Good morning, and welcome to the CONSOL Energy and Arch Resources conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star and then one on a touchtone phone. And to withdraw your question, please press Star, then two. Please note this event is being recorded. You can find today's presentation, as well as the press release regarding today's news, at each company's investor relations website. I would now like to turn the call over to Nathan Tucker, Director, Finance and Investor Relations at CONSOL Energy. Please go ahead.
Thank you, and good morning. Today, we're excited to discuss CONSOL Energy's and Arch Resources' merger of equals, which we announced earlier this morning. As highlighted on slide three, any forward-looking statements we make during today's conference call are given in the context of today only and are subject to important risks, as discussed in the presentation. Actual results and events could differ materially from those discussed here. Please also refer to the additional information discussed on the slide, as well as in the SEC filings and joint press release for both companies. As noted on slide four, on today's call, you will hear from Jimmy Brock, Chairman and Chief Executive Officer of CONSOL, Mitesh Thakor, President and CFO of CONSOL, Paul Lang, Chief Executive Officer of Arch Resources, and Dex Slone, Arch Resources' Senior Vice President of Strategy. I will now turn the call over to Jimmy to start our presentation.
Thank you, Nate, and good morning, everyone. We appreciate you joining us to discuss this exciting milestone for our companies. This morning, Arch Resources and CONSOL Energy announced that we are combining in a merger of equals to create Core Natural Resources, a premier North American natural resource company focused on global markets. We believe this merger will create significant value for our stockholders and benefit all our stakeholders. The new Core Natural Resources will be a leading producer and exporter of high-quality, low-cost coals, with offerings ranging from met to high calorific value thermal coals. Notably, the company will have virtually no overlap of customers or products. The numbers tell an impressive story. We will be among the lowest-cost producers in the United States for met coal and among the lowest globally for thermal coal.
We will also have significant production capacity, with approximately 12 million tons of annual met coal capacity for sale into growing seaborne met markets and more than 25 million tons of high-quality thermal coal. In fact, we anticipate that more than 67% of the combined company's pro forma volume will be exported to fast-growing Asian markets. CONSOL and Arch each have among the best safety records and lowest incident rates in the mining industry, and as a combined company, safety, compliance, and continuous improvement will remain core values. Slide 6 gives a good sense of the compelling pro forma financial profile of the new Core Natural Resources. We'll review this in more detail later in the presentation, but let me give you some key highlights.
On a pro forma basis for 2023, revenues were approximately $5.7 billion, and annual adjusted EBITDA was approximately $1.8 billion, excluding the impact of expected synergies. On a pro forma basis for 2023, Core Natural Resources would have free cash flow generation of approximately $1.4 billion, excluding the impact of synergies. Both CONSOL and Arch have long prioritized capital returns as a key lever of value creation, and the combined company is poised to continue that record well into the future. Our assets are highly complementary and also allow for sharing of operating and maintenance expertise and equipment. By bringing these operations together, we expect to generate $110 million-$140 million of annual cost and operating synergies within six to eighteen months following the close.
Turning now to slide seven, to the transaction terms. Under the agreement, which has been unanimously approved by the board of directors of both companies, Arch stockholders will receive a fixed exchange ratio of one point three two six shares of CONSOL common stock for each share of Arch common stock owned. Upon closing of the transaction, CONSOL stockholders will own 55% of the combined company, and Arch stockholders will own 45% on a fully diluted basis. Based on the market cap as of August nineteenth and net debt of each company as of second quarter twenty twenty-four, the new Core Natural Resources will be an industry leader of scale with an approximately $5.2 billion market cap and an approximately $5.5 billion enterprise value.
The board and leadership of the new company will reflect the strength and capabilities of both Arch and CONSOL. I will serve as Executive Chairman of the Core Natural Resources Board, and Paul will serve as the CEO and as a member of the board. CONSOL's President and CFO, Mitesh Thakor, will serve as President and Chief Financial Officer of the combined company. George Schuller Jr., Arch's Chief Operating Officer, Bob Braithwaite, CONSOL's Senior VP of Marketing, and Dex Slone, Arch's Senior VP of Strategy, will each serve in the same capacity at Core Natural Resources. Additional members of the management team will be announced as we progress toward closing. The board of directors of the combined company will have eight directors. Four directors will be selected by CONSOL, including me as Executive Chairman.
Four directors will be selected by Arch, including Paul and Richard Navarre, who is currently Independent Chairman of the Arch board and who will serve as Lead Independent Director of Core Natural Resources board. Core Natural Resources will be headquartered in Canonsburg, Pennsylvania, and will maintain a presence in St. Louis. This location was chosen because of its close proximity to the majority of the company's mining and export operations. We expect the merger, which we anticipate will be tax-free for U.S. federal income tax purposes to both Arch and CONSOL stockholders, to close by the end of the first quarter of 2025, subject to approval by both companies, stockholders, regulatory approvals, and the satisfaction of other customary closing conditions. I will now turn the call over to Paul for additional color on the strategic rationale for the deal.
