Arch Coal, Inc. (ARCH) Q4 2020 Earnings Call Transcript

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Arch Coal, Inc. (ARCH -0.90%)
Q4 2020 Earnings Call
Feb 9, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Arch Resources, Inc. Fourth Quarter 2020 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead.

Deck S. Slone -- Senior Vice President, Strategy

Good morning from St. Louis, and thanks for joining us today. While we are conducting this morning's call from Arch's boardroom, I want to assure you that the team is widely spaced and following CDC guidelines closely.

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 archrsc.com.

Also, participating on this morning's call will be Paul Lang, our CEO; John Drexler, our COO; and Matt Giljum, our CFO. After our formal remarks, we will be happy to take questions.

With that, I'll turn the call over to Paul Lang. Paul?

Paul A. Lang -- Chief Executive Officer and President

Thanks, Deck, and good morning, everyone. I appreciate you joining us on the call today.

Let me begin by expressing my deep gratitude to the entire Arch team for their ongoing dedication during what is quite obviously a complex and challenging time. Even in the face of a significant step up in infection rates over the last several weeks that mirrored the surge nationwide, the Arch workforce remained steadfast in its commitment to taking all the recommended precautions to protect one another and their families from the virus, while continuing to execute at the highest level as essential service providers.

We are fortunate to have a disciplined and professional team and I'm proud to be associated with them.

That same commitment to excellence was on display in Arch's list of accomplishments during 2020, as we worked to reposition the company for future success. Despite all the requirements associated with navigating the global health crisis, our employees made tremendous progress in achieving a number of strategic objectives.

Hitting on just some of the highlights. We've maintained our strong momentum in the development of the world class Leer South growth project, and we augmented our liquidity and funded the build out of this transformational project through three successful financing efforts. The teammates maintained the first quartile cost structure in our core coking coal segment, despite significant market driven volume reductions.

We continued our strategic shift toward steel and metallurgical markets through the contribution of the Viper thermal mine to Knight Hawk Coal Company. And our employees yet again demonstrated their leadership in the environmental, social and governance arena by capturing many of the industry's top safety and environmental awards and leading the industry on all of these critical fronts.

We've streamlined our organizational structure with a voluntary separation program that reduced corporate staffing levels by 25% and cut our overhead costs by $10 million per year.

Finally, we moved quickly to align our thermal output with the rapidly changing market dynamic and initiated an accelerated reclamation and closure plan in our Power River Basin operations, even as we continue to explore strategic alternatives for those assets.

In summary, we've demonstrated operational excellence in all the facets of our business, pushed ahead with our plan to create an even stronger platform for future cash generation and continued our strategic pivot to a pure coking coal producer in a logical and thoughtful manner.

As you know, Arch began to shift its strategic focus toward steel and metallurgical markets nearly 10 years ago, and we've accelerated those efforts markedly in recent quarters. Most critically, we've delivered on our top priority, ability to powerhouse U.S. metallurgical franchise, supported by an outstanding cost structure, a premium slate of products and a best-in-class growth project.

With the addition of Leer South, we expect to cement our position as the premier producer of metallurgical coal in the United States, and as the preeminent supplier of High-Vol A metallurgical coal globally. Just as importantly, we've built a platform geared to stand the test of time with the Leer and Leer South longwall projected to operate in tandem, and to serve as our financial linchpins for the next generation.

At the same time, we continue to drive forward with a strong sense of urgency in optimizing the remaining value of our legacy thermal assets, and in systematically reducing the long-term closure liabilities associated with them.

We took a significant step in this effort at year end when we contributed the Viper thermal mine in Illinois to Knight Hawk, which will operate the mine going forward. As part of this transaction, we reduced our long-term undiscounted mine closure obligations by about $21 million.

As we move forward in 2021, we plan to accelerate our efforts to shrink the operating footprint of our Powder River Basin mine, and to reduce the inflated state-calculated bonding requirements and long-term closure obligations of associated with these mines.

The next significant step in this effort will come at Coal Creek, where we plan to reduce the asset retirement obligation by around 80% or $40 million over the course of the next 18-month. Significantly, we believe we can achieve this goal while still maintaining the cost structure in line with historic levels. Of course, the closure of Coal Creek will necessitate further reductions of our Wyoming workforce, but we expect to achieve that in an employee sensitive way, principally through normal attrition.

In 2021, we anticipate producing around 2 million tons at Coal Creek, the final full year of operation at the site, before discontinuing mining and commencing the reclamation of last active pit in 2022, followed by the demolition of the facilities.

