July 27, 2021, 4:44 p.m. EDT

10-Q: ARCH RESOURCES, INC.

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(EDGAR Online via COMTEX) -- Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context otherwise requires, all references in this report to "Arch", "we", "us", or "our" are to Arch Resources, Inc. and its subsidiaries.

Cautionary Notice Regarding Forward-Looking Statements

This report contains "forward-looking statements" - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as "should," "appears," "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will." Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from the COVID-19 pandemic, including its adverse effects on businesses, economies, and financial markets worldwide; from the impact of COVID-19 on efficiency, costs and production; from changes in the demand for our coal by the steel production and electricity generation industries; from our ability to access the capital markets on acceptable terms and conditions; from policy, legislation and regulations relating to the Clean Air Act, greenhouse gas emissions, incentives for alternative energy sources, and other environmental initiatives; from competition within our industry and with producers of competing energy sources; from our ability to successfully acquire or develop coal reserves, including the development of our Leer South mine; from operational, geological, permit, labor, transportation, and weather-related factors; from the effects of foreign and domestic trade policies, actions or disputes; from fluctuations in the amount of cash we generate from operations, which could impact, among other things, our ability to service our outstanding indebtedness and fund capital expenditures; from our ability to successfully integrate the operations that we acquire; from our ability to generate significant revenue to make payments required by, and to comply with restrictions related to, our indebtedness, including our ability to repurchase our convertible notes; from additional demands for credit support by third parties; from the loss of, or significant reduction in, purchases by our largest customers; from the development of future technology to replace coal with hydrogen in the steelmaking process; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties 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. For a description of some of the risks and uncertainties that may affect our future results, you should see the "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and subsequent Form 10-Q filings.

COVID-19

In the first quarter of 2020, COVID-19 emerged as a global level pandemic. The continuing responses to the COVID-19 outbreak include actions that have a significant impact on domestic and global economies, including travel restrictions, gathering bans, stay at home orders, and many other restrictive measures. All of our operations have been classified as essential in the states in which we operate. We instituted many policies and procedures, in alignment with CDC guidelines along with state and local mandates, to protect our employees during the COVID-19 outbreak. These policies and procedures included, but were not limited to, staggering shift times to limit the number of people in common areas at one time, limiting meetings and meeting sizes, continual cleaning and disinfecting of high touch and high traffic areas, including door handles, bath rooms, bath houses, access elevators, mining equipment, and other areas, limiting contractor access to our properties, limiting business travel, and instituting work from home for administrative employees. During the second quarter of 2021, as infection rates declined and vaccination rates increased among our workforce, we modified our COVID-19 response procedures in alignment with CDC guidelines along with state and local mandates. These modifications include, increasing allowed meeting sizes, business travel, and contractor access to our properties. We plan to continually evaluate these policies and procedures, in accordance with CDC, state, and local guidelines, and make any necessary adjustments to respond to the particular circumstances in the areas in which we operate.

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We recognize that the COVID-19 outbreak and responses thereto also continue to impact both our customers and suppliers. To date, we have not had any significant issues with critical suppliers, and we continue to communicate with them and closely monitor their developments to ensure we have access to the goods and services required to maintain our operations and continue our Leer South development. Our customers have reacted, and continue to react, in various ways and to varying degrees to changes in demand for their products. Our current view of our customer demand situation is discussed in greater detail in the "Overview" section below.

Overview

Our results for the second quarter of 2021 benefited from continued improvement in metallurgical and thermal coal markets. During the second quarter of 2021, global economic growth continued to accelerate as increased availability of vaccines for COVID-19 has allowed the relaxation of restrictions in some jurisdictions around the world, particularly domestically. While some countries, like India, increased restrictions to combat localized increases in COVID-19 infection rates during the second quarter of 2021, these events did not have a negative impact on our business.

