Arch Resources Inc (ARCH) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Arch Coal, Inc., third-quarter 2007 earnings release conference call. Today's call is being recorded.

And at this time I'd like to turn the call over to Mr. Deck Slone, Vice President of investor relations and public affairs. Please go ahead, sir.

Good morning from St. Louis. Thanks for joining us.

As usual and before we begin, I want to 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 pursuant 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 filed with the Securities and Exchange Commission may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events, or otherwise, except as may be required by law.

I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the investor second of our web site at Archcoal.com.

On the call this morning, we have Steve Leer, Arch's chairman and Chief Executive Officer, John Eaves, Arch's President and Chief Operating Officer, and Bob Messey, our senior VP and CFO. Steve, John, and Bob will begin the call with brief, formal remarks, and therefore we'll be happy to take your questions. Steve?

Thank you, Deck. Good morning, everyone. Welcome to Arch Coal's third-quarter 2007 earnings conference call.

Today the company reported earnings per share of 19 cents in the third quarter of 2007 compared with 35 cents in a year-ago quarter. While US coal markets have improved over the last three months, conditions still remained weaker throughout much of this past quarter compared to the third quarter of 2006.

However, we believe that several key drivers are helping to build momentum and set the stage for a much stronger US coal market in 2008, and I'd like to briefly review these key drivers with you today.

First, thanks to more normal weather patterns than in the previous year, we estimate that coal consumption increased approximately 22 million tons during the first nine months of 2007. At the same time, domestic coal production has declined approximately 13 million tons year to date according to the EIA. This combined 35 million-ton swing has helped reduce the overhang in generator stockpile levels. We currently estimate that generator stockpiles stood at approximately 135 million tons at the end of September, which is lower than the level at which they entered 2007.

Second, regulatory hurdles in Central Appalachia continue to place significant pressures on the supply in that region. And these challenges are likely to persist. As you will recall, Judge Chambers' original decision back in March called into question the way in which permits were being issued for the construction of valley fills and sediment ponds in surface mining operations.

In fact, the court's recent decision to block another valley fill permit in the region further illustrates that an easy or timely resolution of this issue may not be possible. To our knowledge, no new valley fill permits have been issued in what now is almost nine months. As a result, we expect that the impact of these judicial challenges to the permitting process will become more pronounced as 2008 progresses.

The third key trend that is influencing the domestic coal markets is the strength in the export [mets] and steam markets. Global coal demand is robust due to a rapid economic expansion in developing Asia. In particular, China which likely -- which will likely transition from its significant net exporter of coal just five years ago to a net importer of coal this year, with continued growth in its domestic economy for the foreseeable future, China's coal needs will likely continue to grow over time as will India's, Indonesia's, South Africa's, and a host of other developed and developing nations.

Add to this growing demand scenario, some severe supply constraints in many of the traditional coal exporting countries ranging from mine, rail, port, and rail challenges, and you can begin to understand why sea-borne coal markets are booming. These trends are also providing an opportunity for North American coal to move into European and Asian markets to meet demand and fill supply gaps. US coal supply is beginning to feel the impact, as well. Coal imports into the US are up by less than one million tons year to date through August, while US sea-borne coal exports have increased by more than six million tons.

This seven million-ton swing also is helping to reduce US generator stockpile levels this year, and we expect this trend to continue into 2008. In particular, Arch expects to capitalize both directly and indirectly on this trend. We've made excellent progress on ramping up our Mountain Laurel complex in Central App earlier than anticipated and expect to increase our exposure to the met markets as a result.

Our Mountain Laurel coal has the flexibility to move into the international and domestic met coal markets as a highball product, or into the domestic PCI or pulverized injection markets, as well. Additionally, we have the flexibility to sell some of the tons into the export and domestic steam markets if it makes sense from a margin standpoint.

Since the longwall began production on October 1, we have been successful in booking business in the international met market at very advantageous pricing, and fully expect to book additional business into 2008. Additionally, we've booked tons into the domestic PCI market at substantial premiums to the domestic steam market for 2008 delivery. And we've placed some coal on an opportunistic basis in the international steam export market for near-term delivery off the East Coast at a premium price to domestic steam pricing.

Another trend that should help strengthen the US coal markets going forward is the advancement of new coal-based generations. As mentioned in our release, 14 gigawatts of new coal-fueled capacity will come on line over the next four years, equating to approximately 50 million tons of new annual coal demands.

Another five gigawatts or approximately 20 million tons of additional annual coal demand are in advanced stages of development. These facilities represent the largest buildout of coal plants since 1980.

Of course, some proposed coal plants are meeting stiff resistance at present and in part due to the uncertainty over carbon regulation. Yet the need for new generating capacity is very real and we believe there is a growing recognition on the part of Congress and other decision makers that coal must and should remain a strong and growing source for our energy needs for decades to come.

Coal is one of America's greatest resources, and its continued use will aid tremendously in our efforts to meet growing domestic energy needs and provide for a secure energy future. We believe the rapid deployment and development of advanced clean coal technology, including advancements for carbon capture and sequestration, are the keys to addressing these concerns, and we are encouraged by continuing progress on that front.

As an industry and as a nation, it is imperative that we recognize that greenhouse gas emissions in developing nations are growing at a much faster rate than that of the developed world. In fact, China's emissions have likely surpassed the US as of this year. Therefore, it is incumbent upon the US and the rest of the developed world to invest in and bring to maturation clean coal technologies that can be shared with the developing world. Lastly, with oil trading at above $90 a barrel this morning, advancing alternative sources of domestic fuel, particularly coal to gas and coal to liquids, are in the best interests of American consumers. We believe that current CTL projects, including our investment in the proposed EKRW medicine bowl plant in Wyoming, could greatly enhance energy security and provide real economic benefits to the countries by bringing to market supplies that domestic transportation fuels.

Also, we can greatly reduce our carbon footprint of these clean fuels derived from coal and further enhance our energy security by using the Co2 that is -- that (inaudible) in the process for enhanced oil recovery in our domestic oil fields.

All of these key drivers should contribute to a strong coal market in 2008 and over the longer term.