While Coal Creek will be our near-term focus, we're also in the process of developing an accelerated plan for the Black Thunder mine. At this point, we've not finalized the details as yet, but our plan will be to maintain strong cash flows in order to provide funding for the ultimate closure, even as we seek to reduce final reclamation requirements.

Balancing these dual objectives may translate into the establishment of a sinking fund or similar mechanism in order to facilitate putting free cash aside for future mine closures use.

Of course, the speed of the wind down of Black Thunder will depend on a number of factors, including market dynamics and the state's willingness to consider reasonable reforms to its currently owner responding program. Regardless how we proceed, we're confident that the Powder River Basin segment is well positioned to continue to generate sufficient levels of cash to fund its own long-term closure obligations.

Finally, I'd like to share a few thoughts on the metallurgical markets before handing the call over to John Drexler for further comment on our operating performance.

As you're all well aware, the global economy has been shifting into higher gear in recent months in the wake of the virus-related lockdowns and disruptions in 2020. Nowhere is that resurgence more evident than in global steel markets, where production is now running well ahead of pre-virus levels.

To give you a sense of that strength, the World Steel Association estimates that global steel production was up nearly 6% in December 2020 relative to December 2019, and 2020 as a whole finished the year down less than 1% when compared to 2019 in spite of the pandemics impact.

Pricing is up even more robustly with hot rolled coil trading at levels of 50% to 150% above last year's pandemic-driven lows, depending on the regional market.

Moreover, blast furnace utilization rates in North America have climbed steadily and now stand at 76% versus just 51% at the low watermark of 2020. That progress is emblematic of what we're seeing on the international stage as well.

Moreover, the points for Arch, of course, global metallurgical markets are being supported by this resurgence of the steel industry, despite uncertainty surrounding Chinese import policies.

As an indicator of the strengthening, the U.S. East Coast High-Vol A price assessment is up nearly 50% at press when compared to last summer's lows. In addition to the resurgent demand, the global supply cuts is active since the downturn began in late 2019, are also bolstering the market.

Arch believes that more than 30 million tons of coking coal supply has been taken out of the market over that timeframe. What's more of these production cuts came from not only the United States, but from Canada, Australia, Russia and Mozambique, with a meaningful percentage of that total expected to be permanent.

Moreover, global coking coal producers continue to announce plans to delay or even cancel the relatively modest number of expansion projects currently in the pipeline. Obviously, some of these projects will continue, but the cadence of development has been disrupted, serving to further tightening the supply/demand dynamic.

While it's too early to say whether the current price strengthening will persist, we are encouraged by what our customers are saying about their future plans and are seeing strong interest in our remaining open 2021 volumes.

In closing, let me reiterate that we remain highly confident and deeply committed to our straightforward plan for long-term value creation and growth. As the world transitions to a post pandemic future, we believe we're well positioned to continue to build on our proven track record of operational excellence and to excel with our low-cost metallurgical assets, our high quality slate of products, our industry-leading ESG performance and our best-in-class Leer South growth project.

In short, we like our positions and are committed to using our ever strengthening platform to create long-term value for our owners and other stakeholders.

With that, I'll now turn the call over to John Drexler for further details on our operating performance during last quarter, as well as what we're expecting in 2021. John?

John T. Drexler -- Senior Vice President and Chief Operating Officer

Thanks, Paul, and good morning, everyone. I'd like to echo Paul sentiments about the great dedication and tremendous contributions of the Arch's workforce in recent months. 2020 has been a year like no other and I'm so proud of how the team has executed despite all of the challenges and distraction.

As Paul noted, Arch's single highest strategic objective remains the ongoing and successful build out of our world class coking coal platform. During 2020, we once again demonstrated the already significant capabilities of our existing portfolio, delivering a top tier cost performance despite virus-related volume reduction, leveraging our sales and logistics expertise in a difficult market environment, and expanding the breadth and depth of our customer base.

At the same time, we drove forward with the Leer South expansion project that should deliver a step change in our portfolios cash generating capabilities. With the start-up of that transformational asset in about six months time, we expect to realize improvements in virtually every key metric for long-term success, including volumes, per ton cost, and average quality.

For the year just ended, we achieved cash costs of $61.13 per ton, which was only slightly above the midpoint of our guidance at the start of 2020, despite a nearly 1-million-ton pandemic-driven reduction in our coking coal shipments. In fact, we were on track to hit that $60 per ton target level for most of the year, until a significant step up in infection rates in the second half of the fourth quarter.

We estimate that virus-related impacts reduced our output by more than 200,000 tons in Q4, and increased our metallurgical segment operating costs by approximately $3 per ton in that period.

