Arch Resources Inc (ARCH) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Inc. fourth-quarter 2016 earnings release conference call. Today's call is being recorded. At this time I would like to turn the call over to Miss Logan Bonacorsi, Director of External Affairs. Please go ahead.

Good morning from St. Louis. Thank you for joining us today. Before we begin let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act.

Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statement. 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 at the Investors section of our website at archcoal.com.

Additionally, I would like to call your attention to a couple of changes in our operating segment. Going forward our Coal-Mac operation, Arch's only pure thermal mine in Appalachia, will reside in the Other Thermal segment. With this move we have created a new metallurgical segment which includes all of our coking coal complexes as well as our PCI complex. You will notice for that segment we have broken out our volume, cost and average realization results by coal type to deepen the level of detail provided.

On the call this morning we have John Eaves, Arch's CEO; Paul Lang, Arch's President and COO; and John Drexler, our Senior Vice President and CFO. John, Paul and John will begin the call with some brief formal remarks and thereafter will be happy to take your questions. John.

Good morning. It feels good to be back. As everyone on this call knows, 2016 was a transformative year for Arch Coal. In the span of just nine months we completed a sweeping financial restructuring, an exceptionally rapid pace by any measure. The restructuring has fundamentally reshaped our balance sheet, cut our debt and interest expense to fractions of what they were prior to a Chapter 11 process, and eliminated a number of other burdensome drags on our performance. We are a dramatically stronger Company today as a result.

During the restructuring process we received great support from our many stakeholders and particularly from our employees, customers and vendors. I want to thank them all for their patience, commitment and trust. We are without a doubt excited to move past the restructuring and begin a new chapter for our Company.

In a few minutes I will ask John Drexler to walk you through some additional details of the restructuring. However, its many benefits should be apparent to everybody on the call today.

Today we reported our first financial results following our [emergent] achieving fourth-quarter EBITDAR of $94.5 million. In addition, we grew over cash position by $84 million during the quarter ending the year with $393 million in cash and short-term investments. This performance provides clear evidence of the strength of our cash generating capabilities going forward. We fully expect to deliver more of the same in future periods.

I can assure you that the new Board considers identifying the most optimal uses for this cash to be a top priority and we will be spending a great deal of time on that topic in the weeks ahead. For now, however, Arch remains sharply focused on ensuring that we deliver on the Company's great potential. So our near-term goals are simple: to execute; take full advantage of today's metallurgical markets; and prepare for what we expect to be a solid recovery in thermal markets in the relatively near future.

Turning to the marketplace, there has been a dramatic shift in the global met market, as you well know. That shift was driven by several events. First, multiyear period rationalization and under-investment in the global met supply. Second, a long-awaited recovery in the global steel market. And third, policy changes in China that led to supply constraints and higher domestic coking coal prices there. We believe these events set the stage for a prolonged period of market strength.

In recent weeks international coking coal prices have come down from the highs reached in the fourth quarter. However, we believe these prices should stabilize at levels well above those prevailed for most of last year, levels should provide a very healthy margin for a low-cost operation.

Looking ahead we expect seaborne met markets to continue to grow. In China relatively high prices for domestic coking coals and the expected resumption of supply rationalization there should lead to continued robust import levels going forward. In India the government is seeking to bolster steel output and domestic supply of high-quality met coal is in extremely short supply.

In rounding out the picture in Asia, we expect moderate increases in demand for seaborne met coal from both Japan and South Korea, countries where we have cultivated good relationships with customers who value our high quality product.

In the West the outlook is favorable as well, with demand growth projected in the United States, Europe and Brazil, all which are key markets for Arch. Of course the much improved pricing of recent months will spur a supply response and in fact it already has.

But we believe it will take time for significant volumes to return to the market and when they do we expect much of that volume to be higher cost and lower quality. That should keep markets stronger for longer, particularly for the kinds of high quality products that we produce.

In particular, we believe the scarcity of High-Vol A coals is likely to persist for some time to come. Roughly 60% of our met output is High-Vol A quality and such products are earning a premium in the marketplace currently.

Turning now to the thermal market, despite the disappointing winter weather thus far, as well as still high generator stockpiles, coal consumption at [electric] power plants increased by a projected 13 million tons or 9% in the fourth quarter compared to the same period a year ago. Moreover, the US coal plant stockpiles declined by a projected 35 million tons during 2016 ending the year at just over 160 million tons or 83 days of supply. That is a sizable reduction and clear evidence that the market is getting fixed.

Of course stockpiles are still well above targeted levels and it could take several more months of stockpile liquidation to bring them in line. But if natural gas prices hold at recent levels, and weather for the remainder of the winter is more or less normal, we could see generators returning to the market in a more significant way by midyear.

Before turning the call over to Paul, let me say again how enthusiastic we are about the Company's future prospects. In the wake of restructuring we are exceptionally well equipped to compete and excel in our key market segment. We have streamlined [and] highly competitive operating portfolio, a very clean balance sheet, substantial free cash flow generating capabilities, proven management team and an outstanding workforce.

We are happy to be back and ready to deliver long-term value for our shareholder. With that I will turn the call over to Paul for a discussion of Arch's fourth-quarter operating performance and marketing outlook for 2017. Paul?

