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Arch Coal, Inc. (NYSE:ARCH)
Q4 2019 Earnings Call
Feb 06, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Arch Coal fourth-quarter 2019 earnings conference call. Today's conference is being recorded. I would now like to turn the call over to Deck Slone, senior vice president of strategy. Please go ahead, sir.

Deck Slone -- Senior Vice President of Strategy

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 filed 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'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 that Arch continues to deliver on its well-defined strategy for value creation and growth. Our core metallurgical portfolio, excluding the transitioning Mountain Laurel mine, turned in another outstanding operational performance in the fourth quarter, with an average cost below $60 per ton and Metallurgical segment margins of more than $30 per ton. Our Leer mine, which we're in the process of replicating at Leer South, had cost in the mid-$40 range, placing it once again at the far left of the U.S.

metallurgical cost curve. Just as importantly, we made significant strides in reorienting Mountain Laurel to a room pillar operation and expect to complete that process in the current quarter. We believe this transition sets our Metallurgical segment up for even greater success in the future. As previously discussed, Mountain Laurel has recently progressed into reserves that are more suitable for continuous miner than long-haul development.

But we expect to shift to room-and-pillar mining to translate into appreciably lower cost, enhanced product quality, and more consistent operating performance going forward. At the same time, we continue to make excellent progress on the development of Leer South, which should increase the value of our metallurgical portfolio dramatically. As indicated, we are developing Leer South as a near carbon copy of the Leer mine, which continues to hit on all cylinders and seem as it's standing as one of the industry's premier assets. As a reminder, 2020 will be the biggest year of capex spend at Leer South, with more than $200 million budgeted.

We are comfortable, and in fact, enthusiastic about this level of spending, given that it reflects a tremendous and rapid progress we are making in the build out of this world-class asset. As discussed, we expect to start-up a long-haul just six quarters from now, on time and on budget. The impact of Leer South on the earnings and cash generation should be profound. Even at today's relatively depressed metallurgical pricing levels, we would expect Leer South to contribute an estimated $150 million in incremental EBITDA annually.

And substantially more than that during other points in the cycle. That kind of step up will be transformational for our shareholders. In short, we are retooling and upgrading our metallurgical portfolio in multiple ways. The result of these efforts should be an even more powerful cash-generating profile in the future across a range of market scenarios.

As you know, since launching our capital return program in May 2017, we have returned most of our excess cash to shareholders via buybacks and dividends. In the quarter just ended, we returned another $18 million to shareholders, bringing the total since the programs launched to $913 million. Perhaps more impressively, we have bought back 40% of our initial shares outstanding over that time frame, which is a rare feat. As we head into 2020, we expect to slow down our capital return program for the time being and direct most of our excess cash to the build-out of Leer South.

In doing so, we expect to build an even more powerful platform for cash generation, with the potential to fuel an even stronger capital return program in the future, should the board view such a program is desirable. Turning now to the marketplace. Seaborne metallurgical markets appear to have stabilized somewhat in recent weeks, despite ongoing concerns about the extent and severity of the coronavirus outbreak in its potential impact on the global economy. The price of High-Vol A coal, which will comprise nearly 70% of our metallurgical product mix in 2020, has rebounded 10% or so since the first of the year and other metallurgical products has strengthened as well.

In addition, metallurgical producers have now closed or idled eight million tons of production and counting, which should deliver a healthier supply demand balance over time. Finally, the recent progress in global trade talks, the lifting of import restrictions in China and the continued build-out of integrated steel capacity in India and the rest of Southeast Asia, all appear constructive and could ultimately translate into a stronger market environment once macroeconomic concerns begin to diminish. Most importantly, we're confident that Arch is well equipped to weather the current market downturn and just as well equipped to capitalize on the next market up cycle whenever it occurs. In summary, heading into 2020, we plan to drive forward with our efforts to reduce our metallurgical costs to further, set the stage even greater cash generation in the future through the build-out of Leer South, generate significant levels of free cash flow from our thermal portfolio, compare those thermal assets for increasingly challenging market environment through the completion of the synergistic JV with Peabody and maintain our industry-leading balance sheet strength.

With that, I'll turn the call over to Paul Lang for further thoughts on our operational performance and outlook. Paul?

Paul Lang -- President and Chief Operating Officer

Thanks, John, and good morning, everyone. As John noted, our core metallurgical franchise, again, executed at a high level last quarter, even as we undertook a major transition at Mountain Laurel. The cost structure for the metallurgical segment, excluding Mountain Laurel, was sub-$60 per ton, which we believe is at least $20 below the median of our U.S. peer group.