As for Leer South. we recorded another strong quarter of progress and are now entering the stretch run. The operating team is well on its way developing the first nearly two-mile-long longwall channel. All of the 212 longwall shields have been manufactured and we expect to have the entire system on site by the end of the first quarter.

Additional significant milestones include completing modernization and upgrading of the preparation plan, completion of the new high-capacity layout, and finishing the last ventilation shaft.

One of the final major projects remaining is the cutover of the replacement to the existing slope well with a higher capacity system that ties the underground network to the renovated and greatly expanded preparation plan. As has been anticipated, this major system change will necessitate a 30-day outage prior to the start-up of the longwall.

The culmination of this build out, of course, will come with the start-up of the longwall system and the lower companions team approximately six months from now.

The excitement of the mine is substantial as you might imagine. While we anticipate a period of several months during which we will be working the teams out and steadily ramping output, we should start reaping the benefits of the Leer South mine well before 2021 is over.

I'm also pleased to report that the projected capital spend for the mine remains within the guideposts that we provided approximately two years ago, although we now anticipate gravitating toward the higher end of that original range of $360 million to $390 million, due in large part to the virus-related shift losses, quarantines and other impacts.

As we had contemplated, the opportunity to ramp production at Leer South into a strengthened market environment appears to be increasingly likely. Our marketing team has been busy in recent months, locking down close to 2.6 million tons of incremental metallurgical coal sales during the fourth quarter for delivery in 2021. The vast majority of these new commitments have been at index, including our first ever term business with a Chinese steel producer for 300,000 ton of Leer coal delivered rapidly from Q2 2021 to Q1 2022.

To give our overall metallurgical position some perspective, we are 80% committed on this year's plan of 7.8 million tons at the midpoint compared to 60% committed at this time last year on a plan of 7 million tons, another sign of the strength of the market.

As I noted, the build out of our metallurgical portfolio is our top strategic priority, but complementing that strategic pivot is our intensifying focus on environmental, social and governance leadership. During 2020, we once again set the industry standard for large integrated producers with a loss time incident rate across all of our operations of 0.93, which is nearly 3 times better than the industry average, and again leads the diversified producers in the United States.

In addition, we again set the bar for environmental compliance, recording just one SMCRA violation across all of our operations for the fourth year in a row, as well as only one water quality exceedance against 168,000 parameters measured at 650 discharge points company wide, for a compliance rate of 99.999%, a truly remarkable accomplishment.

In addition and as further evidence of our clear commitment to ESG excellence, our operations claimed two Sentinels of Safety Award, the nation's highest distinction for mine safety; the Department of Interior's Good Neighbor Award, the nation's highest honor for community outreach and engagement; the Milestone Safety Award, the state of West Virginia's top safety honor; and the Greenlands Award, the state of West Virginia's highest reclamation honor. Leading the way where our two Cornerstone operations, Leer and Leer South, which claim three of these five awards, thus laying the foundation for continued excellence in the future.

Now, let's discuss our plans for our thermal assets in just a bit more detail. As you know, we are currently exploring strategic alternatives for our thermal mines, consistent with the recent move to contribute Viper to Knight Hawk. At the same time and in the event those alternatives don't materialize, we are moving forward with purpose down a dual track with the objectives of reducing our thermal footprint in an accelerated fashion and optimizing cash generation at these assets for deployment in final reclamation and closure.

Fortunately, we are well positioned to drive progress on both fronts simultaneously. That's because roughly 20% of our total ARO is tied to Coal Creek, even though that mine only produces around 2 million tons annually at present. In other words, we plan to focus our accelerated reclamation efforts at Coal Creek initially, and our cash optimization efforts at Black Thunder, where our margin potential is greatest. And we expect good results in both instances.

At Coal Creek, we are targeting an ARO reduction of $40 million or around 80% of the mines total in just 18 months or so. In fact, we have already made a good start on that effort after transferring around 40 people and a suite of equipment from Black Thunder to the Coal Creek mine in December to focus exclusively on final mine reclamation.

For the year, we expect the PRB mines to ship about 48 million tons, the vast majority of which is already committed. We would also expect to achieve a per ton cost level generally consistent with its recent historical averages, even with the accelerated reclamation work at Coal Creek.

While the primary focus of our reclamation efforts this year will be at Coal Creek, we also intend to pursue several projects at Black Thunder to reduce its surety bond requirements and shrink its operational footprint. We remain confident in the ability of our thermal assets to generate sufficient levels of cash to pay for their own ultimate closure costs.