With that, I will now turn the call over to our President and COO, John Eaves, for further discussion of Arch coal sales and operating performance. John?

Thanks, Steve.

From an operations perspective, our mines ran well during the third quarter, 2007. Overall average price realization per ton expanded in our PRB and Western bit regions during the quarter, offsetting lower realizations in Central App due to the sale of our Mingo Logan Ben creek complex at the end of the second quarter.

On the cost side, our strategy continues to revolve around maintaining flexibility coupled with stringent cost control initiatives. These initiatives which encompass programs designed to contain controllable costs, improve processes, and eliminate nonessential capital spending, have helped streamline our operations and achieve profitability targets despite the fixed cost nature of our business.

On a regional basis, our operating costs in the PRB were essentially flat as we were able to offset commodity cost pressures and higher sensitive sale costs with cost reductions and controls in other areas. Cash costs in the Western bit operations increased slightly in the quarter in part due to increased production from our higher cost mines in the region. We are targeting maintaining average operating costs around $19 to $21 per ton going forward. But we expect expanding margins in the Western bit as we realize significant step up in pricing over time.

In Central App, operating costs per ton declined, benefiting from the sale of our highest cost mine in the region at the end of June, as well as strong cost performance by our remaining mines in the region. In fact, our cash cost in Central App were in the $40 range and expect the startup of Mount Laurel complex to have a beneficial impact on our cash costs in this region going forward. Arch's selective portfolio approach to operations and low cost reserve base in Central App represent a significant competitive advantage for the company.

Now I'd like to spend a few moments discussing Arch's market-driven sales strategy. Given our view the favorable outlook for international and domestic coal markets over the next several years, Arch has taken a focused but patient view of sales contracting.

We have opted to leave low-cost tons in the ground that we believe will draw a better price in the future, and have sought to optimize our sales efforts via brokerage or other trading activity to enhance value for our shareholders. During the quarter, we signed selective sales commitments totaling five million tons annually for 2008 and 2009 delivery across the various operating regions at prices that are significantly higher than the average realized pricing achieved during this past quarter.

Going forward, we have unpriced volumes of less than two million tons in 2007, between 45 and 55 million tons in 2008 and between 100 and 110 million tons in 2009. We believe our leveraged exposure to the upside potential of coal markets will translate into substantial shareholder value as the market strengthens.

This leverage strategy ensures that Arch will obtain an appropriate return on all of its valuable coal reserves. In fact, average spot pricing in the PRB and Central App for prompt quarter delivery are up 36% and 18% respectively since the beginning of 2007, further validating Arch's market-driven strategy.

Lastly, I'd like to take a moment to recognize some of our outstanding achievements this past quarter. Several of Arch's Central App subsidiaries were honored with rewards for safety, environmental stewardship, and citizenship. I would like to thank the employees at these select operations for their hard work and dedication.

Arch's band mill mine at the Cumberland complex won the Sentinels of Safety award as the nation's safest underground mine in 2006. This achievement represents the second year in a row that an Arch mine has won this award, and underscores the company's commitment to operating the world's safest coal mines.

Additionally, Arch's Holden 22 at Coal-Mac operations was recognized nationally for its outstanding reclamation and stewardship practices while our newest operation, Mountain Laurel, won the national Good Neighbor award for its local interaction with surrounding communities. This recognition marks the third time in four years that an Arch operation has earned the Good Neighbor award.

While we are proud of these accomplishments, Arch will continue to focus on continuous improvements in key areas of mine safety, productivity, and environmental stewardship, as we believe these are key pillars which will continue to drive the company's overall success.

With that, I will now turn the call over to our CFO, Bob Messey. Bob?

Thank you, John. And good morning, everyone. I would like to take a few minutes to expand on some of Arch's major financial developments in the third quarter.

In late September, Arch acquired approximately 157 million tons of coal reserves, and significant surface acreage in the Illinois basin for roughly $39 million.

This transaction significantly expands Arch's current footprint in this growing region and represents the type of reserve play that can support the development of a large-scale, major mining complex.

Additionally, this synergistic deal creates one uniform and continuous reserve block that we envision will eventually support a mine [mount] facility to serve the domestic utility market or, as a CTL site depending upon future market conditions. The Illinois reserve play was financed by short-term borrowings under our revolver. At September 30, our borrowing capacity under our revolver totaled approximately $580 million.

For the third quarter, Arch's debt balance increased slightly to $1.3 billion while Company's debt-to-total capital ratio remained at 47%. Looking ahead, we expect to make a meaningful reduction in our outstanding debt balance during the fourth quarter and are targeting a debt-to-capital ratio of 45% by year end.

During the quarter, we also launched a $50 million commercial paper program at our western operations. This program provides us with an additional source of short-term liquidity at rates that are attractive in comparison to those available under our revolver and asset securitization program.

Capital expenditures for the quarter totaled $55 million, primarily related to the ongoing development of our Mountain Laurel complex in West Virginia. Note that this figure excludes the $39 million for the Denmark reserve property in Illinois.

Total capital spending in 2007, exclusive of reserve additions, is now projected to be approximately $250 million, which you will recall was the lower end of our CapEx guidance range for the year.

Going forward, we will continue to spend our capital in a judicious manner by making good capital allocation decisions. We will evaluate the direct and intangible returns offered from strategic alternatives, including organic growth projects, acquisitions, dividend increases, share repurchases, and debt repayments.

I also would like to tighten our 2007 guidance range. We now expect the following -- sales volume of 128 million to 133 million tons, excluding approximately three million pass-through tons. Earnings per share between $1.10 and $1.20 per share. Adjusted EBITDA in the range of $460 million to $490 million. ED&A between $240 million and $245 million. As previously mentioned, capital spending of approximately $250 million excluding reserve additions. And an effective book income tax rate of 10% to 12% offset by a valuation allowance reduction, netting our tax provision to a net tax benefit of between $1 million to $13 million.

With that, we're ready to take questions. Operator, I'll turn the call back over to you.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Bret Levy with Jefferies & company.