Thanks, John, and good morning, everyone. As John stated, we are a far stronger Company today than we were prior to our restructuring. Even before entering Chapter 11 process we had taken aggressive steps to streamline our operating portfolio, cut capital spending and drive down cost in countless ways. As a result of those efforts we are able to maintain positive cash flow in each of our regions through the very depths of the market cycle demonstrating the cost competitiveness of our operations.

That was a good story when the markets were at their most challenging point and it is even a better story now as we look to optimize margins in a much improved metallurgical market and in a thermal market that appears to be on its way to an upturn.

Our story is particularly compelling in our metallurgical segment where we have maintained an average cash cost below $53 a ton while also achieving significantly higher realizations, which in turn lead to significantly higher sales sensitive costs. We believe this cost structure places us the very end of the US cost curve, an accomplishment made more impressive by the fact we also have exceptionally high quality coking coal.

In the Powder River Basin we delivered an outstanding cost performance as well. Our average cash cost for the quarter was $9.88 per ton, which is well below historic levels. Looking ahead, we expect our Powder River Basin costs to normalize in the $10.20 to $10.70 range, still quite strong particularly given our plans to operate Black Thunder at a 70 million to 80 million ton per year rate.

As previously indicated, we believe this volume is optimal for that mine given the changes in the marketplace and having completed the difficult task of rightsizing the operation to ensure we can maintain our competitive cost structure at such levels.

As discussed, the Other Thermal segment now includes Coal-Mac, which makes historical comparisons difficult. But here too our cost performance was very solid. During the quarter we benefited from higher run rate at West Elk where we took advantage of the run up in seaborne thermal pricing last quarter and we locked in significant international commitments for the first two quarters of 2017.

Offsetting that benefit to some degree was a reduced volume at Viper. This shortfall was a result of several unplanned maintenance outages at Viper's largest customer, most of which were resolved in early January.

Turning to marketing, we systematically placed a significant volume of metallurgical coal into this resurgent market and strategically layered in some thermal volume while still maintaining a healthy uncommitted position.

On the metallurgical side we sold and priced 1.7 million tons of coking coal for 2017 delivery at an average price of around $110 per short ton FOB mine and an additional 1.5 million tons on an indexed basis. The majority of the fixed-price sales were into the domestic market.

While international pricing has been somewhat stronger than domestic, we continue to view our domestic customers as highly important to our long-term success. Given this we believe we struck a healthy balance by maintaining a strategic position in the coke blends of domestic mills while at the same time capitalizing on strong international markets.

Moreover, our domestic customers provide us with term business which gives us visibility on both volume and price for the full year. We view this positioning as prudent and advantageous for a percentage of our production.

As we look ahead we have about 1.8 million tons of coking coal to sell to achieve the midpoint of our guidance and we continue to have a positive view on metallurgical market. We are targeting the International market for nearly all of this open tonnage.

In addition, we have 1.7 million tons of committed but unpriced sales, all seaborne, that will price during the course of the year. While international coking prices have come down from fourth-quarter highs, we continue to expect them to stabilize at levels that will provide us with very healthy margins.

In the Powder River Basin we committed around 11 million tons for delivery in 2017, which reflects a mix of about 70% Black Thunder and 30% Coal Creek at an average price of around $10.90 per ton. In addition, we priced about 700,000 tons of index sales of 2017 delivery.

We believe that the current utility stockpile overhang will be with us for a good portion of 2017. Consequently, we have layered in some tons as part of our risk management strategy. For the balance of the year we have 12 million to 15 million tons of Powder River Basin coal to sell in 2017 and hope to be placing that tonnage into a strengthening market environment.

As for the Other Thermal segment, we have strong commitments in place that should ensure attractive margin and a significant contribution in 2017. Along with this we have a great opportunity to run our West Elk mine at a higher volume level should the international window open again or should domestic demand rally.

As we proceed through 2017 we will continue to strategically place tons for the remainder of the current year and to layer in commitments for 2018 as well. As John indicated, we expect the fundamentals in the domestic thermal market to improve steadily as stockpiles come down and we believe metallurgical markets should remain in a healthy balance in the near to intermediate term. Consequently we believe the market environment could set up quite well for 2018.

Finally, we are providing 2017 CapEx guidance, including land and reserve, of between $52 million and $60 million. This equates to $0.50 to $0.60 per ton across all of our operations and is a demonstration of our continued discipline in this area as well as the benefit of rightsizing our Powder River Basin operations.

With that I will turn the call over to John Drexler for some comments on Arch's financial position. John?

Thanks, Paul. As John and Paul have described, we are excited to move Arch into a new era. We are confident that our strategy of focusing on low-cost Tier 1 assets in key markets, combined with a pristine balance sheet that will serve our needs across the full coal market cycle, is a strategy that will deliver value for our shareholders for the long-term.

Arch entered the restructuring process with an exceptional operating portfolio that had already been streamlined and conditioned to succeed in the challenging market environment that prevailed. Consequently, our restructuring process was one that was acutely focused on the balance sheet and uneconomic contracts.