While we are enthusiastic about our outlook for full year 2021, we are cautious about the continuing impacts of COVID-19 in the early part of the year. Due to virus-related impacts that have already idled over 25 continuous miner shifts at our metallurgical operations thus far in 2021, we expect only a modest sequential step up in our Q1 coking coal shipments versus last quarter. Finally, as is typically the case, shipping rates in the PRB tend to be lower in the first half of the year versus the second.

Let me conclude by restating our commitment to driving operational excellence and continuous improvement across the entire enterprise. We are focused on executing at a world class level with our existing metallurgical portfolio, finishing strong the build out of Leer South, expanding the breadth and depth of our market reach in advance of Leer South start-up, and intensifying our focus on industry leadership in the critical area of ESG performance.

With that, I'll turn the call over to Matt for his thoughts on our financial performance. Matt?

Matthew C. Giljum -- Senior Vice President and Chief Financial Officer

Thanks, John, and good morning, everyone. Before getting into the financials, I would like to add a little to the discussion around our plans for the thermal operations with a focus on surety bonding.

As Paul and John had mentioned, our initial priority is the accelerated reduction of the asset retirement obligation and related bonding requirements at Coal Creek. At the same time, John noted the opportunities of Black Thunder for more limited reclamation that will allow for bond reduction without any impact on our operational flexibility.

The work we plan to perform over the next two years, along with the divestiture of Viper, should result in a reduction in bonding requirements of approximately $70 million, which represents nearly 15% of the total reclamation bonding for our legacy thermal operations.

Clearly, that is a significant first step in reducing those obligations. The logical next step, as Paul alluded to in his prepared remarks, is to begin setting aside funds for future reclamation, in line with the cash flows generated from the thermal segment in excess of current reclamation spending.

Given the significant amount of reclamation currently under way, along with the typical seasonality in PRB shipping volumes, we would anticipate that funding to begin in the latter part of this year.

Turning to the quarterly cash flows and liquidity. Fourth quarter operating cash flows of $5 million were weaker than the third quarter, following the trend and operating results and reflecting the semi-annual payment of production taxes for our PRB operations.

Capital spending for the quarter increased $23 million from the prior quarter, with both project capital and maintenance spending up sequentially. Total capex was $80 million, including nearly $57 million of Leer South project costs and more than $4 million have capitalized interest. Maintenance capital for the quarter was $19 million with substantially all of that related to the metallurgical segment.

We finished the year with total liquidity of $315 million and unrestricted cash of $284 million. Availability under our credit facilities was constrained to year end given the divestiture of Viper and the lower-than-expected volumes in the quarter.

If metallurgical prices remain at current levels, we would expect the borrowing base under both facilities to improve meaningfully throughout 2021.

In addition, I wanted to note two other sources of liquidity for this year. First, we have approximately $18 million remaining to be received from our 2019 federal land settlement, with substantially all of that expected in the first half of this year. And finally, approximately $6 million of restricted cash from this summer's tax-exempt bond offering remains on our balance sheet and will be available to us for qualifying expenditures made of Leer South in 2021.

Next, I would like to expand a bit on some of the financial guidance provided in this morning's release. Beginning with SG&A, we're guiding to a midpoint of $79 million for total SG&A with cash spending of $62 million. Cash spend represents a reduction of nearly 7% from 2020 levels, even as we anticipate an increase in marketing activities as Leer South ramps up and COVID restrictions are eventually relaxed. When compared to our original SG&A guidance for 2020, total expense has been reduced by 15% and the cash portion is more than 16% lower.

With respect to interest, we are guiding to net interest expense on our income statement of $24 million at the midpoint, which represents an increase of more than $13 million from 2020 levels. For modeling purposes, the 2021 expense breaks down to cash interest expense of $27 million, non-cash interest amortization of $10 million, offset by capitalized interest of $13 million. The non-cash interest component has increased substantially due to the accounting treatment for the convertible notes.

Finally, we are targeting capital spending at $210 million at the midpoint. Of that total, approximately $107 million relates to Leer South. Roughly $13 million represents capitalized interest and the remainder is maintenance and land expenditures with more than 90% of that total related to our metallurgical operations.

As you'll recall, the Leer South spending includes $23.5 million associated with the replacement of longwall shields lost in Mountain Laurel, for which we were reimbursed in 2020.

From a timing perspective, we expect the vast majority of the Leer South spending to occur in the first half of the year while maintenance is slightly weighted toward the back half.