Thank you, Jimmy, and let me start by also expressing my excitement and honor in being a part of this major milestone in the history of two very strong companies. I also want to thank the respective boards and management teams that guided us to this place. I think that slide eight does a nice job of summarizing the compelling strategic and financial rationale for this transaction, and why both companies expect to reach greater heights together than we could achieve on our own. Both CONSOL and Arch have been a mainstay in the coal industry for generations, and each company has grown and evolved as we've pursued being among the safest and most respected coal producers in the world. Arch's combination with CONSOL is another step in this journey, and one that will solidify the combined company's position at the forefront of the global energy market.
We'll have world-class, high quality, low-cost assets in a broad, diverse range of qualities and blends to offer customers. With that, we'll serve multiple growth markets through our outstanding logistics and export capabilities. In addition, CONSOL long-term industrial seaborne contracts are complemented by Arch's higher value met products, creating both a visible revenue stream as well as meaningful upside opportunities. The financial benefits are equally compelling, including accretion, synergies, and robust adjusted EBITDA, as well as free cash flow generation. I've known and respected Jimmy for many years and have enjoyed working closely with him and his team leading up to this announcement. The combined company will benefit from the talent of both organizations and their record of execution and value creation. Moving to slide nine.
With record global consumption in the last two years, coal is abundant, affordable, and dispatchable form of energy, as well as a critical input in the production of new steel needed for the manufacturing of thousands of products essential to the society's infrastructure in our everyday lives. Together, Arch and CONSOL are accelerating the strategy we both have been pursuing to meet the significant demands in the market and establish Core Natural Resources as the go-to company to build the future. With operations across six states, Core Natural Resources will now own eleven mines. This includes one of the largest, lowest cost, and highest calorific value thermal coal mining complexes in North America, and one of the largest, lowest cost, and highest quality met mine portfolios in the United States.
Our high-quality operating portfolio will be underpinned by eight low-cost, long-lived longwalls, including CONSOL's Pennsylvania Mining Complex and Arch's Leer, Leer South, and West Elk mines. In addition, Core Natural Resources will have access to global markets via our ownership interest in two marine export terminals along the Eastern Seaboard, and strategic connectivity to ports on the West Coast and Gulf of Mexico. We're excited to bring the companies together and create a new industry leader that is ideally positioned to meet the rising demand for critical resources and energy around the world. Turning to slide 10. Compared to our coal-focused peers, Core Natural Resources will be a benchmark company with significantly enhanced market cap and sector-leading adjusted EBITDA.
Together with our differentiated coal portfolio and export capabilities, we believe Core Natural Resources will be the must-own stock that is expected to be attractive to a wide range of investors. With that, I'll now turn the call over to Dex to provide more material on the products and logistics of the combined company.
Thanks, Paul. I'll now touch on slide eleven. Coal is an essential input in the production of steel, cement, electricity, and a range of industrial products, which means that it is an essential input in a modern global economy. Core Natural Resources' ability to provide a range of coal qualities and blends will enable it to serve a diverse customer base across multiple growth markets and geographies. For example, met coal produced by the combined company is a key input in the production of new steel for blast furnaces, which constitutes 80% of the steelmaking capacity in India and Southeast Asia. Met coal is expected to remain in strong demand for decades to come, as new steel will be essential in supporting the world's growing population, ongoing economic development, continued urbanization, and the build-out of a low-carbon economy.
Furthermore, the high calorific value thermal coal mined by the combined company is increasingly sought after in industrial markets, including cement, and to serve resurging power generation demand in many economies, which is being driven in part by AI, data centers, and EV expansion. We look forward to working closely with CONSOL to continue meeting the world's steel, infrastructure, and energy needs that are so critical to the lives of people around the world. Together, we will have significantly enhanced logistics and export capabilities to serve this growing market, as you can see on slide 12. In fact, we expect to have the most export capacity in North America once the transaction is complete.
Our approximately twenty-five million tons per annum of export coal capacity will be spread across ownership interests in two marine export terminals on the U.S. Eastern Seaboard, as well as via connectivity to ports on the West Coast and Gulf of Mexico. Combined with our rail and terminal capabilities, we will meaningfully de-risk the export business and enhance operational flexibility. Turning to slide 13, as a result of our greater export capacity, we will be even better positioned to provide reliable, efficient coal delivery for our customers and gain increased access and penetration into global markets. Both companies already have strong, long-standing relationships with customers in the fastest-growing coal end markets and geographies. With a broader range of complementary coal offerings and expanded export capacity, we can now extend our reach even further.