As you would expect, the Leer mine led the way with cash costs in the mid-$40 per ton range, again, underscoring why we are aggressively moving forward with the build-out of its sister operation, Leer South. While our metallurgical segment has consistently demonstrated operational excellence, we're far from satisfied and still see significant opportunities for continued improvement. First opportunity is the transition at Mountain Laurel. While the remaining reserves at Mountain Laurel are no longer suitable for longwall mining, we are enthusiastic about their potential to support an efficient and profitable room-and-pillar operation.

But by the end of the fourth quarter of 2019, we had four of five continuous miners operating in a room-and-pillar configuration, and we expect to add the fifth unit in March. To date, the units that have transitioned to the new mine plan have operated well and achieved solid rates of advance. With these changes at Mountain Laurel, we expect steady improvement at the operation as we progress through the year. In total, the reconfiguration of the operation should deliver about a $10 per ton decrease in the mine's cash operating cost during 2020, as well as a meaningful improvement in coal quality.

And most importantly, a more consistent operating performance due to our greater ability to address the variations of geology across the reserve. Second opportunity that should drive improvement in the metallurgical segment is the progression of our flagship Leer mine into thicker reserves. As previously discussed, we have systematically reduced costs at the Leer in recent quarters, and the improved geology we are currently experiencing should continue this progress. With a mid-$40 per ton cost structure in each of the past three quarters, Leer is already performing at a high level, but we remain focused on incremental improvements at the operation in coming quarters.

The third and biggest opportunity for improvement in our metallurgical segment, of course, will come with the start-up of the longwall at Leer South. As indicated, we're making excellent progress on the development of this world-class asset and are well on track to commence longwall mining in the third quarter of 2021. Just as importantly, we're maintaining our sharp focus on capital discipline and remain comfortable with our original guidance of $360 million to $390 million for the development of the mine. Within this estimate, we are netting out the cost of the replacement shields lost at Mountain Laurel against the expected insurance recovery.

In summary, we expect a step down in our metallurgical segment's cash costs in 2020, and to a range of $58 to $62 per ton and further improvement in our cash cost structure next year, with the expected volume contribution from the Leer South longwall. We expect still further progress in 2022 when the new longwall will be operational for the full year. We believe we're unique and that we're showing a long-term decrease in our cash costs on an already U.S. industry-leading base.

Moving from operations to marketing, we're also pleased with the solid progress we made to build out our 2020 contract book for the metallurgical segment during the fourth quarter. To start, we added roughly 300,000 tons of High-Vol A and High-Vol B commitments in North America, bringing our total contracted position in the U.S. and Canada to 1.8 million tons at a fixed price of around $107 per ton. We view this as a solid foundation at an attractive price, given the market conditions that prevail through the contracting season.

In addition, we increased our seaborne commitments to 2.4 million tons during the quarter, with more than 90% of that at market-based pricing, and the remaining 10% at a fixed price for our High-Vol B product. We believe our contracting activity to date represents a good and healthy balance. The North American business, which we again expect to account for about 25% of our sales, provides us with a ratable term business that has solid fixed price. The seaborne business extends our market penetration into the international arena while providing exposure to potential strengthening in those markets.

All told, we now have placed approximately 60% of our projected 2020 coking coal volumes and are in the midst of further negotiations with international customers. Turning to our legacy thermal assets, our mines continue to generate significant levels of free cash and is helping fund our capital return program and growth in our metallurgical segment. In 2019, our thermal assets generated over $100 million more in segment-level EBITDA than they expended in capital. This performance brings the total on that same basis to more than $600 million of free cash generation since emergence in late 2016.

As for our thermal contracting position, overall, we're nearly 82% committed at current volume guidance levels. Of these committed volumes, we have 60 million tons of Powder River Basin coal committed, of which 58 million tons are on a fixed price basis of $12.22 per ton and another two million tons were sold on an index basis. We view that position as solid in today's market environment. Moving to the joint venture with Peabody.

We continue to engage with the Federal Trade Commission as we make our way through the regulatory review process. We remain confident that this business combination will prove beneficial to all stakeholders, including our customers, employees, and shareholders by creating a long term, efficient, stable, and cost competitive supply platform in an increasingly challenging energy marketplace. As you can appreciate, we cannot specifically comment on the process other than to say things are progressing as expected. Looking ahead, we expect another strong year of operational execution in 2020 across our entire platform.

We believe we're uniquely positioned to manage through and even thrive in the current market environment. At the same time, we're looking to improve on every key operating metric and plan to extend our competitive advantage further in the quarters ahead. With that, I'll now turn the call over to John Drexler, our CFO. John?

John Drexler -- Senior Vice President and Chief Financial Officer

Thanks, Paul, and good morning, everyone. As John and Paul have indicated, absent the earlier-than-expected transition at our Mountain Laurel operation, our fourth-quarter results represent a continuation of our strong execution on our plan. Since our emergence from restructuring, we have purposely maintained the foundation of a strong balance sheet and abundant liquidity. That strong foundation, combined with our tier one, low cost, long-lived operations has allowed us to generate healthy cash flows even as the market cycle has weakened, but more importantly, allows us to expect ongoing healthy cash flows as we work through the market cycle.