On October 5, 2016 we exited bankruptcy with significantly reduce debt levels, no uneconomic contracts and non-existent take or pay obligations. In short, we have emerged with a simplified, right sized balance sheet, abundant liquidity and healthy cash flow.

With regard to our capital structure, we eliminated approximately $4.8 billion of debt and $330 million of annual interest expense. Our remaining low leverage levels consist of a $326 million term loan with a five-year maturity along with approximately $37 million of capital lease obligations and equipment financing.

The term loan bears interest at LIBOR plus 900 basis points, has no financial maintenance covenants and, maybe most importantly, is pre-payable at par. Our total debt is expected to generate approximately $38 million of net interest expense on an annual basis.

We also continue to have a $200 million accounts receivable securitization facility. This facility, which we had prior to and through bankruptcy, has been instrumental in providing capacity for letters of credit to support a portion of our financial assurance requirement. At December 31 we had $154 million of outstanding LCs and a borrowing base of $83 million associated with a securitization facility resulting in $71 million of cash that is classified as restricted on the face of the balance sheet.

One other item to note is that Arch successfully managed a transition from self bonding in Wyoming to a third-party surety program. With this successful transition we are no longer utilizing self bonding at any of our operations. At December 31 our total reclamation bond obligation was $583 million for which we have posted $69 million of collateral, a very manageable level reflecting the strength of our operations and good confidence from our surety providers.

With the restructuring we are required by accounting rules to apply fresh start accounting. In other words, we are required to value each and every asset and liability of the Company based on its fair value during the time of bankruptcy. Because of fresh start accounting applied to the financial statements at October 1, the successor financial statements are not comparable to the predecessor financial statement. In fact, accounting rules restrict us from showing the combined results of predecessor and successor periods.

Also as discussed, we have provided a new format to present operational results along with updated guidance that reflects the new formula. We believe the new format is more meaningful and aligns with our strategic direction.

Similar to the information we presented at the time of our emergence from bankruptcy we reconciled this regional information to consolidated EBITDAR. It should also be noted that in the reconciliation to EBITDAR the Other category consists of a variety of income and expenses with the largest being cost to maintain and reclaim idled operations across our portfolio.

I don't plan to reiterate guidance for 2017 which is included in the press release, but I will highlight a few items. One of the biggest impacts of first start accounting is the impact of the revised valuation on the Company's assets. After the application of fresh start accounting we expect DD&A to be in the range of $124 million to $132 million. This does not include sales contract amortization which we expect to be between $50 million and $58 million.

We expect our SG&A expenses to be between $85 million and $89 million. This includes $9 million of non-cash equity compensation resulting from equity grants made shortly after emerging. In order to make our metrics comparable to those of competitors, we have also excluded from the definition of EBITDAR the non-cash cost of accretion on our reclamation obligation. That is expected to be between $30 million and $32 million.

As a result of the bankruptcy and the substantial reduction in debt we utilized a significant amount of our deferred tax asset. Any remaining deferred tax assets have a full valuation applied against them.

Looking ahead as a result of the continuing benefit the industry receives from percentage depletion, as well as the impact of timing differences in utilization of deferred tax assets, we expect to have cash taxes and a tax provision between 5% and 10% in 2017. Longer-term over the next several years we expect a similar rate for our provision and cash taxes.

In conclusion we are excited to have been able to manage through the restructuring process successfully and expeditiously. Our operational platform of large-scale low-cost complexes combined with a clean balance sheet and healthy liquidity puts the Company in an enviable position to generate meaningful cash across the full market cycle and to generate substantial value into the future.

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

(Operator Instructions). Jeremy Sussman, Clarksons.

So I mean the past couple quarters you mentioned have been strained in the sense that the domestic market has been well below the international market in terms of pricing. I guess first of all, if we assume those markets normalize, what sort of rough percentage of the benchmark should we see you get going forward? And how do you see these two markets kind of playing out going forward?

Jeremy, certainly the markets have been fairly quiet recently and I couldn't really speak to the spread between the international domestic. I think when you look at our capabilities; we typically look at the Platts East Coast index. And when you look at the Low-Vol right now I think it is about [$171], the High-Vol A is about [$176]. And then the [High-Vol] B is about [$150, $151]. So we think that is kind of what we look at.

As I said, the volumes have been kind of quiet recently. But as Paul said in his opening comments, we have tried to keep a pretty healthy balance between the domestic and international markets and try to look for the long-term value. And we think it is healthy to have both of those markets. We have said in the past we typically have 40% to 60% in that domestic market and I think that will be the case this year.

But we are pleased with the domestic business we have, we think it is important to have that because, as you know, Jeremy, those guys price that volume for the full calendar year. They give us the volume ratably each month, which allows Paul and his guys to run their operations more efficiently.

So we think a healthy balance is good. And if you go back six or eight years, I think all but a couple of years of those, the pricing in the domestic markets have actually been better than they have in the international market. So I don't -- Paul, you got anything to add there?

I think, John, you covered it well. The one thing I would point out, Jeremy, is I think the perceived differential between domestic and international may have simply been overplayed. As you think about it, when the domestic customers started coming out last summer the international prices had yet to run up.