Throughout the second quarter of 2021, domestic steel prices remained at historically high levels and international steel prices remained at levels that allow steel producers to generate healthy margins. However, the return of overall industrial production to pre-COVID-19 levels remains a lengthy process and, as we saw in the fourth quarter of 2020, is subject to setbacks should COVID-19, or its variants, become resurgent. Despite increased coking coal prices, North American coking coal supply remains somewhat constrained compared to pre-COVID-19 levels. Much previously curtailed production has returned, and some new supplies have been added to the market. However, some of the high cost coking coal mine idlings announced during 2020 remain in place, and new supply disruptions also constrain supply. The duration of specific supply disruptions is unknown, but even with the recent strengthening of coking coal prices, we believe that under investment in the sector in recent years will constrain any supply response. Longer term, we believe continued limited global capital investment in new coking coal production capacity, economic pressure on higher cost production sources, normal reserve depletion, and accelerating economic growth will provide support to coking coal markets as demand continues to return to the steel production supply chain.

During the fourth quarter of 2020, a major political dispute that manifested itself as a trade dispute escalated between China, a major importer of coking coal, and Australia, the world's largest exporter of coking coal. Specifically, China has effectively banned the import of coking coal, among other export products, from Australia. Historical trade patterns remain disrupted, and pricing volatility continues as new trade patterns emerge in the international coking coal markets. Indices for United States (US) East Coast coking coal continued to increase during the second quarter of 2021, as strong demand, including from China, had a positive impact on these markets. Australian Premium Low Volatile ("PLV") coking coal prices began the quarter well below US East Coast prices, but have recently increased significantly as demand outside of China has increased. Uncertainty and volatility in pricing and pricing relationships are likely until the larger political dispute between China and Australia is settled. While most of our committed but unpriced coking coal volume is linked to the United States East Coast indices, we do have some volume of committed but unpriced coking coal linked to the PLV or other Asia/Pacific indices for 2021.

Domestic thermal coal consumption increased in the second quarter of 2021, compared to the second quarter of 2020, due to increased natural gas prices and economic recovery. Long term, thermal coal demand remains pressured by continuing increases in subsidized renewable generation sources, particularly wind and solar, and planned retirements of coal fueled generating facilities. However, increased natural gas prices led to increases in the percentage of coal fired generation to total generation in the second quarter of 2021 compared to the second quarter of 2020. We believe coal generator stockpiles likely declined during the current quarter, but expect they have remained above historical averages based on days of burn. During the second quarter of 2021, international thermal coal market pricing increased to decadal highs that economically support exports from our thermal operations. We have layered in additional thermal export commitments for the current year. While we are currently seeing improvement in thermal coal demand due to accelerating economic growth and elevated natural gas pricing, longer term we expect domestic and global thermal markets to remain challenged.

On September 29, 2020, the U.S. District Court ruled against our proposal with Peabody to form a joint venture that would have combined our Powder River Basin and Colorado mining operations with Peabody's, and we subsequently announced the termination of our joint venture efforts. We continue to pursue other strategic alternatives for our thermal

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assets, including, among other things, potential divestiture. We are concurrently shrinking our operational footprint at our thermal operations. In particular, during the first half of 2021, we have completed approximately $25.8 million of Asset Retirement Obligation (ARO) work at these operations, compared to approximately $2.0 million in the first half of 2020. We are also planning to establish self-funding mechanisms for these long-term reclamation liabilities at those operations. Operationally, we will maintain our focus on aligning our thermal production rates with the secular decline in domestic thermal coal demand, while adjusting our thermal operating plans to minimize future cash requirements and maintain flexibility to react to short-term market fluctuations as we have done in the current quarter. We continue to streamline our entire organizational structure to reflect our long-term strategic direction as a leading producer of metallurgical products for the steelmaking industry.

Results of Operations

Three Months Ended June 30, 2021 and 2020

Revenues. Our revenues include sales to customers of coal produced at our operations and coal purchased from third parties. Transportation costs are included in cost of coal sales and amounts billed by us to our customers for transportation are included in revenues.