Before moving on to Q&A, I wanted to briefly mention one ongoing financing initiative. As previously discussed, we expect to have the opportunity to complete the tax-exempt financing efforts that we started in 2020. As you will recall, the $53 million that we raised last year was limited by the State of West Virginia's policies surrounding allocation of tax-exempt funds. We have worked with the state to obtain additional allocation. And now, we'll look to raise another $45 million for the remaining qualifying expenditures. Given the attractiveness of this financing, recall that the original tranche carried a 5% interest rate, we plan to pursue this opportunity in the first quarter.

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

Questions and Answers:

Operator

Of course. Thank you. [Operator Instructions] And we'll go ahead and take our first question from Lucas Pipes from B. Riley Securities. Please go ahead.

Lucas Pipes -- B. Riley Securities -- Analyst

Hey, Good morning, everybody, and job well done on both a very difficult COVID year and then on the ESG front in particular as well.

Paul A. Lang -- Chief Executive Officer and President

Thank you, Lucas.

Lucas Pipes -- B. Riley Securities -- Analyst

I wanted to first go into capex a little bit more. I think you touched on it in the prepared remarks. But can you provide a breakdown on kind of growth capex with Leer versus maintenance sustaining capital in 2021? And then, as we look past 2021, what should we expect? Of course, it's early, but can you give us a sense for where you think longer term capital spending post-Leer would shake out? Thank you.

John T. Drexler -- Senior Vice President and Chief Operating Officer

Hey, Lucas, this is John Drexler. As we've indicated, we're still within the guidance range of $360 million to $390 million at Leer South. We've indicated that we're going to be trending toward the upper end of that range, given some of the challenges of COVID and some of the inefficiencies that we've seen here late in the fourth quarter.

In addition, the capex includes the insurance recovery of $23.5 million for the longwall shields that we lost in 2019 at Mount Laurel, so at the upper end of the $360 million to $390 million plus the $24 million of that insurance recovery, and that begins to get you the total project for Leer South. Then we highlighted the maintenance capex of $13 million -- I'm sorry, capitalized interest of $13 million. And then the remainder for this year would be maintenance capex.

As we look forward, we've indicated that prior to Leer South starting up, our maintenance capex would generally run somewhere in the $80 million to high 90s or under $100 million. I think with the start-up of Leer South and then ongoing capital needs there, that $100 million maintenance capital range or slightly above that is probably from a modeling perspective where we would see maintenance capital going forward.

We're excited to get Leer South up and running. We think it's a transformational project. It's been a big commitment for us here as we've worked through the depth and challenges of COVID and the impact on the markets. But we've got great confidence that as we're coming to the finish line here and bringing this online into a strengthening market and cash generating capabilities as we move forward.

Matthew C. Giljum -- Senior Vice President and Chief Financial Officer

And look at this deck, just to connect the dots really one more time clearly so that we address this. So, to get to that $390 million, $390 million for Leer South, that's another $84 million or so of spending that we have. We have the $24 million for replacement shields, which effectively is what we got compensated for in 2020 with the insurance recovery. So that gets you to with rounding around $107 million, the capitalized interest at about $13 million, and that gets you to about $120 million, and then $90 million or so for maintenance capex, which gets you to that $210 million at the midpoint.

Lucas Pipes -- B. Riley Securities -- Analyst

Terrific. Very helpful.

Paul A. Lang -- Chief Executive Officer and President

Lucas, one thing I did want to point out, and I think the teams been rather modest about this, but if you think about it, it's pretty unusual in this industry to have this bigger project, this complicated project. It's effectively being brought in on time and on budget. So, just tremendous amount of respect for the team and everything that John and rest of this group has done.

Lucas Pipes -- B. Riley Securities -- Analyst

Thank you. Yes, that's great to hear. My second question is on the 2021 guidance, and there's this kind of thermal bucket. And I wondered kind of -- I think in your prepared remarks you touched on PRB cost being similar to recent historical rates. But then I look at this thermal guidance, and does -- costs in there are $11.50 to $12. Does that include some of your western operations, for example, or what you'd say, or maybe somewhat even more other thermal? Or -- can you help us place this guidance? Is this exclusively PRB, or are there other moving pieces in there as well? And this applies not just to the cost, but also to the price volumes as well.

John T. Drexler -- Senior Vice President and Chief Operating Officer

Yes, Lucas, I'll start off here and others can jump in as well. As you know, as we continue our transformation to be exclusively focused on metallurgical coal, we've had two additional thermal segments, the PRB, and then other thermal. Other thermal included our Viper operation in Illinois and our West Elk operation, our longwall operation in Colorado.