So some of the artifact I think people saw or perceived was simply just a result of timing. And as the year went on, I think that differential closed considerably. And I think probably more importantly, as John said, what our focus is on is really the Platts East Coast pricing anyway.

And, Jeremy, if you think about the volumes that Paul talked about, I mean we have got the index volumes that are committed but get unpriced. And then we have got the open tons. So we have got roughly 3.5 million tons that are exposed to the international markets as we move forward.

I mean we -- for all intents and purposes, we don't have any more domestic business that we'll be putting to bed for 2017. That has all been placed and everything is really dependent on what prices do in the international market.

That is great color. And no doubt this has been a little bit of a strange year. And I agree with your comments that historically the domestic market has actually gotten a bit of a premium. So maybe to that point, still very, very good margins of course.

What are your priorities for cash? Would it be a dividend? Would it be share buybacks? Would it be M&A? The credit markets look like they are open again for coal. I guess how do you think about all those various options.

Well, Jeremy, let me say we are about four months of restructuring. So we are just kind of getting our legs under us. We have accomplished a whole lot in the first four months. But we are having serious discussions with our Board, as you can imagine. It could be debt reduction, dividends, debt buyback; those are the focus right now. And those will be the discussions that we have with the Board over the coming weeks.

And as we make decisions on those various options I will come back to guys and keep you updated. But those are kind of the three options that we are focused on. We will make the right business decision and come back to you and keep you updated. But we do think that we are well-positioned to be making those decisions to take the Company forward in 2017 and beyond. John, you got anything to add to that?

No, I think, John, very well said. Always we'll be evaluating ways to be generating shareholder value as we move forward.

Congratulations on making it back. And good to have you on conference calls again.

Thank you, sir. It is good to be back.

Very good to be back.

Mark Levin, Seaport Global.

Hey, guys, just a couple of just quick questions. The first is around the remaining 3.5 million tons of met that have yet to price. Is that all High-Vol A or is that mostly High-Vol A?

Mark, as you can imagine, the maturity of that would be High-Vol A. I think Paul can probably give you a little bit more detail. When you look at our portfolio really we have got Beckley which is producing Low-Vol and everything else is either High-Vol A or High-Vol B or PCI, which we have already placed. So, Paul, you want to --?

Yes, I mean, I think I will give you kind of the best snapshot; it is about 40% High-Vol A and about 40% High-Vol B and 20% Low-Vol.

Got it. 40% High-Vol A, 40% High-Vol B and 20% Low-Vol, got it. And then in terms of calculating the net back and the transportation cost, I have heard a myriad of different numbers from a lot of different producers. When we try to arrive as analysts back at that sort of back of the mine price, is the right transportation cost number $30 a ton, is it lower, is it higher? Maybe some help there as well.

As we have discussed in the past, transportation costs, in specific the rail rates, tend to move with prices. And in general the railroads in our view are trying to maintain a -- I would call it the same margin across any increase or decrease. So if the price goes up 20% we assume rail prices will go up about 20%. And in some instances we have had actual rail agreements that were tied to indexes.

But as you go forward in full-year 2017, we expect transportation on our export business will be I would call it in the $25 to $35 range depending on the load out and the destination and frankly what the indexed prices are.

Yes, that makes sense. And then on the PRB, I know you mentioned 12 million to 15 million tons yet to price. And if I look at kind of where you have priced or what you reported this morning versus maybe where the curve is today, it is a little bit weaker than that.

When you think of that 12 million to 15 million tons and I think having priced at $12.50 and maybe the curve is weaker than that. Can we assume just based on the tons that you would be around where you have previously priced, or should we be thinking about something weaker on that 12 million to 15 million tons yet to price?

Let me give you a little color on that. As you look forward -- or you look at what we priced in Q4, and obviously it was a pretty high percentage of the 8400 coal. That clearly brought our average down. Now I think if you look across and look at the differential, we were pretty well on the marks through the quarter. Going forward I think the one advantage we will have is that just about everything that remains open for us is out of Black Thunder.

Great, got it. Got it, got it, perfect. Well I appreciate the color. Congrats on the first report.

Thanks, Mark.

Lucas Pipes, FBR & Company.

Good morning, great to have you back, congratulations on the (multiple speakers). I wanted to follow up on the met coal pricing contract for 2017. Appreciate all the detail there. I was wondering if this table is as of the end of 2016 or is it as of last week, that would be helpful first off.

That table, [Lewis] was 12-31-16.

Great. And then there was a reference about roughly 35% being index linked. Could you maybe give us additional detail as to how much of the export business specifically is index linked for 2017? And then give us a flavor in terms of the period that it would cover. Is it more back end loaded or are we seeing the price already here in the first quarter? Thank you.

Yes just about -- as I said in my comments, Lucas, just everything we have remaining in just about all of the -- all look the remaining open sales as well as the indexes all linked international pricing, it is all for the seaborne market. And I am sorry, I had trouble hearing your second question.

No, that is fair enough. And then, John Eaves, I have a question for you that is a little bit more higher level. There has been a lot of interest in the market for met coal specifically. You have the dual structure, very big thermal coal position, very large met coal position as well. When you think about that dual structure where do you see more opportunity? Is it both in met and in thermal? Is it maybe more in met? How do you think about those two pieces of the business? Thank you.