Coal Sales. The following table summarizes information about our coal sales during the three months ended June 30, 2021 and 2020:

Three Months Ended June 30,







                        2021         2020        (Decrease) / Increase
                                       (In thousands)
        Coal sales    $ 450,389    $ 319,521    $               130,868
        Tons sold        17,214       13,258                      3,956
        


On a consolidated basis, coal sales in the second quarter of 2021 were approximately $130.9 million, or 41.0%, more than in the second quarter of 2020, while tons sold increased approximately 4.0 million tons, or 29.8%. Coal sales from Metallurgical operations increased approximately $80.5 million due to increased pricing and volume. Thermal coal sales increased approximately $56.4 million, primarily due to increased volume. In the prior year quarter, our Viper operation, which was sold in December 2020, provided approximately $7.2 million in coal sales and 0.2 million tons sold. See the discussion in "Operational Performance" for further information about segment results.

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Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income during the three months ended June 30, 2021 and 2020:







                                                                 Three Months Ended June 30,
                                                                                         Increase
                                                                                        (Decrease)
                                                                                          in Net
                                                              2021          2020          Income
                                                                        (In thousands)
        Cost of sales (exclusive of items shown
        separately below)                                  $  355,329    $  316,348     $  (38,981)
        Depreciation, depletion and amortization               27,884        30,167           2,283
        Accretion on asset retirement obligations               5,437         4,986           (451)
        Change in fair value of coal derivatives and
        coal trading activities, net                            8,762         (129)         (8,891)
        Selling, general and administrative expenses           24,119        19,738         (4,381)
        Costs related to proposed joint venture with
        Peabody Energy                                              -         7,851           7,851
        Asset impairment and restructuring                          -         7,437           7,437
        Gain on property insurance recovery related to
        Mountain Laurel longwall                                    -      (14,518)        (14,518)
        Gain on divestitures                                        -       (1,369)         (1,369)
        Other operating income, net                           (4,347)       (5,704)         (1,357)
        Total costs, expenses and other                    $  417,184    $  364,807    $   (52,377)
        


Cost of sales. Our cost of sales for the second quarter of 2021 increased approximately $39.0 million, or 12.3%, versus the second quarter of 2020. In the prior year quarter, our Viper operation, which was sold in December 2020, accounted for approximately $11.6 million in cost of sales. The increase in cost of sales at ongoing operations consists of increased transportation costs of approximately $21.9 million, increased operating taxes and royalties of approximately $16.1 million, increased compensation costs of approximately $11.3 million, a small decrease in coal inventory valuation versus an increase in the prior year quarter impacting cost of sales approximately $10.7 million, and increased repairs and supplies costs of approximately $8.4 million. These cost increases were partially offset by an increase in credit for ARO reclamation work completed primarily at our Thermal operations of approximately $13.1 million and a decrease in purchased coal cost of approximately $7.0 million. See discussion in "Operational Performance" for further information about segment results.

Depreciation, depletion, and amortization. The decrease in depreciation, depletion, and amortization in the second quarter of 2021 versus the second quarter of 2020 is primarily due to the reduced depreciation expense relating to the asset impairment we recorded in the third quarter of 2020 in our Thermal segment of approximately $2.6 million.

Accretion on asset retirement obligations. The increase in accretion expense in the second quarter of 2021 versus the second quarter of 2020 is primarily related to the changes in the planned timing of reclamation work to be completed at our Thermal operations, specifically at the Coal Creek mine.

Change in fair value of coal derivatives and coal trading activities, net. The cost in the second quarter of 2021 and the benefit in the second quarter of 2020 are primarily related to mark-to-market gains/losses on coal derivatives into which we had entered to hedge our price risk for planned international thermal coal shipments.

Selling, general and administrative expenses. Selling, general and administrative expenses in the second quarter of 2021 increased versus the second quarter of 2020 due to increased compensation costs of approximately $4.4 million, primarily related to higher incentive compensation accruals recorded in the second quarter of 2021.