In the revised guidance range you gave of EBITDA of 460 to 490, kind of taking the mid-point of that range, that implies a very significant bump-up from 3q to 4q, and fourth quarter is traditionally in this business, you know, there's holiday shipments and that sort of thing that get delayed. And usually everyone takes some cleanup costs associated with maintenance.

Can you talk about what the biggest sources of delta positively from 3q to 4q might be?

Well, I not the biggest difference is our startup of our Mount Laurel operation. You know, it's -- any time you expect to start an operation of that size, you expect to have startup issues. And we've been pleasantly surprised by the startup of this operation. The mine's running very well. We're forecasting about 900,000 tons of production during the fourth quarter, which is quite a bit higher than what we had previously mentioned.

Given that and the attractive market environment we see for domestic met, international met, international PCI, we think that will cause the biggest part of that EBITDA growth.

And, you know, is it wrong to think of that -- this is the follow up question. Is it wrong to think of that as something in the zip code of a $30 million bump from third-quarter EBITDA to fourth-quarter EBITDA?

This is Steve. I think you can think of it as in the third quarter, we didn't have really any of the high-valued coal coming out of our Mingo Logan mine because we had sold it and Mountain Laurel hadn't started up. I don't have a specific EBITDA number in mind. But it is a significant bump because third quarter didn't have the production, fourth quarter will have the production, and it should be sold at fairly attractive prices.

I think you also need to clarify, third quarter in the coal industry typically is a difficult quarter for a variety of reasons. But it goes back for decades, what they call miners vacation traditionally is held in the third quarter. And you see a lot of mines including some of ours take, you know, week outages or even two-week outages where the miners literally go on vacation. And then on top of that, you do very significant maintenance turnaround during those periods of time, which typically increases the expenses.

So even though the fourth quarter has some holidays in it, third quarter often is the weakest quarter in the industry.

All right. I'll get back in queue. Thanks, guys.

Thank you. We'll take our next question from Paul Forward with Stifel Nicolaus Please go ahead.

Good morning and congratulations on the Mountain Laurel startup.

Thanks, Paul.

Looking at Black Thunder, can you maybe step us through the next one to three years as you transition more away from the southern end of the mine and the access to (inaudible) loadout that you sold. How are Black Thunder's volumes going to change over time?

Well, we don't give out, you know, volumes per mine, Paul. You know, I will tell you that our public sector plans are going to be market driven. We -- you know, we sold the south loadout to Peabody.

They take ownership of that October 1 of 2008. We're well in the process of building our new loadout, which is a much enhanced loadout that will be operational sometime in September of 2008. So, I think we're in pretty good shape from that standpoint. Volumewise, it's going to depend on the market.

Okay. So there's -- we don't have to worry too much about a product mix shift away from Black Thunder and toward Coal creek that might diminish, I guess, the quality of the coal, just an aggregate that we'll see out of the PRB from Arch over time?

Not at all, Paul. In fact, we see some improvement in quality as we move out. So we don't see that at all.

All right. Very good. Thank you.

We'll go to Anne Kohler with Caris and Company.

Good morning, gentlemen. I was just looking at the absolute cost in the PRB. And there was about an $8 million swing in those. I know that on a unit basis, they were flat. Could you provide detail as to what that increase was attributable to?

I think our big challenge in the PRB has been the tire cost, and our diesel costs, quite frankly. And we think we're doing a pretty good job in managing those. We've improved our tire life between 50% and 60%, you know, several things, maintenance on the roads, training of truckers, slowing the speed of the trucks down. So, you know, we've had good luck there.

We've also got our diesel partially hedged for the balance of this year. In pretty good shape. So I would say those are probably the outliars in terms of our PRB costs.

And then just a follow up. What is your hedge position on diesel going into next year?

Currently we're modestly hedged going into '08. We're using two techniques, purchase contracts as well as the heating oil, heating fuel hedges. As you know, the heating fuel hedges in the west have been a little out of whack. It's made it a little difficult. But, you know, we're projecting to be in the 70% hedged range as we go into the year.

Okay. Thank you.

We'll now go to Mark [Limina] from Morgan Stanley.

Good morning.

Can you comment a little more on the developments in the export markets? And I'm looking mainly-- is there growing interest in seaborne metallurgical coal from the international steelmakers.? And on the thermal side, is most of the interest more spot or term in nature, and is there any difference in coal qualities that they are looking for? Thanks.

All of --

I'll let John do it, but I -- to jump in. Give a little history here. I mean, the international coal markets have jumped so greatly, and this morning, there were quotes that Richard's Bay panamaxes were trading at $80 a metric ton, FOB to boat. And if you go back to January 1, that was $51 a ton. And delivery in Rotterdam essentially on January 1 was about $68, $67, $68. This morning it traded at $125. And someone whispered to me they've heard about $130 trade.

So the markets have gotten extraordinarily robust on the steam side. The met markets have followed even bigger numbers if you will. So we're seeing some great things. I'll let John talk specifically perhaps about what we're doing.

You know, I think first on the met side, certainly it's widely known what's going on in Australia with the port issues and the rail issues and the queue in terms of ships in Queensland. We've seen a real increase in interest in US met coal. I think you'll continue to that as we move out. Any time you start an operation like Mount Laurel there's a certain amount of testing that's involved to get tested at various steel consumers. We haven't really seen that lengthy test process right now. We've been able to get some test shipments, book some business into 2007. So we're very pleased from that standpoint.

I guess on the steam side, if you look at what's going on in South Africa with some of their challenges, some of the challenges in Indonesia and the increased demand within that country, you're basically seeing a lot of new demand on the steam side in Europe that we haven't seen in years. I think Steve mentioned in his comments, we placed one steam boat on a prop basis and have a lot of discussions going on for the next year to two years for some term steam business.

So we're very pleased about what we're seeing on the met as well as the steam. And we think our timing with Mountain Laurel is going to be very good as we move into 2008.

The timing does look great on that. With that, can you comment on what the volume of met coal between the various grades might be next year?

You know, I really wouldn't want to give it by grades. As a company in 2006, we shipped about two million tons of metallurgical/PCI. That number will be comparable in 2007. We hope to at least double that as we move into 2008. Our capabilities on the met side will be between four million and six million ton as a company in 2008. So we like what we see thus far.