So, Lucas, it is a good question. You have heard me say a number of times we have got very --- two distinct business lines but at the same time they complement each other. And we like our thermal position, we think we are on the low end of the cost curve. We think there will be demand for those products in any type of regulatory environment and they will do well.

Clearly on the met side that is really what we have been focused on in the last couple years in filling out that portfolio. So I think we like both of the business lines. I think they are important. We think that they are in areas that there will be solid demand going forward.

And I think the unique thing for us is we have been able to generate cash margins even in the most difficult market. And we positioned the Company to capture those improving margins as we've seen the market improve.

And then if you look at our position on the met side in Appalachia, we have tremendous organic opportunity to actually replicate what we are doing at Leer. Not that we are in a hurry to do that, but clearly in the Tygart Valley we have got over 130 million tons that are owned in fee, they are High-Vol A quality. We can start operations that are longwallable. The cost structure is comparable to what we are seeing at the Leer operation currently.

So I like our portfolio. I think we are well-positioned. I think we have got good access to domestic and international customers, good transportation options. So we have streamlined this organization over the last three or four years and we think we have got a portfolio that will really stand the test of time.

That is very helpful. And maybe one quick follow up on the Tygart Valley. Would you say those are all gross volumes or some of that replacement volumes for your current met coal production?

Lucas, I didn't -- what was that?

It was --.

You are cutting out.

The question was as it relates to Tygart Valley, are those growth volumes or is there also some replacement of existing production in the mix of that?

As we look at it now those with most likely be growth volumes. I mean you are in the process over the next 12 months of getting those permits in place, doing mine planning. Like I said, there is nothing that we are focused on in the near-term. We just want to make sure, if met markets evolve like we think they will, that we are in a position to bring that production on at the appropriate time. Paul, you got anything to add?

The only thing I would add is, as John pointed out early on, the quality of coal in demand right now, particularly is High-Vol A, and the Tygart reserve is High-Vol A. And it is a tremendous asset that long-term will be a great growth potential for us.

That is very helpful. I appreciate it and great to have you back.

Thanks, Lucas.

Paul Forward, Stifel.

Good morning and welcome back. Well, just -- I wanted to follow up on that last question on capital spending. I guess you had given a $52 million to $60 million guidance for 2017. Is there any growth spending in that at all? And is there any ability, if these met markets stay strong, to consider some deployment of additional capital above that $60 million level to push your met coal volumes toward the high-end or above the high end of your range this year?

Yes, Paul, obviously this is a -- the CapEx is a great story, we have done just an outstanding job. The team has done -- the last couple years handling the CapEx situation. As you look at our 2017 spend, we do include costs that are related to some land and reserve acquisitions both in Colorado as well as in West Virginia. Frankly, we are continuing the work on the permitting and the engineering and evaluation of the Tygart reserve.

And well, I guess, Paul, as you think along those lines, having been through a number of just major ups and downs in the coal markets that have been pretty devastating over the past couple of cycles. I was just wondering how are you ever going to get comfortable with the commitment of the amount of capital that it would take to develop an additional longwall?

I mean I know it has got -- I know it has got some pretty appealing features, but at the same time the lack of visibility on metallurgical coal pricing means that you have got to take a lot of risk on in order to bring a three-year project up to speed, if that is how long it takes. How do you think about that relative to other opportunities, for example M&A and trying to consolidate this very fragmented US met coal market?

Paul, let me jump in, this is John, and then Paul can tag on. I think when we look at our Tygart Valley recently in particular, it is a High-Vol A product, we think it is going to be low-cost. And I think we referenced a couple of times the scarcity premium that we are seeing with that product.

And as we look around the world and even with the recent uptick in market and some of the volume that might be coming back on, we don't see a lot of High-Vol A coal coming back on over the coming years. And when we look to our customer base, whether it is in Europe or even in Korea, the High-Vol A has become a very important component in their blast furnace blends. And we think that will continue. And the lack of that product we think will serve us very going forward.

So as we think about those decisions we are going to be very prudent in spending that kind of capital. But certainly I like our position in our portfolio and our cost structure going forward, which probably would make that decision a little bit easier for us than maybe some of our peers. Paul?

Yes, I think, Paul, your question is I think more of the more greater issues we all have going forward on we have all come through this terrible period and I think we are going to all be very cautious as we enter into these kind of deals going down the road. Betting $400 million or $500 million on a five-year out met curve is pretty tough.

What that means down the road I think could be a variety of things, but it may mean that the way these things are financed or the way they are partnered may not be the same they have been done in the past. And frankly we have had a lot of those discussions with customers and they are going to continue.

Okay. Good to hear. And congratulations again on the emergence.

Thank you.

John Bridges, JPMorgan.

Congratulations on emerging and particularly getting the private bonding, that is very impressive. Just following on on the capital. What innovations have you come up with? Because I am used to the idea of $0.50 a ton, sustaining capital on the PRB mines, and so $4 or $5 a ton for your underground mines, which doesn't get me to $60 million for the year.

John, I will give you my perspective and John can jump in. But we entered the downturn with very well-capitalized mines and we had the added benefit of idle equipment and we have been able to deploy -- redeploy a lot of equipment across the Company.