Costs related to proposed joint venture with Peabody Energy. We incurred expenses of $7.9 million in the second quarter of 2020 associated with the regulatory approval process related to the proposed joint venture with Peabody that was terminated jointly by the parties following the Federal Trade Commission's successful lawsuit to block the joint venture.

Asset impairment and restructuring. We recorded $7.4 million of employee severance expense related to a voluntary separation plan that was accepted by 201 employees from our Thermal operations during the second quarter of 2020.

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Gain on property insurance recovery related to Mountain Laurel longwall. We recorded a $14.5 million gain related to a property insurance recovery on the longwall shields at our Mountain Laurel operation during the second quarter of 2020.

Gain on divestitures. We recorded a $1.4 million gain on the sale of our idle Dal-Tex and Briar Branch properties during the second quarter of 2020.

Other operating income, net. The decrease in other operating income, net in the second quarter of 2021 versus the second quarter of 2020 consists primarily of the net unfavorable impact of certain coal derivative settlements of approximately $3.4 million, partially offset by increased income from equity investments of approximately $1.6 million.

Nonoperating expenses. The following table summarizes our nonoperating expenses during the three months ended June 30, 2021 and 2020:







                                                                    Three Months Ended June 30,
                                                                                          Increase (Decrease)
                                                           2021             2020             in Net Income
                                                                           (In thousands)
        Non-service related pension and
        postretirement benefit costs                   $      (539)     $     (1,102)    $                 563
        


Non-service related pension and postretirement benefit costs. The reduction in non-service related pension and postretirement benefit costs in the second quarter of 2021 versus the second quarter of 2020 is primarily due to the increased pension settlement recorded in the second quarter of 2021, partially offset by the postretirement benefit gain amortization in the second quarter of 2020.

Provision for income taxes. The following table summarizes our provision for income taxes during the three months ended June 30, 2021 and 2020:







                                                 Three Months Ended June 30,
                                                                    Increase (Decrease)
                                         2021           2020           in Net Income
                                                        (In thousands)
        Provision for income taxes    $    2,006     $    1,206    $               (800)
        


See Note 13, "Income Taxes" to the Condensed Consolidated Financial Statements for a reconciliation of the federal income tax provision at the statutory rate to the actual provision for income taxes.

Six Months Ended June 30, 2021 and 2020

Revenues. Our revenues include sales to customers of coal produced at our operations and coal purchased from third parties. Transportation costs are included in cost of coal sales and amounts billed by us to our customers for transportation are included in revenues.

Coal Sales. The following table summarizes information about our coal sales during the six months ended June 30, 2021 and 2020:







                                 Six Months Ended June 30,
                        2021         2020       (Decrease) / Increase
                                       (In thousands)
        Coal sales    $ 807,932    $ 724,753    $               83,179
        Tons sold        31,257       30,239                     1,018
        


On a consolidated basis, coal sales in the first half of 2021 were approximately $83.2 million, or 11.5%, more than in the first half of 2020, while tons sold increased approximately 1.0 million, tons or 3.4%. Coal sales from Metallurgical operations increased approximately $76.6 million due to increased pricing and volume. Thermal coal sales increased approximately $23.7 million due to increased pricing and volume. In the prior year period, our Viper operation, which

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was sold in December 2020, provided approximately $17.1 million in coal sales and 0.4 million tons sold. See the discussion in "Operational Performance" for further information about segment results.

Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income during the six months ended June 30, 2021 and 2020:







                                                                 Six Months Ended June 30,
                                                                                        Increase
                                                                                       (Decrease)
                                                                                         in Net
                                                             2021          2020          Income
                                                                       (In thousands)
        Cost of sales (exclusive of items shown
        separately below)                                 $  665,235    $  691,347     $    26,112
        Depreciation, depletion and amortization              53,681        61,475           7,794
        Accretion on asset retirement obligations             10,874         9,992           (882)
        Change in fair value of coal derivatives and
        coal trading activities, net                           9,290           614         (8,676)
        Selling, general and administrative expenses          45,599        42,483         (3,116)
        Costs related to proposed joint venture with
        Peabody Energy                                             -        11,515          11,515
        Asset impairment and restructuring                         -        13,265          13,265
        Gain on property insurance recovery related to
        Mountain Laurel longwall                                   -      (23,518)        (23,518)
        Gain on divestitures                                       -       (1,369)         (1,369)
        Other operating income, net                          (9,615)      (11,874)         (2,259)
        Total costs, expenses and other                   $  775,064    $  793,930    $     18,866
        


