return program. We announced plans for a new value-creating joint venture involving our western thermal assets, and we made excellent progress on our promising growth story at Leer South. In short, we maintained excellent momentum across every facet of the business and set the stage for more of the same in the year's second half, even against a backdrop of modestly weaker coking coal prices. I'm particularly pleased with the strong continued progress on our capital-return program.

All told, we returned nearly $71 million to shareholders during Q2, consisting of $63 million via share repurchases and $7.4 million via dividend payments, despite a temporary suspension of the buyback program during the quarter. Importantly, we maintained a strong and steady pace in the program even while directing more than $36 million to the Leer South growth project in the year's first half. So far in 2019, we have returned nearly $160 million to shareholders, nearly 20% more than during the same period in 2018. Our progress since the program's launch is impressive.

Since initiating the capital-return program in May of 2017, we have bought back approximately 35% of our initial shares outstanding and returned a total of nearly $800 million of capital to shareholders. As we stated in the past, we expect to have the capacity to maintain that strong pace in the year's back half and return as much, if not more, capital to shareholders in the full-year 2019 as we averaged in 2017 and 2018. We consider the fact that we can return that level of capital while executing a transformative growth project to be a powerful evidence of Arch's significant cash-generating capabilities across a wide range of market scenarios. Turning to coking coal markets.

Coking coal prices were strong for the majority of the second quarter. The U.S. High-Vol A price averaged $197 per metric ton during the period and only started to erode late in Q2. Despite this weakening, we continue to view coking coal markets as generally well-balanced.

Global steel demand and blast furnace output were up roughly 5% in the year's first half, and capacity factors in North American blast furnaces averaged above 80%, more than counterbalancing weakness in Europe. Global coking coal demand was solid, with Chinese coking coal imports up more than 20% through the first half of the year. And while India got off to a lackluster start in 2019, we expect to see an acceleration in that country's seaborne demand in the near term. We also see reason for optimism in the supply side.

Australian coking coal exports were up modestly year over year during the first half of 2019 but continued to track well below the 2016 levels, the peak year for Aussie met exports. And the U.S. coking coal exports, declined nearly 10% in the first half of 2019 despite the strong pricing environment, again, underscoring the maturity of the U.S. coking coal reserves.

Of course, trade tensions in the overall health of the global economy represent a risk to the marketplace going forward, but Arch is built to weather such downturns when they come, just as it's structured to deliver exceptional value when the markets are healthy. Looking ahead, we remain highly confident in Arch's clearly defined strategy for long-term value creation and growth. We've identified four significant drivers that should elevate the company's long-term cash-generating potential still further. These drivers include: our robust improving capital-return program; the accelerated build-out of our new world-class Leer South longwall mine; the impending transition of the Leer mine into the heart of its reserve base later this year; and the ultimate completion of the strategic joint venture with Peabody Energy, which should unlock very substantial synergies while sharpening our strategic focus still further.

In combination, these drivers should further enhance Arch's already-powerful value proposition and deliver significant incremental value to our shareholders over the long term. With that, I'll now turn the call over to Paul Lang for some further commentary on our operational performance during the second quarter. Paul?

Paul Lang -- President and Chief Operating Officer

Thanks, John, and good morning, everyone. As John noted, we're pleased with our strong execution during the quarter, and we will remain sharply focused on maintaining that operational excellence as we progress through the balance of the year. During the second quarter, our core coking coal portfolio continued its strong operational and marketing performance as we achieved near-record realizations on coking coal sales. We reported segment cost of $62.07 per ton, which was at the bottom of our guidance range.

We shipped 1.6 billion tons of coking coal despite a longwall move at the Leer mine. And more importantly, we delivered record cash margin of $53.80 per ton. A particular note, the Leer mine turned in another outstanding performance. Even with the longwall move, the mine continued to achieve high productivity levels and exceptionally low cash costs.

Later this year, Leer will transition into the heart of its reserve base where the average seam thickness will increase above 12 inches, growing from approximately five feet to approximately fix feet. This transition should enable longwall to maintain and even improve upon its excellent track record during its first five-plus years of operation. I'm pleased to report that we're making excellent progress in the development of the world-class Leer South longwall mine, which, as I've discussed in the past, is effectively a carbon copy of the Leer mine. As you know, Leer South is expected to be among the lowest-cost, highest-margin coking coal mines in the United States.