The other thing that is out there is we have been able to buy a tremendous amount of what I would call freshly used equipment. There was a lot of equipment sitting idle throughout the US. But I would also tell you that as you look back the last couple of years it has been lost in the numbers, but we have been able to run Black Thunder at CapEx levels that were probably about $0.10 to $0.15 a ton.

And as we move forward clearly cash costs are always going to be a main driver in the PRB. But I have been looking at this also from the perspective of cash cost less CapEx. And if you look at our numbers, we are probably running some of the most enviable numbers in the basin.

John, I think Paul mentioned the redeployment of equipment. And when you think back over the last couple years, we have closed over 32 coal mines, and we have been able to take a lot of good equipment and redeploy that equipment to existing operations. So that has served us well and allowed us to keep our capital levels pretty low. And I think not just for 2017, we think we can do that maybe going into 2018 as well.

And, John, look, at some point this is going to revert to a norm. Look, it is not going to happen in 2016 or 2017 and it may start reverting in 2018. But this is going to be a transition of two or three years.

What do you consider to be a norm then, closer to 100?

Yes, I think what you will see if I were to call it -- and I think we had this discussion prior to bankruptcy, maintenance CapEx for us, a company our size assuming all things being equal is probably about $1 a ton.

Okay, okay. But like you say, the sector has been in a downturn now for several years. So it is surprising that you haven't developed a backlog of things that need to be fixed and replaced.

We have also, John, had the great benefit of downsizing. If there was a good thing about downsizing Black Thunder we have the ability to keep CapEx way down.

I knew there had to be a benefit in downsizing somewhere. Thanks, guys. Best of luck.

David Gagliano, BMO Capital Markets.

First of all I would also like to congratulate the team on the Arch side for what has been a really incredible turnaround story in terms of navigating the bankruptcy process and emerging in such a strong financial position. So really impressive from a corporate perspective at least in my view.

I have two questions. First, on the 3.3 million tons of met coal that actually was already locked in for 2017, can you break down the quality of the volumes that are locked in -- that are already locked in and roughly when was that locked in and how much was that as domestic versus (inaudible)?

So on the locked in business we have about -- I would call it about 60% of that was High-Vol A, about 30% was High-Vol B and about 10% was Low-Vol. For all intents and purposes we are sold out on PCI business. If you recall, we entered 2017 -- or 2016 -- excuse me, 2017. We had a two year deal on about 1 million, 1.5 million of met.

So we came into the year with a two-year deal, which was relatively low-priced in today's market but was real strong 12 months ago. So as you look at the way most of that coal has been sold that made up the 1.7 million we sold in the fourth quarter, that was pretty well evenly spread through the quarter.

And just how much -- and is there a (inaudible) between domestic and export for that 1.7 million? Was that all domestic or --?

No, that 1.7 was predominantly domestic.

Okay. All right, and then my follow-up question. On the thermal coal side, you did touch on this a bit in your prepared remarks. But I am wondering if you can expand a bit more on Arch's approach towards contracting unpriced, volumes in the PRB moving forward. Way back when -- obviously we back when Arch was the I would argue the disciplined producer in the PRB. But I think that changed a bit when the balance sheet became strained.

So, essentially what I am wondering now is now that you have this pristine balance sheet, how do you view the balance between locking in future volumes in the PRB versus exercising pricing discipline? Thanks.

Dave, this is John, I will let Paul jump in. I mean we said that we are not smart enough to catch the tops of these markets. So we need to always be in the market. We think we have focused on our costs, we have got those costs in a good area. And I think it is up to us to be in the market and participate.

I mean, we are going to be selective, but, as Paul said, most of everything, that 12 to 15 million tons that we had to place for 2017, most of that is from Black Thunder which is our higher BTU mine.

As I look at the last 12 months these downsizings are tough. We did what we had to to bring Black Thunder into a production range where we could maintain strong cost and not push a lot of tons out the door into a market that just didn't want them. We seem fairly well set right now and I am very comfortable of that position. We will continue to layer in sales, David, but I think what you see is a pretty effective approach as far as maintaining a good cost structure at the mine.

Okay, that is helpful. Thank you. And again congratulations on all of the progress.

Thank you.

Daniel Scott, MKM Partners.

I will echo the sentiment, it is good to be back for all of us. I want to talk about the stockpile comments that you guys made earlier about over the next few months before we get back to a normal or I think maybe in the release you said third quarter. What normal is that?

I mean I think back to kind of the most recent EIA data has us at the kind of 10 year ago level, but that was when we had 1 billion tons a year of burn and now we are down about 30%. So is the new normal -- does that need to be down 30% from the old normal and do we need to be closer to 100 million tons before we can get real pricing response?

Dan, I mean I think that depends on who you talk to. I guess as we look at the market we came into 2016 with almost 200 million tons, we drew that down about 35 million in 2016. I mean we are coming into the year with about 83 days of supply. We think more normalized levels somewhere in the 55 to 60 day level.

And we think with normalized weather, I mean we have had a pretty rough start to the winter certainly here in St. Louis. But if we get normal weather through the spring and summer we think by third quarter we actually could be approaching those levels and by the end of the year be in that low 100 million level or 55 plus or minus days.