The fourth quarter is a good example of our cash flow capability, even in challenging markets. Despite the transition costs, we encountered at Mountain Laurel, we generated $86 million of operating cash flow and less than robust coking coal and thermal coal markets. Our maintenance capital during the quarter was $36 million, leaving $52 million of free cash flow. That cash flow was utilized to continue the build-out of the Leer South mine and to acquire the Leer North reserves to significantly extend the life of the Leer operation.

As we look ahead to 2020, we continue to expect our low-cost portfolio to generate cash well in excess of our maintenance capital requirements. And to utilize that free cash flow to continue the build-out of our world-class Leer South operation while continuing to maintain a strong balance sheet and healthy liquidity. Let's now focus our attention on Arch's capital allocation and liquidity position. As we signaled during the last earnings call, we have significantly reduced our capital return program during the fourth quarter, given the market downturn.

During the quarter, we paid our recurring quarterly dividend of $8 million, and utilized $10 million to buy back 133,000 shares. Moving forward, we are committed to the quarterly dividend with Arch's board approving an 11% increase in the quarterly rate from $0.45 per common share to $0.50 per common share, which is scheduled to be paid on March 13 to stockholders of record at the close of business on March 3. However, as we look at our capital return program in 2020, we expect that lower met coal pricing, along with the higher capital spending associated with the Leer South build-out, will result in a reduction in excess cash flows available for share repurchases. Quite frankly, that's how the board always envisioned the program working.

When excess cash flows are high and needs are modest, return capital via buybacks. Conversely, when excess cash flows are reduced, the amount of capital available for share repurchases is reduced as well. As John indicated in his remarks, we plan to direct our excess cash flows after the quarterly dividend payment to the build-out of Leer South. Once online, the cash-generating capability of that complex will rival that of Leer which, even in today's lower met market environment is capable of generating $50-plus of cash margin per ton.

Regarding our liquidity, we ended the quarter with $412 million of liquidity, with $289 million in cash and $113 million in borrowing capacity on our credit facilities. As indicated on previous calls, while we are comfortable with our ability to utilize existing cash flows to fund the build-out of Leer South, we will continue to explore and are confident that we have the ability as additional modest levels of capital at attractive rates to help facilitate the construction of the project. As Paul mentioned, the removal of the longwall at Mountain Laurel proved to be more difficult than anticipated. Conditions developed during removal that precluded us from removing 123 of the longwall system's 176 shields.

As you know, we are refurbishing this longwall to be utilized at Leer South. As a result of the loss, we will replace the 123 shields, which will arrive on-site, well in advance of our anticipated start-up date in the third quarter of 2021. We are finalizing an insurance claim for $30 million to $35 million that will cover the amount of capital required for the new shields. Proceeds are expected prior to midyear.

Regarding our capital spending for 2020, while we are guiding to a range of $310 million of capex at the midpoint, $220 million of that is for the development of Leer South, leaving $90 million for maintenance capex. We view that as very manageable levels of capex for our portfolio. Absent Leer South, even in challenged coal markets, we would be generating significant free cash flow. Leer South out offers a great return and a rapid payback in any market scenario and is where we will direct our excess cash flows.

As we wrap up 2019 and step into 2020, we are pleased with the position of the company. Our low-cost operations are designed to generate meaningful cash flows in all stages of the market cycle. Combined with the foundation of a strong balance sheet and healthy liquidity, we are well-positioned to not only withstand the bottom of the market cycle, but to continue to improve the position of Arch through the development of another world-class, ultra low-cost operation with Leer South. We remain enthusiastic about key drivers of value, the ongoing build-out of Leer South, the transition of Lear to the heart of its reserve base, the transition of Mountain Laurel to a lower cost and operationally more consistent room and pillar mine and the ultimate completion of the joint venture with Peabody.

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

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Lucas Pipes, B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey. Good morning, everyone.

John Drexler -- Senior Vice President and Chief Financial Officer

Good morning, Lucas.

Lucas Pipes -- B. Riley FBR -- Analyst

I wanted to follow-up a little bit, just on that last point, John, that you were making in regards to the amount of leverage and liquidity that you could be comfortable with. Could you elaborate on that a little bit, like when we think about liquidity, when you think about leverage, where could we go if this market stays a little bit weaker for longer? Would appreciate maybe just some few numbers around that. Thank you.

John Drexler -- Senior Vice President and Chief Financial Officer

So, Lucas, obviously, as we've indicated during the course of the call, we continue to remain very comfortable with the cash flow-generating capability of the profile that we've positioned the company. With an anchor asset like Leer, even in very difficult markets, generating meaningful amounts of cash flow, as we've indicated, more comfortable we can continue to fund the needs of the company and the capex build-out at Leer South from existing cash flows. As I also indicated in my remarks, we think that there's other opportunities for modest levels of additional leverage. We, obviously, have a very strong balance sheet.