I'll now turn the call over to Mitesh to talk more about customers and the pro forma standing of the company.
Thanks, Dex. Turning to slide fourteen, Core Natural Resources will be a leading producer and exporter of a broad slate of thermal and met coals. As investors desire to benefit from the potential growth in global infrastructure build-out, the combined company offers compelling opportunity to gain that exposure through its steelmaking and industrial market reach to emerging countries. Furthermore, Core Natural Resources provides a solid base of contracted revenue stream, underpinned by domestic thermal coal and contracted export industrial customer base. This base also provides the combined company with relatively better revenue and earnings visibility that should drive a more consistent capital allocation strategy, which Jimmy will cover shortly. Let's now turn to the financial benefits, which underscore the upside value creation that is achievable.
Starting with slide 15, over the past two years, both companies have demonstrated that they are individually capable of generating significant value for their shareholders, as evidenced from their Adjusted EBITDA and free cash flow generation. What excites me even more is when you put these two companies together, you get a powerful combination that also benefits from the enhanced scale and market opportunities that lay in front of us. Furthermore, the transaction is expected to be accretive to free cash flow for both Arch and CONSOL. Strong free cash flow generation capabilities, coupled with synergies that I will discuss shortly, will allow Core to become a benchmark coal company in North America, with diverse market exposure and industry-leading cash flow generation potential.
As slide 16 highlights, bringing our companies together is expected to unlock $110-$140 million in annual synergies within the first six to 18 months following the close. Of the overall synergies, we expect approximately one third to be generated from better use of port capacity and product blending and related opportunities. The remaining approximately two-thirds of the synergies come from run rate cost savings, mostly from procurement, SG&A efficiencies, and the elimination of duplicative public company costs. We will also look to optimize insurance coverage and cost for the combined enterprise. The diversified asset base and distribution of risk should help in that regard as well. Additional upside potential may come from best practices and technological advances that could benefit the combined company in the long term.
Both CONSOL and Arch have curated strong balance sheets with limited debt, and these attributes will benefit the new Core Natural Resources. On slide seventeen, you will see Core Natural Resources is expected to have a strong balance sheet and ample liquidity, with minimal near-term debt maturities and a pro forma positive net cash balance, which would have been approximately $260 million, based on each company's cash balance at the end of second quarter of 2024. Combined companies' diversified revenues further de-risk the business. Taken together, we expect this financial profile to support improved access to capital as we look to reinvest in internal innovation and other growth opportunities. I will now pass the call back to Jimmy.
Thank you, Mitesh. We spent a lot of time this morning talking about the greater cash flow generation of the combined company, which is an important benefit of this transaction, and indeed, we expect our free cash flow to fuel industry-leading capital returns. As reviewed on slide 18, we expect to return discretionary cash flow to stockholders through buybacks. There is also the potential for a modest sustaining dividend, which would, of course, be subject to the board consideration and approval. In addition, as both companies do today, we will have the potential to direct free cash flow to internal investments as we evaluate opportunities to build out our mine operations and advance innovations that enable operating excellence through new technologies. Both continued investment in CONSOL innovation and potential utilization of Little West reserves are such examples.... Longer term, targeted strategic acquisitions will be considered.
We will remain disciplined as both Arch and CONSOL have in the past, and our focus now is on realizing the benefits of this combination.
Building on Jimmy's comments, let me talk about each company's capital return programs between now and close. In connection with the execution of the agreement, the CONSOL board declared a dividend equal to $0.25 per share. The dividend will be payable on September thirteenth, two thousand and twenty-four, to holders of record of CONSOL's common stock as of the close of business on August thirtieth, two thousand and twenty-four. In addition, Arch and CONSOL are each permitted to pay quarterly dividends up to $0.25 per share to their respective stockholders during the pendency period of the merger, with the declaration of any dividends subject to the approval of the respective companies' boards of directors. Arch and CONSOL will suspend their share repurchases until the transaction is completed. Turning to slide 19.
To summarize, we believe this is an incredibly exciting transaction for both companies, stockholders, and stakeholders that can unlock value that neither Arch nor CONSOL could do on their own. By combining our two best in operating platforms and differentiated coal portfolios, we're creating a premier North American natural resource company that is poised for growth and industry leadership. The combined company is expected to generate meaningful cash flow and have enhanced financial flexibility, which will power robust capital returns to stockholders, as long as our ability to continue internal and external growth investments. With its scale and reach, we believe Core Natural Resources will have the ability to distinguish itself on a global basis as the preeminent coal producer. I look forward to working with Jimmy and the rest of the Core Natural Resources team to realize the substantial upside value creation that is possible through this transaction.
Thank you for joining us on the call today. We'd be pleased now to take your questions. Operator?