While we're just out of the gate of the development process, we are encouraged by the pace of the progress. As a result of this strong start, we shifted the expected start-up date of the longwall to the third quarter of 2021 as opposed to the fourth quarter, as previously indicated. To keep this in perspective, even at today's prices, every month the longwall operation is accelerated, it should deliver in excess of $14 million to $16 million of additional EBITDA. Obviously, we remain sharply focused on getting the longwall and operation as quickly as possible, and we're looking for every opportunity to accelerate the development work still further.

In support of the accelerated time line, we now anticipate spending approximately $100 million of development capital at Leer South in 2019 versus the $90 million that was initially indicated. While we are compressing the capital spending into fewer quarters than originally stated, we remain comfortable maintaining our original estimate of $360 million to $390 million to complete the project. Moreover, we still anticipate producing approximately 1.3 million tons of coal with continuous miners during the development process. These development tons, which have the same qualities of our premium High-Vol A Leer product, will be sold at market base prices.

Consequently, we'd expect those tons to generate roughly $100 million of EBITDA given the current market conditions. That equates to more than 25% of the anticipated capital needed to develop the mine. In short, we expect a very rapid payback at Leer South across a wide range of market scenarios. It's also important to recall that the State of West Virginia recently passed legislation with the aim of incenting new investment in the state's coal mining sector.

The legislation should enable us to recover up to 35% of our total investment in Leer South in the form of lower severance tax payments over the course of the next 10 years. I'm also pleased to report with the strong execution during the first half and the positive operational outlook for the remainder of the year, it gives us sufficient comfort to raise our coking coal guidance despite the somewhat softer market environment we've seen in the past few weeks. With this, we now expect to ship 6.7 million to 7.1 million tons of coking coal in 2019, which represents an increase of 100,000 tons at the midpoint. Additionally, we've tightened our cost guidance for the segment to a range of $61 to $65 per ton, an improvement of $0.50 at the midpoint.

While these are modest tweaks, they're reflective of our commitment to continuous incremental improvement in every aspect of our business. As for the third quarter of 2019, we now expect the financial contribution from metallurgical segment to be relatively comparable to what we achieved in the second quarter as increased shipping volumes are projected to be counterbalanced by lower index-based pricing. On the thermal side, we continue to take what the market is offering while being disciplined in terms of capital spending and managing our costs. That strategy allowed us again to generate meaningful levels of free cash from our thermal assets in the quarter just ended, despite the impact of flooding that significantly curtailed rail service during the period.

Looking ahead, we expect a greater contribution of free cash from both the Powder River Basin and other thermal segments in the second half of the year due principally to improve logistics and even lower capital spending. Thus, we are maintaining our prior volume and cash cost guidance for both segments. Moving to the recently announced joint venture with Peabody involving our Western thermal assets, the Hart–Scott–Rodino filing has been made, and the transaction is currently under review by the Federal Trade Commission. We believe this business combination creates unique synergies that will lower costs and strengthen our competitiveness with both natural gas and renewables, benefiting our customers and their consumers.

As you can appreciate, though, given the nature of the review, we will not be able to answer questions to provide additional information related to this process on today's call. Before closing, I want to congratulate the Arch team for another exceptional performance in safety and environmental stewardship. Generally speaking, we gauge our performance against Arch's past excellence, which is a high bar. Even against those metrics, it was a strong performance on both fronts.

As just one example, the Leer mine recently surpassed 1 million employee hours without a reportable injury. In addition, it's also rewarding to be recognized by outside entities, and we collected several noteworthy honors during the quarter. Among those accolades, Black Thunder was honored with the top 2018 Wyoming Department of Environmental Quality Reclamation Award. In addition, out West Elk mine received recognition from Rocky Mountain Coal Mining Institute as the safest underground mine in Colorado in 2018.

These are significant and commendable achievements. In summary, we continue to hit our marks in every critical area of performance last quarter, and we intend and expect to maintain that strong momentum during the second half of the year. With that, I'll turn the call over to John Drexler, our CFO. John?

