The second largest coal miner in the US, Arch Coal, on Thursday announced that it had started work on a new three-million-ton-a-year coking coal mine that will operate on the same 200-million-ton reserve base as its Leer operation, in West Virginia.

The NYSE-listed company would invest between $360-million and $390-million over the next three years to develop the Leer South mine, with the longwall scheduled to start up in late 2021.

Leer South would be similar in virtually every respect to Arch's existing Leer longwall mine and CEO John Eaves said that it would cement the company’s position as a premier global producer of High-Vol A coking coal. 

Output from the Leer South complex will mainly be sold into the 300-million-metric-ton-a-year seaborne coking coal market, which the company believes is undersupplied, following years of under-investment.

Arch estimates that ten-million tons a year of new mine capacity is required, or 75-million tons between now and 2025. It bases its prediction on projected demand growth of 1.5% a year and a yearly depletion rate of 2% at existing mines.

"We believe that Leer South's projected position in the first quartile of the US coking coal cost curve – coupled with its extremely high product quality – will enable us to achieve highly attractive margins, an excellent return on investment, and a rapid payback across a range of potential market environments," Eaves said.

With a high fluidity and superior plasticity, High-Vol A coking coals can facilitate the inclusion of a wide range of coking coals and even petcokes in a steel mill's coke blend, while reducing coking times and delivering a stronger and more homogeneous finished coke product. 

Arch estimates that the global supply of High-Vol A or equivalent coals totals less than 25-million tons a year. 

Eaves said that Arch would fund the 2019 expenditures for the new development with internally generated cash on hand. The new mine would add $90-million to the projected capital spending budget for this year, but the company confirmed that it should be able to continue with its share buyback programme at similar levels to 2018.

After 2019, it might consider alternatives to fund the new mine, including debt financing or using existing borrowing capacity.

Meanwhile, Arch also announced that it would transition its Mountain Laurel operation, in West Virginia, from longwall to room-and-pillar mining at the beginning of 2020, and move the Mountain Laurel longwall equipment to Leer South at that time.

Arch president and COO Paul Lang explained that this transition would be beneficial in multiple ways.

"First, Mountain Laurel's still-extensive reserve base is increasingly well-suited to room-and-pillar mining, which is expected to deliver greater operational flexibility, higher product quality and a modestly lower cost structure. Second, the redeployment of the longwall equipment to Leer South will lower the capital requirements for the new project by around $35-million and further enhance our expected return on investment. Third, we see great value in expanding further our high-margin High-Vol A production while maintaining a value-creating position in High-Vol B markets via a reconfigured Mountain Laurel operation."

Arch expects Leer South to capture a cash margin of about $90/t on seaborne coking coal shipments, and to fully recover its capital investment in 18 months upon achieving full production rates. 

Following the transition to room-and-pillar mining, Mountain Laurel expects to produce about 1.3-million tons a year of High-Vol B coking coal. While that is roughly 20% lower than the mine's 2018 output, Arch expects Mountain Laurel's per-ton costs to decline modestly and its product quality to improve following the transition. The transition will not result in the layoff of any of Mountain Laurel's outstanding workforce, as they will be repositioned in the new room-and-pillar mine plan.

In addition to the redeployment of existing longwall equipment from Mountain Laurel, Arch has further reduced Leer South's projected capital needs via plans to expand and use the preparation plant and select other facilities at the company's Sentinel mine, which is also located in Barbour county. 

When fully operational, Leer South will employ nearly 600 highly skilled and highly trained employees.

Arch expects to produce between 6.6-million tons and 7-million tons of coking coal in 2019 – of which nearly 60% will be High-Vol A quality – and to maintain a similar level of production through 2021. 

In 2022, Arch's total coking coal production is expected to approach nine-million tons a year, with 75% of that total expected to be High-Vol A coal.