Thank you. And we will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause for a moment to assemble our roster. And our first question today will come from Lucas Pipes of B. Riley Securities. Please go ahead.
Thank you very much, operator. Good morning, everyone, and congratulations on the announcement. This is-
Thank you, Lucas.
Great to see. So on slide 10, I think you show really, really well how the combined entity will be the largest standalone coal company by a fairly significant margin, especially when you think kind of towards the or look towards the right side of that graph. So when you think about the strategy and the mandate post combination, is it focused on capital returns, or do you think there's a kind of bigger, broader opportunity to drive further consolidation in the industry? Thank you very much.
I think at this point, Lucas, it'll be focused on capital returns, you know, as we generate plenty of free cash flow going forward. And as we mentioned, you know, in our prepared remarks, if the opportunity in turn was there to do something that's gonna enhance efficiency, so do that, we would certainly have the ability to do that. But the thinking and the process today is that we would use capital allocation to return value to our shareholders.
Lucas, this is Paul. I just echo Jimmy's comments. And, you know, as you look back over the last couple of years, the combined company have done about $1.5 billion of capital return. And as we've said many times, we think it's part of Arch's value proposition, and that's why the combination with CONSOL made so much sense. They've also held it as one of their value propositions. So going forward, I think you'll see, you know, quite a bit of the same. Obviously, the new board will convene, and we'll have the details of it, but I think we're still very much in tune to capital returns.
That is very helpful. Thank you. And, a similar theme, but very different angle for my second question. Are other assets in the portfolio that you would consider, non-core that, could maybe be monetized? Are there any, duplicative assets where there would be unnecessary redundancies that you would look to monetize? Any thoughts on, optimizing the portfolio post combination? Thank you.
Yeah, good question, Lucas. And first and foremost, as you know, we've always done, we look at any opportunities that we have to create shareholder value. And, as far as divestitures, you know, there are some that it's in the portfolio. If it doesn't make sense at the time, we would look at that as we do any business proposition, but I'll let Paul speak a little bit more about that.
You know, Lucas, I think as you look back over the last, you know, really six, seven years with Arch in particular, we've never hesitated to being willing to shed an asset that no longer fit our profile, and we'll continue to do that. And it's, you know, as difficult as it is, it is in the best interest of shareholders, and we, you should expect us to continue to make those hard decisions as we move forward.
Thank you very much. I'll squeeze one last one in. You mentioned one-third of the synergies are port and blending opportunities, and wondered if you could maybe speak more specifically to the blending opportunities. What products do you think make the best mix to enhance value capture? Thank you very much for your perspective.
Thank you, Lucas. This is Mitesh here. As you know, the combined company will potentially have a broad slate of thermal and metallurgical coals, and we have noticed often in marketplace, you see, these products act complementary. For example, they have high vol products, low vol products. We have low vol products, crossover products that could be blended together, in a lot of different ways. We also have very high-grade thermal coal. They have a portfolio that generates quite a bit of mixed products. So I think there are opportunities that we can create, by appropriately blending those products. And given the terminal space that we have, that could be helpful as well.
So, I think if you look at the entire product slate, I think there are various opportunities between various met coal blends, but also certain thermal coal, and mixed blends as well.
Lucas, it's Deck, and I would just echo what Mitesh has said, and certainly add the fact that, look, there's a lot of opportunity here that we probably haven't, you know, even begun to evaluate fully. We have some ideas. We think that those ideas are going to lead to significant value, but I really think there's a lot of untapped potential here, and, you know, Mitesh just walked through it. I mean, you know, our thermal byproduct is probably something that could be blended in a way that could generate more value than we're generating on a standalone basis. But there are lots of other opportunities here.
You know, when you think about us reaching out to, you know, our broad customer base in the metallurgical space and in the steel markets, you know, you think about the crossover volumes and the ways that we might, you know, bring all those products to bear in the marketplace, and really think there are some exceptional opportunities.
That is great to hear. Congrats again. This is, this is a great announcement. Thank you.
Thanks, Lucas.
Thank you, Lucas.
Our next question today will come from Katja Jancic of BMO Capital Markets. Please go ahead.
Hi. Thank you for taking my questions. Maybe starting on the regulatory side, do you foresee any issues there?
We do not, but we don't want to speculate on that at this time. You know, we'll go through the normal process, and we'll see where it falls. We'll be cooperative in anything we need to do, but I do not want to speculate on any of those. This should be a very favorable transaction, as there's not a lot of overlap. So we do not see an issue with it, but I won't speculate on whether or not it will or will not be approved.
Okay, maybe this is more of a question for the Arch team. Paul, can you talk a bit more on the rationale for Arch, given that one of the benefits in the past was your great, that a bigger piece of your EBITDA was coming from the met side?