John Drexler -- Chief Financial Officer

Thanks, Paul, and good morning, everyone. As John and Paul have indicated, we continue to execute on our plan of generating significant cash flows from our low-cost operations, investing in and accelerating the start-up of the high-return Leer South project and returning substantial amounts of capital to you, our shareholder. First, a brief update on our cash flows, capital allocation and liquidity position. We continue to generate significant cash flows during the quarter with operating cash flows of approximately $141 million.

That included the refund of $35 million of alternative minimum tax credits. Capital spending for the quarter was $48.7 million. This total includes $18.9 million of development capital for Leer South with the remainder maintenance capital. Due to the timing of equipment rebuild, the second quarter's maintenance capital is expected to be the highest of the year.

As it relates to Leer South, total capital invested in the project stands at $36.3 million, and we now expect to spend $100 million over the full year. As John and Paul have discussed, we have made substantial progress to date, achieving significant milestones in the process of development, allowing us to accelerate the start-up of the longwall. Consistent with the last several quarters, cash flow in excess of our capital needs was devoted to our capital-return program. For the second quarter, we bought back 697,000 shares or approximately 3% of our initial shares outstanding for $63 million.

We achieved this buyback level during the second quarter despite the fact we were out of the market for a period of time during the quarter, in light of the pending announcement of our joint venture with Peabody. To date, we have spent a total of $726 million, buying back 8.8 million shares or over 35% of our initial shares outstanding in just nine quarters. Also during the quarter, we paid our normal recurring dividend of $7.4 million, bringing our total dividends paid since we initiated the quarterly dividend program in the first quarter of 2017 to $71 million. The board also approved the next quarterly cash dividend payment of $0.45 per common share, which is scheduled to be paid on September 13 to stockholders of record at the close of business on August 30.

We believe the dual focus of returning capital to our shareholders via recurring dividends and share repurchases while simultaneously funding the build-out of our high-return Leer South project represents an excellent allocation of our capital. Looking ahead, we will continue to evaluate which uses of cash provide the best risk-adjusted return over the longer term. But having said that, we continue to view our stock as an excellent value. 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.

Regarding our liquidity, we ended the quarter with $395 million in cash. And when combined with the borrowing capacity of our credit facilities, we had $508 million of liquidity. 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 just above the high end of that range.

Our strong balance sheet, combined with our low-cost operations, provides us protection through the full market cycle while allowing us to generate substantial value when coal markets are healthy. In summary, we are pleased with our performance in the first half of 2019. Our low-cost operations continue to generate substantial cash that we are using to enhance the value of Arch by investing in our high-return Leer South complex and by driving forward rapidly and aggressively on our capital-return program. We expect to continue down that same path for the remainder of 2019.

With that, we are ready to take questions. Operator, I'll turn the call back over to you.

Questions & Answers:

Operator

[Operator instructions] We'll take our first question from Mark Levin of Seaport Global.

Mark Levin -- Seaport Global Securities -- Analyst

Thanks. Just a second of editorializing. Great execution. I can't -- I was thinking about it earlier.

I can't remember a time where the execution has been this solid and this consistent for so long. So my hat is off to the entire company. And related to that --

Paul Lang -- President and Chief Operating Officer

Thanks, Mark.

Mark Levin -- Seaport Global Securities -- Analyst

Yeah. My pleasure. Great job. Related to that point, maybe you can talk a little bit about something that we don't talk a lot about on calls, which are tons per man hour, which seem to improve significantly from Q1 to Q2 in your met operations.

And I think there was reference to, again, the reference to entering into thicker seams. And maybe what you expect that to do to your overall cost when you're thinking about 2020?

Paul Lang -- President and Chief Operating Officer

Yeah. Mark, this is Paul. I'll take off on that. As you look at Q2 versus Q1, we'll start with what was kind of the same.

We just both had -- both Beckley and Sentinel had, what I'd call, just a good, solid quarter. Quarter over quarter, they were strong. Probably the one asterisk by the quarter is Mount Laurel continued to struggle. And I think every day on the decision we made to pull the longwall, it's only been reinforced.