With the contribution of Viper into Knight Hawk, which kind of continues the path that we have here and focusing on that, that leaves us with the combination of both the PRB and the West Elk operation in Colorado, which we are now putting together into thermal.

The guidance that we're representing for thermal, the vast majority of that obviously is influenced by our PRB operations, and specifically Black Thunder. I think if you look back to last year in the PRB segment for 2020, despite the significant adjustments we needed to make in the PRB segment, we delivered costs at around $11.50 a ton for full year 2020. As you look to the guidance in that thermal segment, we're guiding $11.50 to $12, obviously, heavily influenced. The vast majority of that influence is the performance in the PRB.

Our West Elk operation contributes about 2.5 million tons on an annual basis. We've worked to reposition that asset here. There has been some opportunity here. We've not gotten the discussion on the markets. But what we've seen in the Newcastle markets, to get volumes placed there as well. So, we feel good, obviously, about the thermal segment. The guidance there is both the combination of the PRB operations and our West Elk operation, and that's how we'll carry forward.

Matthew C. Giljum -- Senior Vice President and Chief Financial Officer

Lucas, as John said, we thought it made sense to roll the legacy thermal assets together given how the strategy -- given how we're proceeding with our strategy. Additionally, West Elk would have been a segment by itself. So, we didn't have comfort sharing that kind of specificity on West Elk alone.

Lucas Pipes -- B. Riley Securities -- Analyst

Understood. Appreciate that clarification. And then, last one from me, coking coal volume outlook, quite robust. Can you share with us kind of what we should expect in terms of cadence on the volume side, Q1, Q2, maybe across four -- second half of the year more broadly? And how would you recommend we think about that ramp up over the course of the year? Thank you.

John T. Drexler -- Senior Vice President and Chief Operating Officer

So Lucas, as we indicated in our prepared remarks, we're continuing to see the impact of COVID here. And we think over time, we'll continue to manage COVID effectively. We're encouraged with the vaccine rollout, but that's going to influence the first quarter shipment levels. We're guiding to we believe rates that would be similar to what we just experienced in the fourth quarter.

As you know, we've got the opportunity here to bring the Leer South operation online here in the third quarter is what we're guiding to. Obviously, once the longwall comes up and starts to run, we'll be working out kind of the nuances of starting that up. It typically takes a month or so and continues to work through that. And then over time, we'll continue to focus on ramping up and optimizing that asset. But with that longwall coming online, you can expect to see an increase in shipments in the back half of the year.

So right now, from the portfolio we have, we've indicated flat shipment levels for Q1. I think you could look to some of our historical trends in modestly better quarters historically to kind of build Q2, and then it should continue to ramp up as we step through Q3 into Q4 and ultimately to that -- what we're guiding to now, that midpoint of 7.8 million ton.

Lucas Pipes -- B. Riley Securities -- Analyst

Terrific. Well, really appreciate all the color. Everybody, best of luck and thanks.

Paul A. Lang -- Chief Executive Officer and President

Thank you, Lucas

Operator

[Operator Instructions] And we'll go ahead and take our next question from David Gagliano from BMO Capital Markets. Please go ahead.

David Gagliano -- BMO Capital Markets -- Analyst

Hi. Great. Thanks for taking my questions. On the-just wanted to ask a little more on the coal side, first of all. On the pricing dynamics, obviously, gave us 80% of sold, committed on volumes; can you just walk us through each of those buckets in terms of how they're actually going to be priced as we go through the year as well?

John T. Drexler -- Senior Vice President and Chief Operating Officer

So Lucas, I'll start here, once again, others can jump in. So, we feel really good about the book that we've built. As we indicated, having 80% committed at this stage of the game, with the vast majority of that commitment being unpriced and exposed to market pricing. We feel a very strong position. You know the portfolio of our production prior to Leer South coming online between Leer and Sentinel, the predecessor to Leer South operation, you're running at about 5 million tons of coking coal with that being High-Vol A, then you've got Mount Laurel High-Vol B, which is 1 million ton, and you've got Beckley Low Vol, which is 1 million ton.

So, we're real proud of that portfolio. What we've seen, and I'm very proud of the marketing team. There's a very strong market environment. And we put a lot of met coal to bed over the course of the last quarter. And with all of that at index pricing, pricing in a market that was improving, you can kind of take that and spread the market prices across the qualities and average back to build the rest of the model.

Paul A. Lang -- Chief Executive Officer and President

As you look, David, obviously, we've got about, if you look at the midpoint of our guidance, about 25% can be at fixed price. So that leaves about 75% of our remaining position subject to index pricing. And I think more specifically, as I understood your question, the vast majority of that's priced off East Coast indices or assessments, although there's a small percentage that has of the Australian PRB.