We expect to continue to maintain a very strong balance sheet and healthy liquidity as we manage through this. But we'll continue to explore that if we think there's opportunistic ways to add on some additional smart leverage, we'll consider that. Absent if those avenues aren't available, but we think they are. We remain comfortable that we can continue to build-out of Leer South from existing cash flows.

Lucas Pipes -- B. Riley FBR -- Analyst

That's helpful. I appreciate that. And then just a quick follow-up on Mount Laurel. Good to see that transition occurring.

Could you tell us what level of production we should expect from this mine going forward under the current configuration? And also I'm curious in terms of where that mine would be shaking out on the cash cost side going forward with the continuous miners? And then just separately, I noticed there were some movements on the other thermal portfolio in regards to 2020. What changed there? It looked like the committed tons came down a bit. Thank you very much.

Paul Lang -- President and Chief Operating Officer

Lucas, this is Paul. I guess start with Mount Laurel. As I mentioned earlier, we currently have four of the five CMs running. The fifth will start up in March.

And what we're targeting right now is a production level of about 1.2 million to 1.3 million tons. But as you think about, Lucas, this mine was set up to run four million tons a year. And we have a lot of opportunities to expand that. But right now, we're going in at that kind of 1.2 million to 1.3 million ton rate.

Well, a little bit on the cost side, I think Mount Laurel will probably fall right in what I'd call average for the U.S. industry in that mid- 80s range. So if I remember your third question on the other thermal, I think what you're seeing is the impact of Coal-Mac's sale and the committed tons with Coal-Mac went with the sale.

Lucas Pipes -- B. Riley FBR -- Analyst

Got you. So that's really straight forward. This is all very helpful. I appreciate that.

Best of luck

Paul Lang -- President and Chief Operating Officer

Thank you, Lucas.

Operator

[Operator instructions] Our next question comes from Daniel Scott, Clarkson.

Daniel Scott -- Clarksons Securities -- Analyst

Hey. Thanks, guys. Real good quarter, particularly in the met segment with all that was going on. I just want to follow-up on Lucas' question about Mount Laurel.

At that run rate you were describing, assuming you keep it there at 1.2 million to 1.3 million, what kind of reserve life are we looking at for that piece?

Paul Lang -- President and Chief Operating Officer

Oh, geez. 15 years. 20 years.

Daniel Scott -- Clarksons Securities -- Analyst

OK. So that's a steady part of the balance. So then when I think about that that mine drops $10 in its cost structure. You add Leer South that presumably is going to have a full handle in its cost structure.

I know you said you were going to be trending down this year versus last year, next year versus this year. When you get to the point of full production from Leer South, are we talking of the potential and without giving hard guidance that mid-50s on average cost is not unreasonable?

Paul Lang -- President and Chief Operating Officer

I mean, that's the direction we're trying to get to.

Daniel Scott -- Clarksons Securities -- Analyst

Well, that would support a lot of free cash flow, certainly. And then the two last ones. One was, it was reported that Springfield is closing a couple of the units that are served by Viper. And then given the Coal-Mac sale, is in the joint venture covering kind of everything else, is Viper a core of asset at this point?

Paul Lang -- President and Chief Operating Officer

Yeah. I think the announcement on City of Springfield was not a surprise. Obviously, we knew what they were trying to get to with their integrated resource plan. They're basically shutting down two of the older units that ran, what I'd say, at best, on a part-time basis.

The two big units, especially the newer one that will continue to run. Incrementally, it's about 100,000 tons, we think, of lower production out of Viper. Viper is one of those interesting mines. It is what it is.

It's a captive to the CWLP in the City of Springfield. It generates a nice little bit of EBITDA. And is it core is not, if there was a way to create value from it by some other means, I think we'd explore it.

John Eaves -- Chief Executive Officer

Just a follow-on there, Dan. We do have a five-year contract in place that's been secured for the next five years, with most of the volume from Viper. So as Paul said, we're really not subject to the open market very much at all. So we think we're well-positioned, certainly with that mine for the next five years or so.

Daniel Scott -- Clarksons Securities -- Analyst

That's a good defense there. And then I guess, lastly, a longwall move schedule for Leer. Any this year?

Paul Lang -- President and Chief Operating Officer

Yeah. We just finished one at Leer last week. The other one will be in late Q3, early Q4.

Daniel Scott -- Clarksons Securities -- Analyst

Great. Very helpful. Thanks, guys. Good job.

Paul Lang -- President and Chief Operating Officer

Thanks, Daniel.

Operator

Our next question comes from Mark Levin, Benchmark.