So, that certainly the way we are looking at it. And feel like if that happens that, as Paul was saying earlier, I mean we will sell into an improving market particularly with our PRB coal.

Okay, great. And down at Coal Trends and last week there was -- one of the speakers had an interesting observation about reserve life's in the PRB and how major producers had basically -- it is getting a little shorter and they would have to start thinking about leases again. At what point do you have to start thinking about that when you look at your capital deployment?

Our last volley which was 12-31-15 we had about 1.3 billion tons in the PRB. If you take the midpoint of our numbers of about in the mid-80s between the two mines of production, that is 12, 15 years of reserve. Clearly reserve replacement is always going to be a big issue. But right now it is on the list but it is not on the top of the list.

(Multiple speakers). I'm sorry, Dan, go ahead.

No, go ahead, please.

They implemented the moratorium on leasing. We think over time that probably goes away. I mean, as Paul said, we are in good shape for the next 10, 12 years. Anytime you are producing the volumes we are in the PRB you want to replenish your reserves. We were fortunate that actually the North highlight LBA was outside that moratorium.

So if that comes up sometime in the future certainly we will take a look at it. But we feel good at that 70 million to 80 million ton production level for quite a while.

Okay, great. Could you just also let us know what your longwall move schedule is for this year?

Yes, we have two longwall moves at Leer and Mount Laurel. Let me get you the exact timing of that. The Mount Laurel longwall moves are in Q1 and Q2. The Leer moves are in Q2 and Q4. And West Elk is in Q2.

Great, thanks very much, guys.

Michael Dudas, Vertical Research.

Your comeback has nothing on what the patriots did on Sunday, that is for sure.

We are trying.

I know you are. You lost the football team but gained another coal company. So two questions, one maybe for Paul. How do you view productivity performance at your major operations, [let's call it like] Leer and say Black Thunder, where they are today, where they have been going through the restructuring? And is there room for visible improvement as we go forward?

And my second question maybe for John is, any thoughts on how the Department of Labor is going to handle new -- with a new administration how they handle mine inspections and processes, etc.? And can that be helpful going forward to Arch in general and -- or in particular on the industry in general? Thank you.

I will start off with Leer. I will say I think Leer, as I have said in the past, was one of those rare mine developments one sees in their career. It came in below cost, its operating costs were below [thought] and its productivity has been higher. But with that we are clearly focused on it.

I was at the mind a couple of weeks ago and the longwall frankly can outrun the development. And that is typically at longwall mines but at Leer it is particularly pronounced. And so we are heavily focused on what we can do to improve development rates at Leer and see what we can do to improve productivity overall. But that is clearly the key at Leer.

At Black Thunder we went through this pretty tough downsizing and rightsizing of the mine. We shed about 20% or 25% of our employees. And in doing so we were able to also idle back on some of the older, smaller shovels.

So one of the advantages we will see going forward besides CapEx and one of the reasons why I think you are seeing costs on a comparative basis, even though volume is down about 20%, we are still running lower costs than we did historically since we have been able to pull back on some of the older, smaller equipment. Clearly cost and productivity will always be a huge factor in the PRB. The Department of Labor inspection, I missed the third question.

Just kind of what we expect out of this administration going forward.

I guess it is going to be better, right?

So, Michael, it is Deck and I'm on the line as well, Deck Slone. We really haven't had any issues. On the production side really we are -- we don't have any significant concerns other than the Stream Protection Rule and that was clearly beneficial. We saw the Congressional Review Act action and the resolution of disapproval there. That certainly should be helpful. We thought that was a redundant rule that was going to potentially make permitting lengthier and more challenging without any real benefit.

On the production side I would say that there may be some changes, we really don't have any significant concerns. As you know, our operations are run exceptionally well. And those costs are just part of doing business from our perspective. Clearly on the Clean Power Plan, that is another benefit for us as we look forward and as we think about long-term thermal demand. As John said, the moratorium on better coal leasing is beneficial. But on the production side we have been in a good position there and don't see any real benefits.

Michael, I think the benefit is more long term. The immediate benefit I think is probably pretty minimal. But if you think about the Clean Power Plan being enacted and the cliff that we faced as an industry [in 2022], I think that has probably gone away now.

So we are never going to see probably the coal consumption we saw six or eight years ago of 1.1 billion. But I think at 750 million plus or minus going forward and pretty stable I think with the asset base we have we should be pretty successful in that environment. So we are pleased with the administration. We hope they continue to be pro-energy and pro-fossil fuel. And we will see where it ends up.

Excellent. Thanks for your thoughts, everyone.

Amer Tiwana, Cowen and Company.

My question is more general about the met coal space. You guys had put out a presentation when you emerged that there was about 86 million tons of production in 2013, came down to about 56 million in 2016. Just in terms of how much of that can potentially come back -- you talked about capital is going to be constrained in the near-term.

So just in terms of what are the balances here? Where do you expect that number to go? And basically following up on that is put your protection hat on and give us some sort of normalized range for met coal prices.

I will take the first piece of that; I might kick the second one to Paul. But that slide you are referring to, yes, since 2013 we have had about 30 million tons of met production coming off in North America. Those were smaller midsized mines. People that as the market deteriorated just decided they couldn't do it any longer.