But what offset that clearly was an outstanding performance by the team at Leer. The mine went through a longwall move. They got it done ahead of schedule, and the productivity coming out of the move was outstanding. So I think you're starting to see that reflected in the productivity and the ton per man hour numbers.

Mark Levin -- Seaport Global Securities -- Analyst

And when you think about -- just now, maybe more financially, when you think about Q3 versus Q2 EBITDA, I think in the press release, you referenced the met coal contribution being somewhat similar in Q3 to Q2 with more volume offsetting weaker pricing and then better outlook, maybe for PRB and also other thermal in the second half. Maybe how to think about what the earnings will look like or what EBITDA might look like in Q3 versus Q2 given those factors?

Paul Lang -- President and Chief Operating Officer

Yeah. Obviously, Mark, we gave a pretty good indication on the met segment. As you look at the PRB, as you know, PRB third quarter is usually the strongest quarter. And I think there's every indication that we're not quite back to what I'd call normal, but we are operating it fairly well out there.

So there's nothing that I see in the PRB that would offset kind of that normal Q3 strong shipping schedule. On the other thermal, I think we're also expecting a pretty good pickup. So in all things being equal, I think you could take our typical Q3, say, from last year, adjusted for prices and give our indication on met, you'd have a pretty good indication on where we're at.

Mark Levin -- Seaport Global Securities -- Analyst

OK. And then my last question is a market question. So over the last couple of months, I know met prices have weakened at a fair amount. What are you guys seeing in the market? I mean, obviously, U.S.

exports are still down 8%, 10%. I think they recovered a little bit in the second quarter from the first quarter. Australia -- Australian exports haven't picked up a whole heck of a lot this year. And I know we -- we're all aware what's going on kind of in the steel market.

But just kind of from your vantage point and what you're hearing from your customers in Europe and domestically about what's going on in the met market, do you guys expect prices to stabilize around here? Or what are you guys seeing or thinking?

Paul Lang -- President and Chief Operating Officer

Yeah. Mark, I think what -- as we enter the third quarter, I think we're comfortable at about 98% committed on the coking coal side based on the midpoint of our guidance. And we're really not seeing what I would call a pushback. We've had a lot of conversations with our European customers.

There's a lot of concern in the economy. There's a lot of discussion on what the global economic situation is, tariffs. I think people are being cautious. But right now, I haven't had a lot of concern relative to the customers not taking coal.

John Eaves -- Chief Executive Officer

Mark, this is John. Let me jump in. I guess as we look at the globe, we continue to think there has been pretty significant underinvestment the last several years. We think that markets are overall pretty well-balanced.

Yeah, we've seen some weakness over the last couple of weeks. But I guess, longer term, we're still pretty confident about where we see prices going, with depletion rates at 2%, and those are Arch's numbers, pretty conservative demand growth, we think you still need 70 million, 75 million tons over the next five to six years just to meet that new demand. So we're not looking at it short term. We continue to look long term.

We feel very confident with our cost structure, our quality and our balance sheet being able to manage through these dips and really capitalize when they move up.

Mark Levin -- Seaport Global Securities -- Analyst

That's great. Thanks again. Congratulations on a very good quarter.

John Eaves -- Chief Executive Officer

Thank you, Mark.

Paul Lang -- President and Chief Operating Officer

Thank you, Mark.

Operator

Thank you. We'll take our next question from Lucas Pipes of B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, good morning, everyone. And I would like to echo Mark's comments, fantastic execution. That's really great to see.

John Eaves -- Chief Executive Officer

Thanks, Lucas.

Paul Lang -- President and Chief Operating Officer

Thank you, Lucas.

Lucas Pipes -- B. Riley FBR -- Analyst

I wanted to hone in on one of Mark's questions on the met coal side with very strong productivity. And then the higher seam height at your -- I think later this year, starting later this year, I wondered if you can maybe quantify for us what that impact could be on a both production and cost basis? And from there, I'd have a few more follow-up questions. Thank you.

Paul Lang -- President and Chief Operating Officer

Yeah. Lucas, obviously, this has been baked into our numbers. We've echoed this is coming for quite a while. And obviously, the impact is positive.