Deck S. Slone -- Senior Vice President, Strategy

David, so it's Deck. And so, most of our Asian business is priced off of that, as Paul said, off of the Australian PRB price. And so, you will see here in the first quarter a reflection of that fact, the fact that the PRB had lagged pretty significantly, you'll see that in our pricing in the first quarter. Having said that, with the recovery, that'll be short lived. And so, that business we've signed into Asia based on Queensland pricing should rebound significantly and reflecting what we've seen in terms of the balance in terms of PRB pricing.

Additionally, we did note that we sold about 300,000 tons into China, that is CFR business. And so, that will be priced based on the delivered price into China, which, as you know, is quite strong right now, well over $200. And so, that's advantageous as we sit here today.

Paul A. Lang -- Chief Executive Officer and President

So, Dave, I mean, even if you look at the averages for High Vol A, our primary product, U.S. East Coast, for the fourth quarter, those averages were $121 a metric ton delivered to East Coast. Through end of last week, High-Vol A is averaging close to $150. So clearly, over a $25 increase in that primary market for us, strength across all of the markers. So, we feel good about how the book is built and how it will perform as we move forward.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, that's helpful. Thanks. So, I think I got most of that down. I just want to -- so 75% open, and can you just break that bucket, that 75% piece? Can you break that into -- maybe just frame it on a percentage basis or ton basis? How much is actually linked to that Atlantic basin price that is significantly higher than the Pacific Rim price, Pacific basin price? And how much is actually linked to the Pacific price?

John T. Drexler -- Senior Vice President and Chief Operating Officer

David it would be more than 75% would be the U.S. East Coast price.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, thanks. That's helpful.

John T. Drexler -- Senior Vice President and Chief Operating Officer

Of course, the vast majority that being to the High-Vol A, the High-Vol A marker specifically given that that's how we're weighted pretty heavily.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, perfect. Thank you. And then I just wanted to switch gears to the surety bonding reclamation topic. And I apologize I'm not fully up to speed on this subject. But I'm just wondering if you could help us frame the size of this, the potential size of this sinking fund, right, that you flag?

Matthew C. Giljum -- Senior Vice President and Chief Financial Officer

Yes. So, Dave, this is Matt. I'll start on that. In terms of the reclamation work that we will ultimately have to do in the PRB, I characterize it in really two distinct things. One, is work that we can do on an ongoing fashion while production continues. And the other is work that essentially can't be done until we're done mining and no longer generating revenue.

And it's that second piece, kind of the end of the mine life that we think makes sense to build a sinking fund for the remainder, and we've worked with our sureties to make sure they understand the work that we're doing, and the focus we're putting on that. The remainder, we think as long as we're remaining as current as we can be, there's no need to build funding toward that.

So, as we look at this year, just to kind of frame up what we're talking about based on the thermal guidance, if you use roughly 50 million tons and an average price rounded to $13, we're going to generate about $50 million to $60 million in the thermal operations. The capex needs are going to be less than $10 million. So, there's going to be, call it, roughly $50 million, $40 million to $50 million available.

We're going to spend the majority of that on reclamation work being done today, probably $25 million to $30 million at Coal Creek, and it's going to leave somewhere in the neighborhood of $15 million to $20 million that would be available to put into a fund that will go for those end of the mine life activity.

So that's kind of the way we're thinking about it here in terms of what that fund builds up to over time. At Black Thunder, there's probably roughly half of their ARO is in that second bucket. So, something in the neighborhood of $100 million to $120 million over time that we would have to build to. But that's how we're thinking about it today. And as I mentioned, had good discussions with our surety partners about that concept. They're very supportive of the work we're doing today, and the fact that we're meaningfully going to be reducing both the ARO and the bonding and think that's a good path forward.

Paul A. Lang -- Chief Executive Officer and President

And Dave, I think Matt laid that out very well, just a couple other items maybe to comment on. We couldn't have two better examples in the portfolio that we're working on, Coal Creek and Black Thunder. Coal Creek, as we've indicated, at the end of this mine life, we're in a position now where we can make significant advances in final closure of that operation that does two things. It not only reduces the bonding requirement, but it also eliminates the ARO, the reclamation obligation recorded on the balance sheet.

At Black Thunder, where we continue to have the opportunity given markets to generate meaningful cash, our focus is on reducing the footprint while simultaneously producing that coal generating cash and using that cash generated to shrink the footprint; and then also, as Matt indicated, provide for that sinking fund over time for the final mine footprint, as we look to the future. So hopefully, that gives you a little more color and insight on that.