As we look at that 30 million that came off in that timeframe we think two-thirds of that volume was gone more on a permanent basis. A lot of mines where they pulled power, pulled the belt system out, quit supporting the roof, that volume is not coming back.

As we think about 2017 our forecasts have about 6 million tons coming back this year. I would say that that is running additional shifts, restarting mines that were on hot idle and then some new mine development.

I think the one challenge -- you mentioned capital, certainly capital is a challenge, but I think labor is a challenge as well. We were talking about it a few days ago and trying to replace about 10 people at one of our operations in the East. We are having a lot of trouble finding skilled labor out there. So we think that is going to be pretty indicative in the industry, maybe not just in the East but across the industry.

So I think a lot of those people the last downturn decided they were going to move on and look to other industries for employment. So I think that will be a challenge. But in short we see about 6 million tons coming back in 2017. Most of that 6 million tons will hit the seaborne met market, a little bit will hit the domestic. Paul, do you want to touch on the pricing?

It is good to be boss (laughter). Look, I think the issue on the pricing going forward was the question I was asked earlier about how do you justify these projects longer-term. And how do you convince a Board and shareholders to go out and risk $400 million or $500 million on a four-year curve that is five years out.

I think what prices are going to have to do is stabilize where first you are getting a return on existing assets. And we can argue that number, but that is probably somewhere in the [$120], to [$130], maybe [$135] range. Then for new investment that number is going to have to be $10 or $15 higher. So I think that is kind of my general sense of how I am looking at it.

That is very helpful. Thank you very much.

Patrick Marshall, Cowen and Company.

Just one quick housekeeping question. On your committed tonnage, so you had 3.3 million tons this quarter, prior quarter was 2.1 million. Did the prior quarter include the PCI tonnage?

Yes.

Yes, it did.

Okay.

So going forward we will break it out for you.

Okay, yes, great, thank you.

Wayne Cooperman.

Hey, guys, you got to me. Two quick questions. Just on the way you have changed around the reporting, is the only real change you took Coal-Mac out of East and put it in thermal? And if that is true can you just kind of put some parameters on the size of Coal-Mac and potentially your 2017 thermal guidance, just break it down between East PRB and other?

And as long as I am talking, the other question was just your guidance is for $38 million of interest expense, yet we have net cash on the balance sheet. I assume that you guys don't plan on leaving all that debt out there all year. Could you talk about that a little bit?

Hey, Wayne, this is John Drexler, a couple good questions. One, the primary difference from how we reported previously was the movement of Coal-Mac into Other Thermal. As I described in my prepared remarks there are some other items as we reconciled down below to EBITDAR that take in some idle costs, things like that.

But, yes, for the vast majority of the change we have moved Coal-Mac into Other Thermal. I think we are giving that breakout of the volume commitment on the thermal side, Coal-Mac is roughly 2 million tons a year on an annual basis. And so that is all now included down below.

On your question about the cash and the debt on the balance sheet, as John indicated, the management team, the Board will be absolutely proactively looking at the opportunities that are out there. But clearly aware that we have got debt on the balance sheet that has got a high interest rate. And we have got a strong market right now. So we will evaluate everything and do what we think ultimately is generating value for the Company moving forward.

I mean is there anything stopping you from just sending all the cash over to the banks tomorrow? It sounds like there is no penalty and you can prepay whatever you want.

Wayne, yes it is all pre-payable at par, that is correct.

So I guess my question is, what is stopping you from just paying off -- paying it off now with your cash and [with something else]?

Wayne, I think one thing to make sure that -- we are going to be prudent in all of the actions that we take. And one thing that we need to make sure everyone understands is our liquidity is in the form of cash.

And so, at December 31 we had $393 million of cash on the balance sheet. We are going to be generating meaningful cash moving forward and so we are going to be evaluating all of that. But if we were to go pay off all that debt right now it would leave us with very low levels of cash, very low levels of liquidity if we were to do that today. So we have got to be prudent in how (multiple speakers).

Just to be clear then, is it an all or nothing thing or could you pay off $50 million of the term loan tomorrow if you wanted to?

We can do portions of it. And so clearly, Wayne, we are evaluating all of that and discussing that with our Board.

Okay. Last, Paul, just I think if I take $2 million out of your Eastern coal and look at your guidance it looks a little bit low. Am I missing something else? Because you guys used to do like 12 million or 13 million tons of total Eastern coal.

Wayne, I think all of our guidance is aligned with us pulling Coal-Mac into that Other Thermal region. So any of the projections that we have in the guidance that we have is broken out between the metallurgical segment, which excludes Coal-Mac, the PRB and then other bituminous. And if you have further questions we can follow up with you off-line on that.

Sure. Thanks a lot.

That concludes today's question-and-answer session. Mr. John Eaves, I would like to turn the conference back to you for any additional or closing remarks.

Thank you. And I would like to thank you guys for joining the call today. We certainly appreciate your interest in Arch Coal. We are excited about the way the Company is positioned. This management team is laser focused on executing and creating long-term shareholder value. So we look forward to updating you on our first-quarter call in April. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.