A 20% increase in seam height is effectively what we're expecting. As you go to that, it should have a corresponding impact on costs. But at the same time, as I've said, we've got Mount Laurel that's been out there, a little bit offsetting this. But overall, I couldn't be happier with where Leer has gone and expecting the same great things at Leer South.

John Eaves -- Chief Executive Officer

I mean, Lucas, if you think about second quarter, I mean, Paul has been a little modest. I mean, we had a longwall move at Leer. We continue to fight the same at Mount Laurel. We had cost of $62.07.

So going forward, you got to feel good about our cost structure, particularly with Leer's performance.

Lucas Pipes -- B. Riley FBR -- Analyst

And then I assume in 2020, we would have a full-year impact of those higher seam heights, correct?

Paul Lang -- President and Chief Operating Officer

That is correct.

Lucas Pipes -- B. Riley FBR -- Analyst

So -- and I guess, there has to be a little bit patience in terms of how 2020 will look like in terms of production and cost, but looks very promising. So another question on the met coal side. In the release, you mentioned about 1.3 million tons of development tons as you advance in Leer South. Where would we see those tons precisely? Would this be captured under Sentinel? Would this be a new normal production guidance? Or could production be -- already be a little bit higher as you develop this new mine? I would appreciate some additional context throughout placing those tons in our model.

Thank you.

John Drexler -- Chief Financial Officer

Yeah. Lucas, this is John Drexler. The 1.3 million tons, we talked about the development tons and how they will generate EBITDA as we move forward. As far as how they're being reported right now with the very modest development that's occurring, they are included in Sentinel's tons.

But it's very small, as you can imagine, as we're just initially into the Lower Kittanning seam there. And so that will grow as we move forward. But remember, we're transitioning some CM units at Sentinel into the Lower Kittanning seam. So we'll -- all in all, that's incorporated on all of our met coal guidance as we move forward.

Lucas Pipes -- B. Riley FBR -- Analyst

OK. Got it. Perfect. And then one last one for me.

Is your phone ringing in regards to the PRB? I would think that if you take 10% out of supply, it shakes things up even in the what is otherwise a pretty lackluster demand environment. Would appreciate your thoughts.

Paul Lang -- President and Chief Operating Officer

Yeah. I'd tell you, Lucas. It's hard to talk about the PRB without at least acknowledging there's a pretty tough story out there with large number of people lost their jobs and the impact, what I'd say, the county, the vendors, the states, the cities, it's a tough story. What I find fascinating about this thing, having said all that, is we pulled out 35 million or 40 million tons out of the market.

And that was a combination of Central App, High-Vol B, PCI, PRB, and the market reaction was effectively zero. We've had a few calls, but to be honest, there's just not been a lot of concern over the issue, at least from the customer's perspective that we've heard from.

Lucas Pipes -- B. Riley FBR -- Analyst

No, I share your thoughts on the PRB and the reach. And thank you for that additional color. I'll turn it over. And continued best of luck.

Paul Lang -- President and Chief Operating Officer

Thank you.

Operator

Thank you. We'll take our next question from Michael Dudas of Vertical Research.

Michael Dudas -- Vertical Research -- Analyst

Good morning, gentlemen.

Paul Lang -- President and Chief Operating Officer

Good morning, Michael.

John Eaves -- Chief Executive Officer

Good morning, Michael.

Michael Dudas -- Vertical Research -- Analyst

First question, I guess, on the lines of the great performance at Leer and the productivity enhancements you're having, how do you feel about current lever, where you are relative to your needs? And since there's been more trouble and more concern in the coal fields, is that gonna be helpful to help you get better quality, especially if you're ramping up and trying to plan for Leer South as you target 2021? And are some of these activities from some of your competitors going to maybe start to impact some issues from vendors and some other negative issues has moved from the 2020?

Paul Lang -- President and Chief Operating Officer

Michael, I'll start by talking about the PRB on the labor front a little to the East. But relative to people, we were in pretty good shape. Obviously, there's been a lot of good people put on the market. I think you've read some headlines of some of the other competitors picking up people.