Mark Levin -- Benchmark -- Analyst

Great. Thanks very much, guys. So a couple of quick questions. One, turning to U.S.

thermal. How much PRB coal do you expect to sell this year versus last?

Paul Lang -- President and Chief Operating Officer

We didn't give exact guidance, Mark. But I think you can imply from our thermal guidance, we look like we're going to be down anywhere from two million to five million tons versus last year.

Mark Levin -- Benchmark -- Analyst

OK. Great. Perfect. And then the second question is for John Drexler.

John, when we're doing that kind of EBITDA to free cash flow bridge, obviously, you noted capex and you noted cash interest expense. Is there anything else below the line that's not captured in EBITDA that needs need to be accounted for to get to that free cash number?

John Drexler -- Senior Vice President and Chief Financial Officer

Yeah. So, Mark, a few other items just to reference is, as you know, from a tax position, we're not expecting any cash taxes for the foreseeable future. So that's not a component. And so then there are some other items that provide a positive impact that we expect in 2021, that we've referenced is the PRLA settlement, that gain of $39 million that was recognized in the fourth quarter.

We expect the majority of that gain to be realized over the course of 2020. We do expect an AMT tax refund somewhere to the tune of, call it, $17 million to $20 million flowing through in 2020 as well. And another item that we referenced in our guidance, while we provide SG&A guidance, we do split that out between cash and noncash. There's a stock-based compensation component of that that's flowing through and negatively impacting EBITDA, but won't be in a cash component, and that's in the range of $18 million to $20 million.

So you need to kind of add those positives back to reconcile. We don't expect any -- while we are affected by working capital adjustments over the course of the year, we think a lot of those things smooth themselves out.

Mark Levin -- Benchmark -- Analyst

Got it. Got it. Got it. And I believe you guys are -- there's a $52 million purchase of reserves from Black Hawk.

Is that expected to hit this year? And how would that be funded?

John Drexler -- Senior Vice President and Chief Financial Officer

That cash came through in the fourth quarter. So that's already reflected in our cash balance and affecting liquidity.

Mark Levin -- Benchmark -- Analyst

Got it. OK. Perfect. That's terrific.

And I think I had one more question, and it's probably circling back to -- well, I'll ask a broader market comment about the net market. So this morning, Mittal mentioned in its press release that they are seeing signs of stabilization and improving demand in European and Brazilian steel markets, yet a lot of the destocking is over. I'm just curious if you guys are feeling any better about either the European or Brazilian at market heading into 2020?

Paul Lang -- President and Chief Operating Officer

Yeah. Mark, this is Paul. I'll start with rewind about six weeks, it was a pretty bleak picture. I think we had a lot of concern for our customers, particularly in Europe.

And South America was -- I don't want to say worse, but it was pretty depressing also. What we have seen, though, is really the last couple of weeks, there's been a little more positive news coming out of it and a little more discussion over what we're going to be doing in 2020. And I think that's reflected in the indexes you're seeing. We've seen a movement of about $10 on High-Vol A prices since the end of the year.

John Eaves -- Chief Executive Officer

Mark, as I made my opening comments, we've seen eight million tons of production come out. We think that number is going to grow, probably about several million tons with a lot of the cost structure in central app. I think at current price levels, it's just going to be challenging. So as Paul said, we've seen an uptick over the last couple of weeks.

There's probably a little pause right now because of the virus concerns. But as we head into the back half of the year, we certainly could see a pickup in the market. And with our cost structure and our logistics, I mean, we'll be prepared to capitalize on that. So we feel pretty good about where we are and where we're going.

Mark Levin -- Benchmark -- Analyst

No. That's great color. Appreciate it. Last question, this one is actually for Deck.

Any thoughts on what you think PRB consumption or demand is going to be in 2020 versus 2019, given kind of where gas is today in the inventory situation?

Deck Slone -- Senior Vice President of Strategy

Yeah, Mark. Thanks. I guess, I would say, I mean, clearly, that's a hard call. With gas prices in the mid-180s, that's tough.

And, obviously, we've had a pretty mild winter so far. I guess, for us, we're going to focus more on kind of the strategy, which is we're going to take whatever is there in terms of the market. We're going to continue to generate high levels of cash to the extent we can, and as we've been doing with our thermal assets. And, really, that continues to be our focus.

As we've indicated since emergence, we've generated about $600 million of segment-level EBITDA in excess of capital expenditures. And so rather than sort of sweating where the market is going to be, we know it's going to continue to be under some level of pressure, we're just going to continue to focus on that harvest strategy and taking cash to the fullest extent possible, managing our capital in a disciplined way. So hard for us to call exactly as we saw in 2019, it was a pretty significant step down in terms of overall thermal consumption. 2020 could be another one still.

We're not starting out great, obviously, but we think we've got the right strategy for that.

Mark Levin -- Benchmark -- Analyst

Great. Appreciate the time and congratulations, guys.