That's great. Thank you.

We'll now go to John Bridges with JP Morgan.

Hi, everybody. Congratulations on Mount Laurel.

Thank you.

You talked about the met and PCI. Any guidance on the split?

You know, really I'd be Hess taints to give you that split right now because we're in a number of negotiations and some of those could go either way. But, you know, the advantage I guess on the PCI, John, is we have the ability to change our yield around in the (inaudible). That will just be market determinate. Like I say, we're real happy with whatwe're seeing thus far.

Okay. Broadly, is it 50/50, 75/25?

I'd rather not go there, John.

Okay.

John, to put it -- I mean, the coal itself can go to either market. It's simply what (inaudible) will leave in the coal, if you will. So obviously, the goal will be to maximum the met side it versus the PCI and the met and PCI versus steam. But the market will determine that.

Okay, okay. Understood.

And then internationally, how -- how do you approach ta crazy market like the one we've got? You know, how much interest are you getting on sort of longer term business that you can actually invest capacity in?

Well, we're approaching it with a great big smile.

No, we are getting a lot of interest. We've had a number of buyers that have come to the state. We've actually in the last 60 days put on a new Vice President of marketing that's going to handle nothing but domestic international met and PCI. So it's certainly going to be a focus for our company.

You know, we haven't seen this kind of interest on the steam side in many, many years, probably since the early to mid-90's. So we're pretty excited about what we're seeing. And it's certainly going to be a focus point of our marketing and operations team.

I presume that you can't invest in capacity until you see longer term business.

Well, I mean, I think we're fortunate that we have, you know, the minds that are -- mines that are in place now that have a cost structure that allow us to go in the steam or the met market. And we'll expand those accordingly.

Yeah. I was thinking in terms of the thermal business that you're seeing.

Well, I mean, you know, I guess in the last week or two we've seen a number of buyers that are starting to see this international market. And there's been a number of bid requests out. So we're going to evaluate those versus what we see in the international markets. Whether it be steam or met. So it -- it's going to be market-driven at this point.

Interesting --

And right now what we see internationally is more attractive than what we're seeing domestically quite frankly.

Okay. Thank you very much.

Our next question comes from Sam Martini with Cobalt Capital.

Hi, guys. Just on that note, can you give us -- can you walk us through or give us roughly a break-even domestic cap price that you're seeing as you look internationally and make the decision to ship or not to ship, and how you -- maybe a little bit more of the thought process behind how much of it is purely economic versus how much of it is keeping supply and demand tight? Thanks so much.

Again, we're always responding to the market. But if you just look at the pure indices for next year, domestic steam is in the 50's. And international steam is a negotiated deal right now every boat. But we're seeing better pricing there than we currently see available just based on the indices.

Now contract markets are different. And we're not going to get into specifics on contracts. But, you know, we're very pleased with the direction domestically, the direction internationally, and again to maybe give some context around it, I would guess over the third quarter you probably saw the public indices move $4 or $5 for the domestic steam markets, for 2008 delivery. And that pressure seems to be continuing to build, which we'll be able to bounce back and forth, whichever gives us the best value long term for our shareholders.

Steve, is it safe to say then that the spot market, to export into the spot market is financially superior to contract in the US market, but contracts, freight adjusted, are still below the US market contract?

I'm not sure that I would say it on contract. But just on the indices and the spot international sale on a steam coal and a spot domestic sale based on the indices, international is better at the moment.

Contracts, as you know, have a variety of other items other than the pure price that go into them. You have to put it all into the equation. And right now, I guess the trend is across the board up.

Right. Above and beyond freight.

Right. Yes.

Thanks so much.

Thank you.

We'll now go to Michael Dudas with Bear Stearns.

Good morning, gentlemen. Steve, could you elaborate a little bit more on your views on the Illinois basin with the third-quarter purchase of the reserve lock.

Is this a signal that Arch is feeling a little bit more comfortable with maybe the market into the next decade, or is this more of a play on as you mentioned mine mouth or long-term CTL, and you still think that the Illinois basin might be in oversupply over the next few years?

I think there are a couple of things. It's -- you know, we've always said that we see the Illinois basin developing, but it was going to be in the second decade of the century, not the first. We continue to believe that.

Frankly, there will be more scrubbing in the east as the scrubbers -- even though some are being delayed, some are coming on the current times, and once they're built, you know, we think the market will develop for the Illinois basin development.

One of the things that really attracted us to this particular reserve base was if you looked at it, it tied together two large reserves that we already owned or controlled. So now it becomes basically a 300 million-ton contiguous block.

It was also low in chlorine which again, unless you get into kind of the details, down in the weeds, that is a very important issue because whether you're operating scrubbers, higher chlorine coal ,which are in big parts of the Illinois basin, have trouble or cause trouble for the scrubbers. So we saw it as a huge positive to overall value.

On top of that, we see CTL, CTG being developed in a 300 million-ton reserve base really gives us the momentum and the critical mass for that sort of development. But if you had to pick a timeframe, it's, you know, more -- you know, it's seven, eight years from now, its not in the next two or three years.

Appreciate the answer. My follow up is regarding maybe your early indications going into 2008.

I know you're running through the budgets about your capital spending program. Certainly you're finishing up Mount Laurel.

I would look -- other than your LBA payments- that the capital needs for the company, at least for '08 seem to be somewhat, rather limited other than maybe productivity issues.

Could you comment on like the direction and how what could be very reasonable cash flow will be allocated as we go forward?

Michael, you don't know our operating guys. They always want new stuff.

I know, there's more projects than (inaudible). I understand.

I'll let John --

We're doing better, Michael.

You know, I think as we said, our maintenance capital is going to run somewhere between $150 million $200 million. I think we'll probably be closer to the $200 million. In '08, the big spend is we got to $75 million, we've got to spend to finish the loadout at Black Thunder. You know, we had the LBA payments.