You know, Katja, this. It's a fair point. You know, we've been exercising our pivot from domestic thermal exposure really since 2011, and have taken several major public steps to reduce our exposure to the U.S. market. You know, that included shrinking the footprint of both of our Powder River Basin mines, including reclaiming about 85% of Coal Creek, coupled with a significant reclamation work at Black Thunder. You know, more importantly, we also funded the discounted ARO liability at Black Thunder to ensure that our future cash flows would be shielded from the ultimate cash closure expense at that mine. I'd also say that along that same period of time, we've been very disciplined and prudent about investing in the PRB.
As a result, something I'm very proud of the team about, and we have successfully employed what we've been calling the harvest strategy from the assets. And you think about it, you know, over the last seven or eight years, we've generated about $8 of EBITDA for every $1 of CapEx we've put in this. You know, as you think through all of this, we've remained committed to the seaborne thermal markets and have always been enthusiastic about the future of West Elk and its ability to compete on the global stage. Frankly, our transitioning to the B seam and its higher quality, we're expecting a bright future from that operation in the seaborne market. So in many ways, the merger with CONSOL is a natural extension of what we've been saying and doing relative to reducing our exposure to domestic thermal and growing our seaborne thermal business.
CONSOL, in fact, has done their own successful pivot from a domestic thermal business into the global seaborne market as well, as well as finding crossover tons from the metallurgical market. So when you look back and look at the situation, I think the move was very logical and why the two companies are an amazing fit.
Katja, it's Zach. I mean, I would add, look, you know, as we talked about the pivot, you know, our concern was domestic thermal demand, and I think we've been right about that. Obviously, we've seen significant declines in the domestic, you know, thermal marketplace, since we sort of announced that pivot and began moving in that direction. Really, we were thinking primarily of those assets that are more captive to the domestic market. You know, the PRB is not entirely captive, but, you know, we can only export so much volume from there. So as Paul said, look, we've been really enthusiastic about West Elk for a long time, as you know, view it as a core asset.
If you go back to 2022, then we made $200 million at West Elk, exporting only, you know, 1.3 million tons of thermal coal. So, you know, this is just a dramatically bigger platform. It creates two core lines of business for the combined company. Obviously, the metallurgical assets, which are already our core focus, but then add to this, this much bigger seaborne thermal platform. And look, some of those same demand drivers that make us excited about, you know, the seaborne metallurgical market are very much present in the seaborne thermal market. So, you know, look, we just we view this as an extension of what we were doing at West Elk, but just on a much grander scale. So we're really excited about the prospects.
... That's a fair point. Thank you. I will hop back into the queue.
Thank you, Katja.
Our next question will come from Nathan Martin of The Benchmark Company. Please go ahead.
Thanks, operator. Morning, everyone. Congrats on the announcement.
Morning, Nate.
Morning, Nate.
Maybe first, related to the synergies, I guess you guys commented about a third from port and blending. But maybe specifically, can we talk a little bit more about the use of how, you know, CONSOL Marine Terminal and DTA could evolve, you know, under the combined company?
Yeah. So, Nate, this is Mitesh here. So currently, we use the Pennsylvania Mining Complex uses CONSOL Marine Terminal exclusively. We did use a little bit of the Norfolk Southern Terminal during the Baltimore bridge collapse. Arch has been using DTA as well as CSX terminal in Baltimore as well. As you move forward, there's an opportunity to have some of Arch's shipments for Leer, Leer South, go to Baltimore, which could create some blending opportunities at the terminal itself. And you could also see us reroute some of our shipments to some of the other options that we would have with Arch combined in a combined company.
You know, I would add, look, we've, you know, we've got two million tons of available capacity at DTA that we're currently, you know, not using. You know, we're leasing to third parties, and we'll continue to do that for the near term, but over the longer term, look, again, available capacity is a good thing. As we've seen, you know, logistics is clearly an outdoor sport. We've seen disruptions, you know, the additional optionality to move volumes through these two terminals is potentially huge. You know, we've identified a number of opportunities that we think will unlock value, Nate, but, you know, we won't get into the details here. You can just imagine the toggling between the various port facilities. You know, don't forget, we're using Curtis Bay today as well.
So you know, what that option value is, is significant for us.
I'll also add that the CONSOL mines are served by both railroads as well, which creates more flexibility for the combined company.
Yeah. So I think the exciting part about it is the increased capacity that we have as a combined company, and then there's a lot of synergies that can be gained through the logistics part of the terminal as well. So I think it's, it's a good thing to have both of these.
Yeah, one last thought, Nate, and, you know, it's probably lost in the noise, but as you know, Itmann is further south in West Virginia, and DTA is probably a more natural outlet for it on the eastern seaboard, and that also allows blending with our Beckley mine and, you know, take advantage of that longwall product, which is in heavy demand globally.