Deck Slone -- Senior Vice President of Strategy

Thanks, Mark.

Paul Lang -- President and Chief Operating Officer

Thank you, Mark.

Operator

Our next question comes from Lucas Pipes, B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey. Good morning again, and thanks for taking my follow-up question. I wanted to follow-up actually on some of the kind of bigger picture, met coal market questions that just came across. And if you think about kind of the balance in the North American market, is there a need for more production cuts? And if so, roughly how much? Thank you very much for your perspective on that.

John Eaves -- Chief Executive Officer

Lucas, I'll let Deck jump in here. But I think, certainly, with the cost structure, call it, 80-ish for average, I think it's going to be challenging at current pricing for a lot of these guys to make it. Some of them also have pretty stressed balance sheets, which is also going to put a challenge. But I guess we look at kind of the world and what's going on globally.

And as we put out a number of times, when we look at a very conservative demand growth over the next five years, a very conservative depletion rate. We think the world is going to be undersupplied over the next five to six years. I think the challenge to some of the guys in North America is kind of making it to that point. With their cost structure, I just think it's going to be very challenging.

I don't know, Deck, you got any comments?

Deck Slone -- Senior Vice President of Strategy

Yeah. Certainly, Lucas, I would agree with all those comments. And the fact is, and as we've indicated, we think this downturn is actually pretty constructive for us. We think that separating the wheat from the chaff is fairly useful here.

There's high-cost production in the market that really should come out, high cost production that was kind of cleaning to the rock even in a high-priced environment. And so because of the barriers to exit for a range of reasons, so this turndown is really, we think, healthy from a supply demand balance in the long run. Quite obviously, we are built to weather this, but we think several more quarters would be desirable. In just seven months, really, the downturn really began in earnest, sort of July 1, 2019.

And in just seven months, the fact that eight million tons has already come out of the market kind of tells you everything you need to know. There was production that really just didn't need to continue to produce. And as we've seen, I mean, some of that, quite frankly, some of those reductions happened even before the market turned down, which is significant. And then some happened 10 minutes after it did.

We've seen this steady drumbeat of additional reductions. And so we'd like to see this play out for a couple of more quarters, quite frankly. We're just not sure that, in particular, in North America, that the supply side can hold up. And so what's the right level? We couldn't tell you that.

But quite frankly, we could say that in the U.S., there's production that needs to dissipate. I would also add that we went through a three-year up cycle with very limited investment and expansion capital, which was a significant development. When you go through sort of $200 pricing for three years and there's very limited investment in new mining capacity, I think that speaks well to the sort of constructive nature of coal markets going forward. This downturn probably ensures that that continues.

And as John said, with depletion, it's a natural resource business, so we're going to have depletion, and we really think this sets up well for the next five to ten years in terms of a healthy supply demand balance in coking coal markets globally.

John Eaves -- Chief Executive Officer

And, Lucas, just a follow-on. If you think about our focus on High-Vol A, I mean, we think that that demand is going to be strong for decades. And with our cost structure and our logistics, I mean, we think we're well-positioned from a quality standpoint as well. There's just not a lot of people around the globe producing high quality, low cost, High-Vol A coal.

Deck Slone -- Senior Vice President of Strategy

And, Lucas, I'll throw on just one more comment. It's interesting, too. We are starting to see a little impact in the international arena as well. We saw a shutdown in New South Wales, the semi soft coal.

Just last week, there's a restructuring that's going on in Mozambique. And so it's not confined in the U.S., but the U.S. seems to be where we're going to see the biggest cuts quicker.

Lucas Pipes -- B. Riley FBR -- Analyst

Very helpful perspective. Maybe one quick follow-up just on the back of this. In North America, you have some coking coal assets guideline in restructuring. Is there anything that could be of interest there? Or you're pretty happy with your portfolio and to build-out at Leer South?

John Eaves -- Chief Executive Officer

Lucas, as you can imagine, I mean, we look at everything that becomes available and with a critical eye, but we also benchmark it against what we can do with Leer South and that reserve of 200 million tons. And really, quite frankly, nothing stacked up yet. From a cost standpoint, from a quality standpoint and our ability to get it to the port. So we'll continue to look around, but we like our organic growth strategy, very good.

So...

Lucas Pipes -- B. Riley FBR -- Analyst

Perfect. Great. Thank you very much for the additional color. Best of luck.

John Eaves -- Chief Executive Officer

Thanks, Lucas.

Deck Slone -- Senior Vice President of Strategy

Thank you, Lucas.

Operator

Our next question comes from Dave Gagliano, BMO Capital Markets.

Dave Gagliano -- BMO Capital Markets -- Analyst

Thanks for thanking my questions. And I apologize if this has been covered already. I just wanted to come back to the longer-term capital allocation plans and thoughts there. After 2020, obviously -- or not obviously, but after 2020, it looks like free cash flow generation goes up quite a bit, assuming market conditions hold relatively stable.