Other than that, i those are the big items as we work through the budgetary process. But we spent 25 on the loadout this year. We'll spend the balance next year. Then the biggest bulk of the remainder of that will be the maintenance capital. And there's always some hodge-podge things, the enhancements or productivity improvements that certainly get reviewed. They may get approved, they may not. But that always works through the system.

And is your debt-to-capital targets, you feel comfortable with right now?

Absolutely. I think the balance sheet and the debt-to-cap of the company is as strong as it's ever been. And we look at the marketplace and where we're sitting, we feel very, very good about next year.

Appreciate your thoughts, Steve. Thanks, John.

And we'll now go to John Hill with Citi Investment Research.

Great. Thanks, and thanks for all the detail on the call.

You've certainly done a great job laying out some of the drivers of a tightening domestic thermal market, stockpiles, supply and demand, etc. And signed five million tons of contracts so far.

Is the change in this data a being reflected yet in kind of the stance and behavior and body language from the customers, or is it still just the coal industry talking to itself?

Well, John, I think the last couple of weeks as I mentioned we've seen some interest in some of the domestic buyers in securing some long-term coal. So I mean, if you look at the fundamentals on what's going on internationally, you look at where Arch is positioned, I think you need to look at it three different ways. We've talked about Mount Laurel. In 2008, you will have a full year of met/PCI. You're also gonna have contract roll off in western bit. And we're seeing some pretty significant step ups in our prices.

And then if you look at the PRB in the last week or so, we've seen some pretty good movements in the PRB prices as you move out into '08. They're in the $12 to $13 range. So is that where we like them? No. But as they starts to move up, we'll start layering in business.

So I think Arch has really positioned itself very well as we move into 2008. So it'sreally hard to ignore the fundamentals right now. You've seen inventories come down a little bit. Certainly we think Central App is going to be challenged with their production. So, you know, we like where we're positioned.

Great. Great.

Would you say that the pricing on what you could do today is significantly above what you did last quarter? It was all the similar, small volume of contracts concluded? Is it safe to say we've tracked the indices higher there now?

Yeah, I think that's a safe assumption right now.

Next ,what would you be thinking about brokerage and resale tonnage as we go forward?

I mean, you know, we typically do about a million and a half to two million a quarter. I mean, we're always looking for opportunities. We've set up a trading company, I mean, we're very active. And where we see opportunities to create margins, we're going to do that.

But I think if you use that million and a half to two million ton-a-quarter range, that's probably a pretty good number.

What are some of the opportunities you're seeing in terms of disconnects and blending opportunities?

I mean, obviously we're looking for opportunities on exports. Maybe we can blend in some lower quality coals. We see some opportunities in Central App to maybe bring in some lower quality coals to some of our facilities where people don't have rail loadouts, etc. And we've also seen some opportunities in the PRB that we got in early and took advantage before these projects started moving.

So we're really looking at all the regions.

Got it. Thank you.

Next is Jeremy Sussman with (inaudible)

You talked about steam coal going out of the east towards Europe at certainly very strong prices.

Any update on PRB coal potentially going west and also while we're on the subject of the PRB, is there a level that you would feel comfortable being contracted or uncontracted with going into 2008 at year end?

Well, we're comfortable being uncontracted with our current levels. So I guess that answers that question.

We continue to look at the western movement. I think there's going to be some -- you know, I don't know how much tonnages. We have made the rounds if you will, in Asia, talked about it, you've seen some export coal out of Utah go to the west coast, and -- so far, we've heard some rumors about PRB, but we haven't done any. But given the world market, it's a matter of time before it happens.

Thanks. And then just as a follow up, the stockpiles that you mentioned of 135 million tons, certainly a bullish indicator I think that the markets have turned. So a good sign there. Can you tell us if there's a big difference kind of across different regions in terms of inventory dates, or is it pretty equal all around?

I think it's pretty equal. I mean, every utility is unique and they keep it somewhat, you know, confidential on what their actual stockpiles are.

So we do individual unit modeling, and I don't have that in front of me. And I think the errors in our own models on a per-unit basis offset each other. We tend to be pretty good on the aggregate number. I wouldn't want to claim victory on knowing each one of the individual unit numbers.

Sure. Okay, thank you very much.

Our next question comes from Brian Gamble with Simmons and company.

Yes, good morning, guys. I just wanted to talk a little about PRB pricing and the moves we've seen recently.

Do you think that is just due to the run-up that we've seen in east, or is it a more fundamental shift, and how has the increased rail capacity which I know the rails are talking about having plenty of capacity to move what anticipated tonnage is next year so there's kind of an incremental supply, if you wanted to put it on the market. How has that affected the pricing, as well?

Well, I mean, certainly the railroads of late has done a pretty good job. You know, the first half of the year, there were certainly challenges with weather and derailments, et cetera. But I think there's probably catchup going on now in terms of people behind on their shipment.

But if you look at the pricing, you know, I truly believe a lot of the buyers that understand what's going on primarily in the east, that's driving some of the buying right now. I really do.

I think if you look at Central App, and the decline in production forecasted there, you look at the imports that are basically flat year to date, that's part of the driver in the PRB. You know, we continue to think the railroads are going to move the coal. They make good money at that. But we think the fundamentals are such that the PRB prices will continue to move up.

And on the incremental basis, too, in the Powder River Basin. I mean, there's challenges with the railroad, and they have seemed to overcome those with their expansion and the investments.

But there are still challenges at the mines in terms of really increasing production, new equipment has to be added, in many cases additional loadout capacity had to be added. So the old days of the 90's whether we all had excess capacity, or certainly Arch had excess capacity, and it was easily added, just doesn't exist today. And it's not that they can't expand because they can over time, but it takes time and it takes money.

Great. And then I was wondering, when you think about what you guys have already spent in the east on regulations, I was wondering if you could quantify that number for the year and then potentially talk about anything that might be left over for next year, whether it be things at Mountain Laurel or at other operations that you might be planning on doing some incremental tonnage.

First of all, at Mount Laurel, or goal this year was $110 million. I think we'll come in in that range. As we move out, there will be some ongoing maintenance capital. But the bulk of the capital on that project has been spent. And will be spent between now and the end of the year.