I appreciate that, guys. Maybe, you know, we heard comments from both of you, both companies this morning, I guess, how the combination should allow the combined companies to achieve more than the individual companies. Paul, we just got some further thoughts from you on kind of the rationale from Arch's side. Jimmy, this would be great maybe to get some of your thoughts on, you know, what you saw as attractive, you know, when entering into this opportunity, you know, on the Arch side of the equation.
Yeah. Well, when we look at it, it's value creation. You know, we've started trying to bring some met coal on when we opened our Itmann Mine down, and then we've got an opportunity here that's a very close proximity to where we operate. You know, they are low cost, longwall coal mines, which we know very well. So, you know, having longwall, low cost metallurgical coal is certainly of interest to us as we've talked past, you know, on earnings calls and investor calls and everything else. But also, and that is the important leadership. I mean, we know both of these pretty well.
I mean, we've been, you know, at events, talked about things, looked at the synergies before, and then when you add the terminal capacity in there that both of us have, it makes it really a lot of products that we can put into global markets without bypassing, you know, our domestic customers here. So I just think it's a really good fit, and what I like best about it is culturally, we are aligned to what's really important, and that's safety, compliance, and creating value for our shareholders.
Nate, if I may add a couple of things, too. As you have noticed in the past, both companies have done a phenomenal job of generating free cash flow when the markets are strong. We expect the combined company to benefit in both of those scenarios. Sometimes in commodities, the cycles work differently. Sometimes thermal coal is doing better, sometimes met coal is doing better. In such a situation, having a consistent capital allocation framework becomes easier when you have an asset base that could make benefit of both of them. So that is one. And more importantly, if you think about from an asset diversification standpoint, particularly for CONSOL, Pennsylvania Mining Complex is a great asset, great longwall operation.
And having that longwall operation with Leer and West Elk also is a huge complement to operational synergies as well, which we are gonna explore further, as I discussed, and create value for both shareholders here.
Appreciate that, guys. And maybe, Mitesh, along those lines, the shareholder return program, as you guys just laid out the possibilities for the up to $0.25 dividend until close, first quarter 2025. But would you expect to, in the future, roll out a more defined shareholder return program once the deal closes, similar to, you know, the percentage targets both Arch and CONSOL had previously?
... I would think we certainly would, when we get the combined company together, you know, with our new board and everything else, we would do. As you well know, I've said many times in the past, I like something to be kind of formulaic to whereas the investors know and the stockholders know what they're getting. But that's something we'll do in the future. We'll sit down together and come up with a plan. But again, the priority here is returning capital to shareholders, and at the current time, both companies prefer the buybacks.
All right, great. Appreciate the time, everyone. Congrats again, and best of luck.
Thank you, Chris.
Thank, bye.
Our next question today will come from Michael Dudas with Vertical Research Partners. Please go ahead.
Good morning, gentlemen. Well done.
Great. Thank you, Mike.
I know this deal did just come about over the last, say, seventy-two hours. Be interested in, like, how much you guys thought about this over the past several years, and why is now the right time?
Michael, the details will be in the background of CONSOL's registration statement on the Form S-4. That will include a joint proxy statement of Arch and CONSOL. But broadly, I will say that, as industry leaders, CONSOL and Arch know one another well and have long recognized the complementary nature of our business and cultures. So from time to time, we've had conversations with Arch about the opportunities ahead for our businesses. And as these conversations progressed, it became clear that a combination of our two companies would strengthen our position at the forefront of the global energy market and create significant value for all the stakeholders, including CONSOL's stockholders. So the transaction demonstrates our confidence in the future of coal, and we're excited to move forward together.
You know, I'd simply add that, you know, Jimmy and I have known each other a long time. We have very similar backgrounds and a lot of respect to each other. It's almost, you asked the question of why we didn't think about this before, because it is an amazing combination when you really start looking at the pieces and parts and the value that it creates.
No, that's a fair comment. How so as you were going through this, how did the Baltimore issue kind of, like, change your views or enhance your views of what was going on, given you guys are most likely thinking about something like this?
When the Baltimore incident happened, you know, it affected both of us because it was coming into Curtis Bay as well as Baltimore Terminal. But it didn't deter us in thinking about what happened. We never believed that that was a long-term event at the terminal. But, you know, the value creation of beyond that point, when we look at what we can do with the terminal, not only from a blending standpoint, but, you know, a stockpile, inventory, as well as logistics part of it, it really didn't deter us any. What it did for particularly us on the CONSOL side is it showed how important having a second diversified opportunity become too, whereas we could move coal to other places and, you know, as we quickly did that, going up to Virginia.
But again, I think this shows the value of having diversity too, whereas you're not dependent on one source all the time.