So I was just curious about the philosophy, prioritizing capital allocation plans after Leer South has developed. And is it a preference for more buybacks, special dividends, that kind of thing or other uses? Thanks.

John Drexler -- Senior Vice President and Chief Financial Officer

Yeah. Hey, Dave. Good question. Obviously, what's most important is the foundation that the entire company is built around, which is significant cash flow generation.

Right? The low-cost assets in any market environments are going to allow us to generate free cash flow. It's only going to be enhanced as we move forward with Leer South. For the last several years, we've been very focused on a capital return program. Back when markets were healthier, and we didn't have the more significant capital needs of Leer South, it really focused on share repurchases because we felt that that investment was an appropriate one.

We've made big strides there. We've reduced the shares outstanding by 40% during the course of that program. Obviously, as we've indicated, that we'll have a shift right now with a lower market environment, coal market environment, and higher needs right now for bringing on a significant cash-generating asset. But as you referenced, as we move forward into the 2021, post-2021 time period, this cash flow generation is going to be substantial.

That's a great opportunity for us. We'll continue to evaluate longer term as a management team and with the board on what ultimately that we'll do here. But we continue to believe that an investment in Arch is an investment that is appropriate. And so there'll be a lot more to come over that time period.

And, obviously, we'll keep the markets informed of our direction. John?

John Eaves -- Chief Executive Officer

Dave, just a follow-on. Certainly, we think the investment in Leer South is a prudent business decision. As I said early on, on an annual basis, an incremental $150 million of additional EBITDA, even in this pricing environment is pretty compelling. Investors, we think.

So we're going to spend that capital this year, quite frankly, as fast as we can spend it. And as quick as we can get this production up and running. And I can assure you, my board and I talk about capital returns at every board meeting. So as we get into 2021, and we're generating all this cash.

Clearly, that will be a topic that we cover very early on.

Dave Gagliano -- BMO Capital Markets -- Analyst

OK. Really, what I was -- and I appreciate those answers. And so just to clarify, really, what I was trying to get to is beyond 2020, is the preference for capital returns in whatever form? Or is there more preference for, our shift in preference for inorganic or organic opportunities?

John Eaves -- Chief Executive Officer

Dave, I think that'll depend on the business environment, the market environment. And as I said, I mean, those conversations are ongoing with our board and certainly, we'll make the right decision. But the management and the board's focus today is to get Leer South up and running as quickly as we can.

Dave Gagliano -- BMO Capital Markets -- Analyst

OK. Appreciate it. Thank you.

John Eaves -- Chief Executive Officer

Thank you, Dave.

Operator

Our next question comes from Chris LaFemina, Jefferies.

Chris LaFemina -- Jefferies -- Analyst

Hey. Good morning. Thanks, guys. Thanks for taking my question.

Just first on Leer South. I think you said that you expect to be able to fund that project out of existing cash flows. Does that mean that you expect free cash flow for Arch Coal in 2020 to be positive? And, secondly, with the development profile for Leer South and assuming coal prices stay relatively stable or go higher from here, I think Dave made a point earlier that your free cash flow should improve significantly beyond 2020. But then you also commented about looking for potentially adding on some smart leverage.

But if the Leer South project is covered by cash flows in 2020, and then your free cash flow trial -- profile significantly improves beyond 2020. I'm just trying to reconcile what you might do to add leverage to the business, when it seems like, if anything, your net debt should be going down.

John Drexler -- Senior Vice President and Chief Financial Officer

Yeah. So, Chris, this is John Drexler. I think as we've discussed over the course of this call, we're confident that the ability of the company to generate significant excess cash in all stages of the market cycle is meaningful. And we've indicated over the course of the call that given today's environment, we believe, in our expectation moving forward, we can continue to fund Leer South from existing cash flows.

I think I noted in my discussion with Mark, that there's some other positive cash impacting items as well. So as we look at the totality of that, clearly, we continue to believe the opportunity is there to fund Leer South from existing cash flows. With all that said, we know markets can be volatile. We know markets can be dynamic.

And so we'll continue to explore opportunities to put on very modest levels of leverage, probably designed in a way that could be paid back or paid back in accordance with getting Leer South back online. Any type of leverage that would be brought on would be very modest, would not stress the balance sheet. And once again, as we continue to watch markets evolve, we'll be prudent in evaluating all of those types of opportunities.

Chris LaFemina -- Jefferies -- Analyst

That's very helpful. Thank you.

Operator

Our next question comes from Michael Dudas, Vertical Research.

Michael Dudas -- Vertical Research -- Analyst

Thanks for squeezing me in. John -- or John Drexler. I guess, could you remind us how much, to date, has been spent on Leer South and what's the cadence? And where is the peak kind of level spending that you anticipate whether it's this year or early into 2021? And...