I guess in terms of some of the regulatory costs we've seen, certainly with the miner act, the seal challenges, it's been pretty costly on the industry. I think we've planned over the next 24 months, we'll spend about $20 million to $30 million on the miner act for various things. And that's pretty inclusive. Could be a little bit more than that.

In terms of seals, though, we built a few new seals in the east. The cost on those seals is probably almost double. Most of those seals have been the 50 Psi, where you still have to monitor behind the seal. The seals that we've constructed out west are the 120-plus PCI or Psi seals that you don't have to monitor. So, you know, there is a cost to that. We're managing through that. We think we're building that into our budgetary models for 2008. But, you know, it has been costly.

And then quickly if I can sneak in a third one, the tonnage, the uncommitted tonnage for '08, if I look at it by region, should I think of it on a percentage basis, layered in even with production as far as what's uncommitted?

You just need to look at it on a prorated basis, basically 45 to 55.

That's perfect. Thank you very much.

You're welcome.

And we'll now go to William Egan with Raymond James.

Good morning, guys.

Good morning, William.

Looking at the fourth quarter, can you give us some range of the tax benefit that you're expecting?

Well, it will be 20 million to 30 million.

Okay. Thank you very much.

We'll now go to Luther Liu with Friedman, Billings, Ramsey.

Hi, good morning, Steve and John.

Luther, how are you?

Good. Kudos to John for nice cost control.

Thank you, Luther.

Yeah. And speaking of costs, could you, John, elaborate a little bit how the miner act has affected the productivity in the east and Utah?

You know, obviously, Luther, it's been a challenge. You know, I think if you look at our reserves and our geology, I mean, I think we're well positioned to deal with it.

If you look at our costs since all this was implemented, I think we've done a pretty good job in managing our costs, you know. They basically have been flat quarter over quarter. You know, as we move forward, we've got to deal with this $20 million to $30 million. I think with our geology, our reserve base, our infrastructure, and really our operating team, I think we'll do pretty well.

Okay. Okay. And my next question is, Steve, since you mentioned there hasn't been any permit in the last seven months, I was just curious when does Arch need next permits in the Central App region?

I think it's actually almost nine months for the permits. But our only surface operation is really our CoalMac operations. And we're fortunate in the sense that they probably don't really need any permits until the 2009 timeframe.

Okay.

We just happened to hit that one lucky, unlike the old Judge Hayden decision where we needed one within six months of the decision. So I think that's representative of how Central App is. People are all over the place on their needs for the next permits. And you certainly can do thing to extend yourself. You take a higher ratio of cuts, you do some things that you wouldn't normally do in your mine plan, which you do because that's better than shutting down or closing off equipment.

But eventually, it catches you. And I think we're starting to see the initial impacts right now. And as we progress into 2008, they will become more pronounced.

Right. And any update on the spruce line?

No, I mean we continue to build some roads and ponds. You know, that will be a market-driven decision. And certainly that permit we have has been, you know, through a pretty intensive review.

So we feel pretty good long term. But it's basically going to be market driven. And it's not in our short-term plan right now.

Okay. Great. Thank you, guys.

Thank you.

We'll now --

Let's go back to the tax question I got a while ago. We've got a -- it's two components. There's an effective tax rate on the book which is basically 10% to 12% offset by that benefit that I just mentioned, 20 to 30, which gives you a net income tax benefit of $13 million, as low as $1 million to $13 million. Just want to clarify that. Thank, Steve.

Thank you. We'll now go to Dhaval Patel with Columbus hill.

Good morning, guys.

Good morning.

Can you tell us, you know, you talked about what's unpriced. How much are you committed for '08?

You know, we used to have a fair amount that would be unpriced and -- but committed. And that has dwindled to maybe a few million tons, but it's not much.

So there's not a big delta between the two?

I mean, no. I mean, there's not. It's -- maybe up four million to five million tons. But it's really not a big delta.

Okay. Thank you.

We'll now go to David Gagliano with Credit Suisse .

Hi, I wanted to focus in on the Powder River basin volumes. Looks like you had a strong quarter in the third quarter. I'm wondering -- I actually have a couple of questions.

One, on the run rate basis, it looks like your PRB volumes are about 104 million tons. My first question is, as we go out to '08 with the loadout and Black Thunder and perhaps some idle capacity, what is your capacity in terms of your production capacity in the Powder River basin as we get to this time next year?

Again, you know, I think a one quarter, one-month times 12 is, you know, you can gets a very misleading answer. I've often said that we think we could do around 100 million-ton if everything works perfectly. And it never works perfectly. As an honest answer. You know that, with either the equipment or the railroads or the loadouts or the weather.

So, you know, I think as the practical capacities are in that 95 to 100 range be depending on really the last five million tons of how things operate. You know, Dave, it really -- to go much higher than that, we've got to go out and get a truck shovel spread. And there's lead times, you know, it's going to take time. We can do it. But it's going to take eight to 12 months minimum to, you know, to secure that equipment and get it in and get it operating. So I think Steve's right, that 95 to 100 run rate is probably a pretty good number.

Is that for Black Thunder or for all of --

Black thunder.

What would be the -- the capacity at Coal Creek?

You know, Coal Creek, obviously it's got an air quality permit for 25. But you know, we've been running that mine at about 10. We can probably do a little bit better than that. But -- but much more than that, we've got to spend some capital to get, you know, significantly higher than that 10 -1 range.

Great. Thanks. And then just on a somewhat related question. You know, you're bigger, obviously you're larger in terms of just volume. Competitor out there has already given us numbers for second half versus first half PRB public sector. And it -- and it does show about a -- if I'm not mistaken about a 15 to perhaps as much as 20% sequential increase.

And then it looks like on your numbers, you know, that run rate in the Prb is running at about an 8% you know, increase versus say 2006. I'm just wondering if you think, you know, production is in line with, above, or below demand coming out of the Powder River Basin at this point.

Right now, supply/demand balance would say that we're pretty much meeting the market needs.