Yeah, I just want to reiterate that. I think if anything, the Baltimore tragedy just reinforced the fact that, look, we have great assets, but, you know, this combination gives us a lot greater mass and a lot less reliance on a single point of failure. So I think if anything, it should take risk out of the business.
I would also add, Mike, that if you take a step back and look at the combined company, I think it becomes a very attractive opportunity from an investor standpoint, too. The U.S. coal industry is very fragmented, where we have a lot of companies, including us, before this call, that were, for lack of a better word, not up to scale, that could attract a lot of capital, right? So from a capital perspective, capital markets perspective, I think, and benefit of all our investors, I think having that scale and diversification is critically important.
Yeah, Mike, it's Deck, and just, I guess one final point we would make. Look, the really impressive, you know, pivot that CONSOL has made into, you know, directing additional volumes in the seaborne market over the last few years, you know, really in just such a short period of time, has really opened our eyes to the possibilities. You know, I think we've been amazed at what they've accomplished, and it started to sort of, you know, to fit better with our view of the world, which is, you know, that it's, that the markets are out there, and that you've got to, you know, get into the seaborne market.
And so, you know, as they've executed their own pivot into the seaborne markets, obviously, it's felt more and more like a fit to us, you know, for some time, so, you know, the timing really is, you know, ideal from our perspective because of how far they've come in such a short period of time, and because we believe we can help, you know, continue that, you know, continue that push.
Yeah, no question the alignment's there, gentlemen. Thank you very much. Best of luck.
Thank you.
Our next question today will come from Chris LaFemina of Jefferies. Please go ahead.
Hi. Thanks, guys, for taking my question. Congratulations on the announcement. So Deck, you just mentioned the timing being ideal for Arch. If we look at kind of the outlook for Arch, obviously, we are set up to be heading into District Two, which should be sort of a step change in the operational performance of that asset. It's debatable whether that's fully reflected in your share price today. Met coal prices are down a lot, and met coal levered mining equities are down a lot, even versus thermal coal equities. And obviously, the share exchange ratio is basically at current share prices. So the recent underperformance in Arch's shares, which I would attribute at least partially to met coal price weakness, which is probably temporary, is being kind of crystallized in this deal. So my question is really, again, about timing, you know.
If you do this deal in two years' time, Leer South is in District Two, it's firing on all cylinders, you're generating tons of cash flow, the met coal price is probably well above where it is today. Your share price will probably be well above where it is today. But a lot of that benefit that you get from that asset and from your high exposure to that market is now being shared with the CONSOL shareholders. So just kind of trying to understand better the timing aspect. I mean, I understand the strategic rationale, the synergy number is a big number, but it just seems like there is some money being left on the table, potentially in the case of Arch related to Leer South and related to met coal price upside. Thank you.
Yeah, Chris, you know, good, good questions. Look, it's commodity space, right? So we're gonna, we're gonna be riding the waves on both sides. I think Mitesh said it, said it well earlier, which is stabilizing, smoothing out those, those curves a little bit in terms of your, you know, free cash flow generation is gonna be valuable. You know, we're really enthusiastic about both sides of this equation and the long-term outlook for, yeah, seaborne metallurgical, but also seaborne thermal. We think there's tremendous growth potential there. And, you know, the, the precise timing is, is not something, you know, we would, you know, be as focused on. It really is the tremendous potential here for the combined organization. And so look, we're really excited. We think this is nothing but positive.
Understand your questions, but again, we're really excited about where things are going in both these markets, you know, in the intermediate and long term and even in the relatively short term. So, I guess I would start there.
You know, the only thing I'd add is that, you know, when Jimmy and I first started talking about this transaction, there were a couple common themes. The first was neither of us had to do anything. We were both very strong standalone companies that had a good strategy. I think the second point, and it really ties into what Deck is saying, is that we've both been around the commodity market long enough. It has its ups, it has its downs, and you're never gonna time things perfect. You know, our board has been decisive and done a good job of positioning the company, and I think that's what you see here today.
You know, there's another. Go ahead, I'm sorry.
Sorry. So I understand the point about, you know, commodity prices are gonna be volatile, and who knows where price is gonna go. But what about the point about Leer South, where, you know, when you get into District Two, regardless of what prices are doing, that becomes a, you know, really a Tier One type asset, and it's debatable whether the value of that is fully reflected in your shares today, because you haven't hit that kind of sweet part of the seam yet. So how do we think about that? I mean, is it, you know, there's a lot of operational upside here that is arguably not reflected in your shares yet at Arch.
Yeah, Chris, look, we do think there is good understanding of what's happening at Leer South, that we're progressing into District Two. Sorry about that, got choked up. That we're progressing into District Two. We talked a lot about that. I think that, you know, people have seen that slow progression even as we've gotten closer to District Two, if you look to, you know, the second quarter, the execution at Leer South was quite strong. Good volume, you know, good output. So look, again, as Paul said, we're not gonna time it perfectly to, you know, any one asset. Again, we would view this as a tremendously positive development. I think there's, you know, great upside from here, and we're excited to be here today.