And honestly, we've picked up some people. And frankly, I've been willing to pick up some skilled people that we didn't necessarily need, and it's just a good opportunity to hire what are some very good operating electricians and those type of people. On the East, it's always a little more interesting on the labor side. Clearly, we have to bring on, and I forget the exact number, but somewhere between 150 and 200 people at Leer South.

And we've been doing it pretty methodically and had relatively good luck doing it. I think the one advantage we have is that we've anticipated this issue. We started a training program at Leer about three years ago where we're starting to train new minors. That process is paying off, and we're starting to build the pipeline of employees that were not so dependent on trying to go out and steal people from each other.

And probably, the one thing I'm probably most proud of in that process is we have a very good stick rate with those people. And I think taking young people that are interested in the industry and training them the way we want has really been the way to go. And this poaching people from each other just doesn't seem to ever work out.

John Eaves -- Chief Executive Officer

Michael, just to jump on to that, I think our employees -- certainly, we have a low turnover rate, but when you look at Leer South and the growth and future of the company, I think people feel good about where we are today and where we're going. And therefore, we're just not seeing a lot of turnover of people. And as Paul said, we're not having a whole lot of trouble bringing people on for Leer South. So from a labor standpoint, I think we're probably as positioned as well as we could be.

Michael Dudas -- Vertical Research -- Analyst

I appreciate those comments. That's very hopeful. And I just for my follow-up would be as gauging the export market, especially globally on thermal, how that's been talked pretty well over the last several months. How -- just from your angle, looking at the met side, has the quality of the coal that you and the U.S.

providers into the marketplace are going to offset maybe their economic slowdown on the met side? And then I guess, you have an export side on West Oak. Are we getting close to bottoming? And do you anticipate seeing some of the supply issues that come out of the marketplace to help pick up the market? Thanks, guys.

Paul Lang -- President and Chief Operating Officer

Yeah. I'm not sure I caught the entire question. But I'll just try and hit the high points, and maybe John can jump in. But we export principally roughly about 750,000 or 1 million tons out of the East from our Coal-Mac operation off API-2.

At current marks, those values won't -- or those tons will not go into the European market. We've done a fairly good job, though, of displacing some of that export with some domestic sales that we jumped on earlier in the year. So generally, we feel good about that position. In the West, West Elk has always been a strong participant in Newcastle.

We were aggressive in taking out hedges, which, obviously, have paid off the last couple of quarters. So we're in relatively good standing as far as West Elk going into 2020. And I think the way West Elk is always gonna run, as we watch the Newcastle mark, it will enter in and come out of it. And just -- we're not gonna try and judge the market out of the top.

We're just gonna to layer it in and be careful how we do it.

Deck Slone -- Senior Vice President for Strategy

Mike, on the coking coal side, we do feel good about what we're seeing on the quality front. If you look at where High-Vol A is trading today, it's just a couple of dollars below Australian hard coking coal, and that's just the advantage of Australia being right there at the doorstep of the Asian market. But we do feel good about that. We certainly continue to believe that their High-Vol A product is gonna be really instrumental as additional lower-quality tons have to make their way into the market.

Semi-soft tons, pet coke, etc., the High-Vol A is a really significant advantage from a lending perspective and allows the cokeries to bring in those lower-quality products. It does feel to us like the market feels is sort of getting a little steadier here. We've obviously had a dip over the last month and a half or so, but we are starting to see what we think might be a little bit more stability. We'll see how that plays out.

But last couple of days have seen -- have looked better. And as indicated, we are hearing good interest continue to be sort of encouraged by the tone, despite those macro concerns that John and Paul referenced. So we do feel decent about sort of the export markets. It's just we have the sort of same uncertainty at that sort of global economic level that everybody else does.

Michael Dudas -- Vertical Research -- Analyst

Deck, I appreciate those thoughts. And I think the only team that had a better second quarter than Arch Coal was the St. Louis Blues. Thanks, guys.

Deck Slone -- Senior Vice President for Strategy

Thanks, Mike.

Operator

[Operator instructions] We'll take our next question from John Bridges of J.P. Morgan.

John Bridges -- J.P. Morgan -- Analyst

Morning, everybody. And I'd like to echo Mark and Lucas' comments on your results. Well done. Maybe I'd also like to take another shot at the seam thickness question.