John Drexler -- Senior Vice President and Chief Financial Officer

Mike? Michael? Did we lose you? OK. I think we got the majority of the -- we lost -- as long as we're still online, I think we got the majority of the question related to Leer South. From a capital expenditure standpoint, we're guiding $360 million to $390 million. We've indicated in 2019 that we incurred $103 million of capital in our capital guidance for 2020, which is the most significant year of capital required for the build-out.

It's $220 million. So then backing into what's remaining in rounded numbers, it's around $40 million to $70 million that would be remaining in 2021, in advance of the longwall starting up in the third quarter of 2021. That's essentially the cadence. So 2020 is a significant year in capex.

And once again, all designed around making sure we're in a position to start the longwall up in the third quarter of 2021.

Operator

Our next question comes from Wayne Cooperman, Cobalt Capital.

Wayne Cooperman -- Cobalt Capital -- Analyst

Guys, sorry -- yeah.

John Drexler -- Senior Vice President and Chief Financial Officer

Good morning, Wayne.

Wayne Cooperman -- Cobalt Capital -- Analyst

So just to follow-up on that last question, what's the actual capex number for 2021 in total? And is there a number you guys are comfortable using a sort of an ongoing capital spending number beyond that? And I have one more question after this one.

John Drexler -- Senior Vice President and Chief Financial Officer

So, Wayne, from a capital perspective for 2021, we don't provide guidance to that other than the fact that you can back into the guidance for Leer South. Right? Maintenance capex this year is $90 million. I think we've made indications previously that for the structure of the company as it is today, that kind of $80 million to $100 million range going forward is a comfortable range for the company from a maintenance perspective...

Wayne Cooperman -- Cobalt Capital -- Analyst

So that includes Leer South after it's up and running?

John Drexler -- Senior Vice President and Chief Financial Officer

Once again, we haven't provided that specific guidance for 2021, and maybe there's a modest step-up in that capital for maintenance for Leer South going forward, but it wouldn't be significantly different from that range that I just described.

Wayne Cooperman -- Cobalt Capital -- Analyst

OK. So just the quarter, since you had a net income loss, the shares outstanding was like 15 million. What is the -- assuming you had an -- like what would the diluted shares outstanding be assuming you have positive net income? Is 15 million the right number? It seems a little bit low.

John Drexler -- Senior Vice President and Chief Financial Officer

Yeah. So 15 million is the actual shares outstanding. If you go back to the previous quarters where we had net income, I would say the diluted effect of those shares is anywhere from 800,000 to a million in a rough range. I guess you can go back to the actual filings themselves and see that.

So once again, because it was a net loss at the bottom line, accounting rules require that we not take in the dilutive effect of the dilution of the shares. So once again, I think you can go back to the quarterly filings, but it's anywhere from, call it, half a million to a million shares, but you should have access to those specifically.

Wayne Cooperman -- Cobalt Capital -- Analyst

If I was being conservative, and you guys obviously will get back to net income, the 16 million, give or take, would be about the right number.

John Drexler -- Senior Vice President and Chief Financial Officer

At out of the range of reason.

Wayne Cooperman -- Cobalt Capital -- Analyst

All right. Thanks very much.

John Drexler -- Senior Vice President and Chief Financial Officer

Thanks, Wayne.

Operator

And we have no further questions in the queue at this time. And I would like to turn the call back over to John Eaves.

John Eaves -- Chief Executive Officer

Thank you. I want to thank everybody, again, for your interest in Arch and for joining the call today. As discussed, 2020 could well be a year of transition for the industry following a three-year up cycle that leveled off in mid-2019, but Arch is exceptionally well equipped to ride the commodity cycle. While 2020 could start choppy, corrective forces are already under way in the marketplace and long-term global outlook for met coal was positive.

In closing, let me remind you the key value drivers that we believe make Arch an attractive investment. We have some of the industry's lowest cost mines producing some of the industry's highest quality products. We have a balance sheet that will serve us well regardless of the market, and we have a compelling organic growth story that we believe is unmatched in the industry. In short, Arch is positioned to manage effectively through any downturn and thrive over the long term.

Thank you, and we look forward to updating you in April.

Duration: 50 minutes

Call participants:

Deck Slone -- Senior Vice President of Strategy

John Eaves -- Chief Executive Officer

Paul Lang -- President and Chief Operating Officer

John Drexler -- Senior Vice President and Chief Financial Officer

Lucas Pipes -- B. Riley FBR -- Analyst

Daniel Scott -- Clarksons Securities -- Analyst

Mark Levin -- Benchmark -- Analyst

Dave Gagliano -- BMO Capital Markets -- Analyst

Chris LaFemina -- Jefferies -- Analyst

Michael Dudas -- Vertical Research -- Analyst

Wayne Cooperman -- Cobalt Capital -- Analyst

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