And, you know, we're seeing improving pricing, and I think one of the big issues that are very hard for anybody to model, and it's hard for us as an industry to have our hand around, too, as we've -- we saw in 2001 and we saw in 2003, the problems that occurred in the eastern markets ended up manifesting themselves in terms of demand in the western markets. And we saw the eastern guys reach to the western bit and buy that up in the span of about a week, and then reach into the PRB, and it looks like it's setting up to do that again. Time will tell. But it's certainly every -- if you go back and look at each the components, say in 2003 and look at today, it's all occurring except that the international market is more robust than even in 2003.

Okay. Fair enough. Should we expect any change in the -- in terms of the sequential change in your volumes out of the PRB in Q4? Or is it about the same?

You know, we -- again, don't give specific projections for the quarter. But you can kind of do the math. But it all comes down to how well thing run. I mean, we had a good operating quarter, and third quarter. And the railroads operated well and under that assumption not much would change.

Okay. Thanks.

Thanks.

And we'll go to Lawrence Zolin with Lehman Brothers.

Good morning. Your anecdotal comment around 120 to $125 per metric ton in terms of the European export market. Can you help us get a sense after you factor in the metric conversion and transportation costs what that would be kind of FOB mine in Central App. Is that 60 -- $65 a ton, $65 a ton?

You know, it depends on a couple of things. You know, it depends on the transloading rates which vary on the east coast. From owner to owner. And also the rail rates. You know, the $125 number is moving so quickly, I would be hesitant to give you that, that is a metric so you got to take 10% off that number and then take your transloading on the port and rail out of it. But you know, you're reasonably close on your net back that you mentioned.

And can you guys help us get some color around how much you guys have historically exported out of Central App on the steam side. I mean, if you have, you know, in '06 you guys did, I don't know, 13 million tons, out of Central App you had a couple of million there in met. Did you guys export, you know, from a steam perspective 200,000 tons, 500,000 tons,. Where do you think -- what do you guys think you can do in '08?

You know, historically we haven't exported much steam coal. We exported a couple hundred thousand tons of PRB coal to Spain over the last five years. But it's probably been 10 years or so since we really exported meaningful steam off the east coast. In terms of what we can do next year, I think there again it depends on the price and what we're seeing domestically versus internationally. So it will be market driven. But we've done some prop steam business that we're pleased with. And, you know, if that materializes into some term agreements, attractive prices, I mean we'd be happy with that.

Okay, thanks a lot.

And we'll go to Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

The first question that I have is just about your exports again out of Central App next year. You said that about a proportionate ratio of 45 million to 55 million in tons is in Central App. So I'm guessing that's 4.5 million to 5.5 million tons of Central App that is unpriced. Is that all kind of Mountain Laurel, is that what your potential for export is if you export at all out of Central App next year?

I mean, we treat our eastern properties as kind of a portfolio of products. We don't really go to one operation. But I will tell you since Mount Laurel is fairly new, you can assume that a large portion of that is uncommitted. And we're in pretty serious negotiations right now for metallurgical and PCI agreements out of that operation.

So that's pretty much where your ability to take advantage of the international markets is coming from.

You know, I mean there again, we had the flexibility to move things around from mine to mine. But certainly Mount Laurel would be cost structured, has an ability to go steam or met, is an attractive source for European buyers.

So then I guess to expand this notion to the broader market, it's interesting because on the one hand we're hearing a lot of companies say that they want to take advantage of the export market. But I think you guys are unique in that you have this big Mountain Laurel complex that's coming on line. But most of the other larger US players have either pared back some expansion plans and they're mostly committed on the Central App side for next year.

I'm wondering as far the argument that exports will help tighten up the US coal supply, do you think that there's much propensity for that to happen with other companies given that most of their existing production is committed and the fact that they've pared back their expansion plans?

You know, you got the demand,the world demand entering the US markets. So whatever, you know, the eastern market is able to produce, you're right. It's out there in the marketplace. People are trying to sell whatever they have. Or they're trying to buy additional coals to take advantage of some of the demand that has shown up.

So we think we're sitting almost perfectly with the introduction of Mountain Laurel. And you're seeing other things occur that are interesting. There's some import guys who are trying to buy a US domestic coal. We assume they're going it try to replace their import coal with US domestic coal and take the traditionally imported coal and move to Europe because the marketplace is better.

So there's a lot of moving dynamics out there. But you know, I think you touched on it, Justine. You basically have supply declining in the east for a variety of reasons, whether it's regulatory or permits or people are already committed and pushing their mines as far as they can. And then you have demand manifesting itself from the international markets so it's, you know, what gives us price. And Arch being uncommitted is a good feeling.

And then a question about the freight cost of sending the coal to Europe.

First of all, who pays the freight, you guys or the buyers? I know either way it's factored into it, but I wanted to know who actually pays for it.

Second of all, we're hearing from some other exporters in the steel industry, et cetera, that there's simply no vessels available for spots voyages, which given the fact that most are trying to jump in on the China business isn't too surprising. What sort of vessel ability are you seeing as far as efforts to capitalize on the export markets?

First on that question, they're building new vessels, yeah. If you look at the q's in Australia and the ocean freight rates you're seeing across the world, certainly there is a shortage of ships right now.

Your question about who handles the freight. Typically we handle the freight to the east coast, put it in a ship, and then the buyer handles the ocean freight. And most of the buyers, a lot of them have hedged some of that freight forward. Hopefully they're not paying the spot market ocean freight rates.

I hope for them they're not.

Yeah.

And then the last question is just on costs in the western bit region. You said that you're thinking there are going to be $19 to $20 a ton going forward. That's at least what I thought I heard. That seems to be a lot higher than previously. I was wondering, first of all, what the driver is of that.

And second of all, you know, to what degree are you guys seeing a fallout from the Utah mine collapse as far as the operating costs in western bit going forward? I mean, everyone's talking about Central App, but it seems as though that's going to be the next focus for regulators.

Well, I mean, certainly, you know, we've seen an increase in inspections. We think we run safe coal mines in our western bit region. If you look at our safety record versus the industry average, we're about 1/3. That will continue to be a focus of ours. We have good geology for the most part for that region.