You're going into the heart of the seam in 2020. How long will the engineers let you stay there before you come out of it? And then Leer South, presumably, that's not in the bull's-eye as well. So what do you expect the seam thickness to be at Leer South in 2021?

Paul Lang -- President and Chief Operating Officer

Hey, John, this is Paul. First of all, thank you for the comments. John, this is kind of the heart of the reserve. We're gonna be in this seam thickness for quite a few years out.

It was simply the way we have to develop a mine that we had to go basically to the southeast core and come back out. But as we head North and we head West, the coal seam is relatively fit. And it's a pretty good story. It's a little unusual that you don't start off in your best coal, but that's the way the mine was -- had to be developed.

John Bridges -- J.P. Morgan -- Analyst

And so Leer South is in the six-foot coal as well?

Paul Lang -- President and Chief Operating Officer

Yeah. Leer South, as we've talked in the past, has a couple of advantages, actually, over Leer. It's a little bit thicker coal, and probably more importantly, it's got longer longwall panels. So we're expecting productivity very similar to Leer.

Deck Slone -- Senior Vice President for Strategy

So John, what we've said about that is the Leer South looks like -- a lot like Leer has been over its first five years-plus of operation. Actually, as Paul said, a little bit thicker, longer longwall panels, all good. It's just that Leer now takes this sort of the step change into even thicker coal still. So we would expect Leer South to look a lot like what we've seen out of Leer, with the additional benefit that we've learned a lot over the last five-plus years of operating there in the Lower Kittanning and longwall mining, and that we really refined those processes.

So we feel a really positive one.

John Bridges -- J.P. Morgan -- Analyst

OK. Great. And you were commenting a lot about the shortfalls on supply affecting met coal and helping keep the price up. One of the things that's sort of intriguing me is that certain in theory, given the pressure on thermal coal from the SG investors, etc., etc., is that that effect should be having a bigger impact on the supply of thermal coal.

But of course, we have this big disconnect between met coal and thermal coal prices at the moment. I just wondered if you have any thoughts as to what was depressing the seaborne thermal coal prices and when that might abate?

John Eaves -- Chief Executive Officer

Well, let me jump in, and Paul can add on. I think certainly, on the thermal, we're starting to see a lot of pressure given where API-2 is. I think the reason you get to see a more significant drop-off is people hedged their self for 2019. As those hedges come off later in the year and going to 2020, I think there'll be a lot of pressure.

And quite frankly, John, I don't know that there's any place for that coal to go domestically. So I think you'll see a lot of pressure as we move into 2020. Paul, you got anything?

Paul Lang -- President and Chief Operating Officer

No. The only comment I'd make, John, is the usual commentary you hear on Europe. And that is LNG prices were relatively low. It displaced a lot of coal.

Coal inventories built up, and API-2 crashed.

John Bridges -- J.P. Morgan -- Analyst

OK. OK. Yeah. I was hoping you had some new revelation that's more or less in line with --

Paul Lang -- President and Chief Operating Officer

Now if you're here, I'd like --

John Eaves -- Chief Executive Officer

Yeah. We'd love to hear it, John, if you have anything else out.

John Bridges -- J.P. Morgan -- Analyst

I'll keep on looking. Thanks again, and congratulations on the results.

Paul Lang -- President and Chief Operating Officer

Thank you.

John Eaves -- Chief Executive Officer

Thank you, John.

Operator

Thank you. We have no further questions at this time. I'll turn it back to John Eaves for closing remarks.

John Eaves -- Chief Executive Officer

I wanna thank you for joining the call this morning. The management team will be focused on executing on the four drivers in the back half of 2019: our capital return program, development of Leer South, the transition in the heart of the reserve at Leer and the completion of the JV with Peabody Energy. We look forward to updating you in October. Thank you.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Deck Slone -- Senior Vice President for Strategy

John Eaves -- Chief Executive Officer

Paul Lang -- President and Chief Operating Officer

John Drexler -- Chief Financial Officer

Mark Levin -- Seaport Global Securities -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

Michael Dudas -- Vertical Research -- Analyst

John Bridges -- J.P. Morgan -- Analyst

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