Deck S. Slone -- Senior Vice President, Strategy

Dave, it's Deck. And just one final point on that. Just -- I know it's a question that some have had. It's a multifaceted effort and multifaceted engagement with the surety. Certainly, we're conveying to them that that strong commitment to conservative balance sheet, and you saw that with the three financings we did during 2020. So, making sure that it's clear that we have lots of cash on the balance sheet and a very strong financial position, generally, we've kept them apprised of Leer South coming online, which is going to greatly expand our cash generating capabilities. And we continue to convey, as John just described, that we're well committed in the PRB, and we will continue to generate meaningful amounts of cash in the PRB. We have the aggressive reclamation and closure plan that we continue to expand upon, as announced today, the closure of Coal Creek as the next step in this really accelerated closure of Coal Creek. Matt laid out the sinking fund mechanism that we are contemplating. We're focusing on both the reducing the bonding as well as the asset retirement obligation. And then we're going to be providing sort of ongoing progress.

So, we think that all those things should provide a lot of comfort to our providers and feel good about where those discussions are today.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, that's very helpful. Thank you. So, when you take all of that together, is it expected that the thermal coal business, the cash generated from the remaining thermal coal business will sort of be ring fenced and/or whatever and isolated, and that will be enough for the surety bonding requirements? Or is there an expectation that some of the free cash flow associated with the net business will also end up funding surety bonding requirements?

Matthew C. Giljum -- Senior Vice President and Chief Financial Officer

Yes, Dave, this is Matt. I think our expectation today is that given the -- certainly, the committed business we've got in the near term, but also the plants that we're selling to and our view for the PRB demand over the next handful of years, that there's enough cash that can be generated in the thermal business to pay for the obligations that are there.

John T. Drexler -- Senior Vice President and Chief Operating Officer

And Dave, that's a reflection, I think, of just once again, the tier one nature of the asset that we have out there for years, despite the significant changes we've seen in volume levels, the outstanding team we have out there is continuing to deliver on cost, costs that allow us to generate cash. And as we sit here today, we've got great confidence that we'll be able to continue to do that moving forward.

Deck S. Slone -- Senior Vice President, Strategy

And Dave, as John mentioned, I mean, if you look back over the last 10 years, as we've systematically reduced production, we've maintained the margin that has been pretty consistent over that timeframe. And so, we have the ability to flex as we need to flex, still generate cash. And yet, over time, that 50 million tons will become 40 million tons, will become 30 million, but still generating meaningful amounts of cash.

We've also talked extensively about the conservatism built into some of our assumptions on the liability, so we feel quite good about the thermal assets being able to continue to sort of pay their own way here, pay final closure costs from those online cash flows.

Paul A. Lang -- Chief Executive Officer and President

Dave, without pushing this down the road too far, I think as you stand back, the way I look at this is pretty simple. First, I think what we're doing, we're taking positive control of the situation. We're controlling the things that we can see steer. The other thing is, and it's just from my experience, reclamation never gets cheaper or easier. I think if we get it done, and we get it done quickly, we have always tended to get it done cheaper than what we have on liability. So, that's kind of the overriding philosophy of what we're trying to do here.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, great. Thank you very much.

Operator

And it appears we have no further questions. And with that, that does conclude our question-and-answer session. I would now like to turn the call back over to Paul Lang, for any additional or closing remarks.

Paul A. Lang -- Chief Executive Officer and President

I'd like to thank everyone again for your interest in Arch and taking time today to participate in our quarterly call. As you can tell, our optimism and enthusiasm continues to build as the start-up of Leer South longwall draws closer. While we're trying to guess market timing, it's always fraught with peril, it appears that we could be very well positioned to take advantage of a post-pandemic era, which many countries are looking to stimulate their economies. At the same time, that pent-up consumer demand is starting to materialize. However, that timing plays out, we intend to be prepared with a significant step up in capabilities that we're going to recognize with our expanding coking coal platform.

With that, operator, I will conclude the call and I look forward to reporting to the Group in April. Stay safe and healthy, everyone. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Deck S. Slone -- Senior Vice President, Strategy

Paul A. Lang -- Chief Executive Officer and President

John T. Drexler -- Senior Vice President and Chief Operating Officer

Matthew C. Giljum -- Senior Vice President and Chief Financial Officer

Lucas Pipes -- B. Riley Securities -- Analyst

David Gagliano -- BMO Capital Markets -- Analyst

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