Yeah, and I would add one of the things I started to say is, you know, one of the things that's really out of our control is the volatility of the market, but one thing that's directly in our control is cost. And I think cost is a more important element of it, and I think this will give us an opportunity, combined, to look at those efficiencies we can gain and possibly have a better cost structure.
Chris, I guess I would say one final thing. You know, right now, look, there is another logistical disruption on the East Coast, right? So, you know, this is further underscoring the value of that optionality. You know, as we sit here today, loadings are, you know, and vessel loadings are being impaired. So look, I think that's another way to look at it as well, which is, you know, we've seen several disruptions. This idea of additional optionality for both companies, I think, you know, has the potential to be really valuable longer term.
Yeah.
Chris, I'll just add to the comment you made about met being towards the lower end. If you look at the API 2 chart, you're gonna come up with similar conclusion on that front, too.
Chris, just kind of closing out the, some really good comments. You know, at the end of the day, this transaction unlocks value that neither of us could unlock alone, and that's what we're focused on, and that's what we're moving forward on.
Yeah, thanks. So, just one last question on the synergies. I mean, obviously, you know, economically, that's where the benefit is. These are big numbers. Are we gonna be able to kind of track how those are progressing after the deal closes? Will you provide kind of quarterly disclosures as to what the synergy realizations have been? Because that'd be very helpful. Thank you.
So, Chris, we have obviously spent a lot of time putting our pencils and making sure that we are coming up with a number which is achievable and takes a lot of things into consideration. As the deal progresses, we'll continue to work through it, but remember, we are still operating as two different companies till the merger closes. So I think as far as the update on the synergies are concerned, like, a lot of planning work is gonna go on, but you can't really implement some of those things till the companies combine. So we still have to continue to work as independent companies and make sure that from a planning perspective, we are ready to hit the ground running on day one.
I, I'll be a little more blunt. I know that Jimmy and I are both going to be watched very carefully by our respective boards. We've made promises, and we are going to report to not only our internal boards as well, but as well as the investment community on how we're doing on these synergies.
Yeah, I can assure you there will, there will be a defined plan, and there will be a tracking mechanism in place.
I guess one argument that you guys didn't make as to a benefit to this deal would be better liquidity in the shares and kind of increased scale and becoming potentially sort of an industry leader in the coal market could be helpful to your valuation over time. We'll see how that plays out, but that's just another thought that you guys hadn't mentioned, and thanks for this, and good luck, guys.
Thank you.
Thanks, Chris.
Again, if you have a question, please press star then one. The next question today is a follow-up from Lucas Pipes of B. Riley. Please go ahead.
Thank you very much, operator. Thank you for taking my follow-up question. So, we are in the middle of North American met coal negotiations for twenty twenty-five, and obviously, you'll have greater logistical flexibility, a more resilient earnings profile after Q1. Is that a consideration as you deliberate how much tons to place into the North American market? Thank you very much.
Look, Lucas, I think we've been pretty open, and, you know, I've been also pretty blunt about, you know, what I've been willing to do on the North American side of the business. You know, it's important, you know, in, in a lot of ways that we can participate in that business, but it's not required. And, you know, if you look back over the last couple of years, we've done much better on the seaborne side. The one thing that shipping domestically, or at least in North America, does is it's much more ratable, much better cash management. And, you know, there are reasons to keep a North American business online, but I don't think that strategy is gonna change at all.
You know, what this does, and I mentioned it in my comments, is, you know, CONSOL has a very good forward book on the international industrial business, and it complements our ability to play the seaborne metallurgical markets very well. And with the balance sheets we'll have combined, it should be a great fit.
You know, I would add, Lucas, that, you know, we've talked a lot about logistics, but again, you know, we've said repeatedly, that we would be glad to ship all our tons, excuse me, into the seaborne market. And, you know, this just frees up additional capacity potentially to move additional volumes into the seaborne market. Now, again, we could have done this before, but this greatly enhances our optionality there as well in reaching that market. So as Paul said, we're happy to sell tons into North America if there are times when that makes sense. But if we need to, we can certainly direct, you know, all of our volumes into the seaborne markets.
Yeah, and it gives us the ability to continue to do what we've done, and that's look for the highest arbitrages.
Very much appreciate this additional color. Really quickly, the synergies, are those pre or post-tax?
The synergy number provided is pre-tax.
Thank you very much. Congratulations again.
Thanks, Lucas.
At this time, we will conclude the question-and-answer session and also conclude the CONSOL Energy and Arch Resources conference call. Thank you for attending today's presentation, and you may now disconnect.