Cost of sales. Our cost of sales for the first half of 2021 decreased approximately $26.1 million, or 3.8%, versus the first half of 2020. In the prior year period, our Viper operation, which was sold in December 2020, accounted for approximately $22.1 million in cost of sales. The decrease in cost of sales at ongoing operations consists of an increase in credit for ARO reclamation work completed primarily at our Thermal operations of approximately $22.3 million, a decrease in purchased coal cost of approximately $13.9 million, and reduced repairs and supplies costs of approximately $13.3 million. These cost decreases were partially offset by increased transportation costs of approximately $25.3 million, increased operating taxes and royalties of approximately $10.6 million, and increased compensation costs of approximately $5.1 million. See discussion in "Operational Performance" for further information about segment results.

Depreciation, depletion, and amortization. The decrease in depreciation, depletion, and amortization in the first half of 2021 versus the first half of 2020 is primarily due to the reduced depreciation expense relating to the asset impairment we recorded in the third quarter of 2020 in our Thermal segment of approximately $5.5 million and reduced depletion expense from lower depletion rates in our Metallurgical segment of approximately $1.3 million.

Accretion on asset retirement obligations. The increase in accretion expense in the first half of 2021 versus the first half of 2020 is primarily related to the changes in the planned timing of reclamation work to be completed at our Thermal operations, specifically at the Coal Creek mine.

Change in fair value of coal derivatives and coal trading activities, net. The cost in both the first half of 2021 and 2020 is primarily related to mark-to-market gains/losses on coal derivatives into which we had entered to hedge our price risk for planned international thermal coal shipments.

Selling, general and administrative expenses. Selling, general and administrative expenses in the first half of 2021 increased versus the first half of 2020 due to increased compensation costs of approximately $3.5 million, primarily related to higher incentive compensation accruals recorded in the first half of 2021.

Costs related to proposed joint venture with Peabody Energy. During the first half of 2020 we incurred expenses of $11.5 million associated with the regulatory approval process related to the proposed joint venture with Peabody that was terminated jointly by the parties following the Federal Trade Commission's successful lawsuit to block the joint venture.

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Asset impairment and restructuring. During the first half of 2020 we recorded $13.3 million of employee severance expense related to voluntary separation plans that were accepted by 53 employees of the corporate staff and 201 employees of our Thermal operations.

Gain on property insurance recovery related to Mountain Laurel longwall. During the first half of 2020, we recorded a $23.5 million benefit from insurance proceeds related to the loss of certain longwall shields at our Mountain Laurel operation.

Gain on divestitures. During the first half of 2020, we recorded a $1.4 million gain on the sale of our idle Dal-Tex and Briar Branch properties.

Other operating income, net. The decrease in other operating income, net in the first half of 2021 versus the first half of 2020 consists primarily of the net unfavorable impact of certain coal derivative settlements of approximately $4.9 million, partially offset by increased income from equity investments of approximately $2.2 million.

Nonoperating expenses. The following table summarizes our nonoperating expenses during the six months ended June 30, 2021 and 2020:







                                                                 Six Months Ended June 30,
                                                                                          Increase
                                                                                         (Decrease)
                                                           2021            2020        in Net Income
                                                                       (In thousands)
        Non-service related pension and
        postretirement benefit costs                   $    (2,066)    $    (2,198)    $          132
        Reorganization items, net                                 -              26              (26)
        Total nonoperating expenses                    $    (2,066)    $    (2,172)    $          106
        


Non-service related pension and postretirement benefit costs. The reduction in . . .

Jul 27, 2021

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