In terms of your question on cost, I think I said $19 to $21 per ton for cost. And obviously we'll try to do better than that. But if you look at the cost of the miner act, the new seals. As we go through the budgetary process, we think that range is probably pretty indicative of what we're going to see. I think previously we'd said high teens to low 20. I think the 19 to 21 range is a good cost range, but what you need to think about in western bit is we've got a lot of contract roll off over the next year or two. And that price is going to average up pretty significantly.

I mean, as we indicated in the second quarter release, we had placed nine million tons at between $30 and $35 a ton. So as we had tons roll off, we're gonna replace them at pretty good numbers. So our average price, even as we move into '08, is going to be up pretty significantly.

Okay. And then I had one last clarification. For the Lba's, I know that you guys haven't said how much dollar amount you're spend on those, at least for the ones that are coming up for bid this year. That's because I know it's a competitive bidding process.

If we want to do our own analysis as to how much it could cost, could you tell us how many tons you're bidding for so then we can puts a dollar or cent amount per ton of reserves.

You know, just given the rules and the way those bids are structured, Justine, we're just -- we can't talk about them. And I apologize for that. But it's -- it is extraordinarily strict.

Next is Wayne Atwell with North Street capital.

Good morning.

Good morning.

Good afternoon. There's a lot of exciting things happening in coal with China becoming a net importer, demand picking up in India, and the dollar weakening.

Could you go over your strategic plan for the next five years, what you'd like to look at, and are you going to do any foreign initiatives.?

Well, I don't think we have that much time, Wayne. But, you know, you're right. We see a very robust world market. Coal worldwide is the fastest growing energy source out there. We continue to look internationally at different things as they come available. We obviously look domestically. We don't try to limit ourselves.

We do believe that for Arch to go internationally, we'd like to do it with partners, or we could probably take small steps as opposed to baby steps. But it will be opportunistic.

Domestically, we will then build off of our strong positions in PRB's, Central App, and western bit. I think beyond the five years, five to 10 years, you could see the Illinois basin start to play into our decision making.

So we see it all coming together. From an international perspective, it's always interesting, and we're always looking and talking, but so far haven't done anything.

Thank you.

Thank you.

And we'll now go to [Snell Dapsatar] with (inaudible) Asset Management.

On the domestic front, you mentioned the (inaudible) stockpiles coming down, but do you see the demand growing from the domestic market? Or are you just talking about using good export demands, you would be exporting out there to the international markets?

Well, you know, it's not a multiple of different markets. I mean, they all intertie and intertwine with each other. But yes, US electric generation is up almost 3%. I think it's 2.8%, 2.9% this year. US coal production is down some thereabouts.

And it doesn't take an economist to figure out if that continues, the lines cross at some point in time.

We have seen more normal weather patterns. The economy continues to expand. And the abnormalities of 2006 where we had the extraordinarily mild weather and really depressed generating demand, just the opposite this year where we're seeing pretty pretty regular weather pattern.

As an example, you know, September, August/September timeframes, we saw, I think in August it was, the highest demand for coal-fired electricity that has ever been and it approached 100 million tons, it was under 100 million tons consumed that month.

So yeah, again, all the cylinders, all the signs are going the right way.

So you mean to say demand picked up for coal, or you think the demand will pick up for coal going into the fourth quarter, you mean to say --

Demand has picked up for coal throughout this year compared a year ago. And we saw some very robust, I think, demand in the last part of the summer.

Now as we just go into the fourth quarter, I mean, quarter-to-quarter demand probably gets driven by weather patterns more than the economy. But the economy itself is a steady, underlying floor to that overall electric coal demand.

Okay. On the export market you talked about, of course, export is one of the big areas for thinking of that.

How would margins fare for if you had to export coal in the international market and to China, then how would your margins compare with what their margins are in the domestic market?

Well, again, on the spot basis right now, as John said on just taking the thermal coal out of the east coast, we've seen an improvement or a better margin than the US domestic price. But traditionally, those will move in relationship to each other, and if that continues, you'll see US domestic margins improve.

And we'll now go to Aaron Marsh with [Ducayne] Capital.

Could you please talk a little about the quality of that coal in the Mountain Laurel complex and maybe the split between the different characteristics, PCI, and the thermal content would be of their production.?

Yeah. I mean, the steam product typically is a 12-3 to 12-5. We have the ability to make a higher BTU coal if we choose. Less than 10% ash.

You know, sulfur is well below 1%. The metallurgical properties, it's got good fluidity. Good reflectance, good (inaudible).

You know, if you look at high vol met coals, they'classify them. There's a rank a and a rank b. This would be a pretty high ranked b, high vol coal in the world markets. So it's pretty well received most places in the world.

And of the four million to five million annual tons capacity there, what do you see as the split being for PCI versus met?

You know, I think really it depends on the market. I mean, we have the ability -- we have a state-of-the-art preparation plant there. We can adjust our yields as needed.

And if -- you know, if we see an attractive met market, that's where we'll target our volumes. If the PCI becomes attractive it will be a combination of both. I think it's just gonna be market dependent.

Great. Thanks.

Thank you.

And our final question today comes from Terrence Ortslan with TSO and Associates.

Actually, that was the pretty final question on that call. Thank you very much. I'm done.

That was easy.

My favorite question.

Thank you, I'll turn the call back to Steve Leer for additional or closing comments.

Again, I want to thank everybody who joined us on the call today for your time and interest in Arch. I wanted to just take an additional moment to emphasize that while we're witnessing what we think is a significant strengthening in the coal market and something that we talked about, that we were seeing the initial signs last quarter, really the second-quarter call, I want to say that Arch remains committed, and we are focused and absolutely have a passion if you will for tightly controlling our costs. I think you saw some of that in the third quarter.

There are cost pressures and -we certainly wouldn't want to forecast that we can keep costs flat quarter to quarter to quarter to quarter. But at the same time, we have a passion for safety and a passion for cost controls. And really that manifests itself in creating long-term shareholder value.

So we're going to run the company tightly. We're going to meet market demand. And we're going to run safe operations. So again, thank you for your interest, and I appreciate your time. Good-bye.

Thank you very much. And that does conclude our conference for today.