Arch Resources Inc (ARCH) 2007 Q4 法說會逐字稿

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

At this time, I'd like to turn the call to Mr. Deck Slone, Vice President of Investors Relations and Public Affairs. Please go ahead, sir.

Good morning from a snowy St. Louis. Thanks for joining us this morning. 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 Private Securities Litigation Reform Act.

Forward-looked 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 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 Investors section of our website at archcoal.com.

On the call this morning, as typical, 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 Vice President and CFO. Steve, John and Bob will begin the call with some brief formal remarks, and thereafter, we'll be happy to take your questions. Steve?

Thank you, Deck, and good morning, everyone, and welcome to Arch Coal's fourth quarter and full year 2007 earnings conference call. Today Arch reported earnings per share of $0.56 and adjusted EBITDA of $143 million in the fourth quarter of 2007. The strong operational performance during the last three months suggests that the momentum is building as we enter 2008.

For full year 2007, Arch reported EPS of $1.21 making 2007 our second best year from an earnings performance in the Company's 10-year history as public company. Our best earnings performance on record was in 2006 when market conditions were appreciably stronger than in 2007. Given our current outlook we expect to set new earnings records in 2008 with meaningful expansion in EPS and adjusted EBITDA.

I'd like to take a few moments discussing highlights from 2007 as well as our view of some of the trends in 2008 and beyond. In 2007, we estimate that U.S. coal consumption rose by 2% while domestic coal production declined by 1.5%. These trends helped reduce the build and generator stockpile levels. We estimate that generators into the year holding 51 days of supply, in line with last year's level and probably indicative of the new target range going forward.

In 2008, we expect continued growth in power demand although at lower levels given the forecast for a slower U.S. economic growth. We believe this will further reduce generator stockpile levels. We also expect supply increases to lag despite higher pricing due to the significant geologic, quality and regulatory challenges facing several key U.S. supply basins in addition to the considerable amount of time it takes to add new capacity.

However the biggest trend influencing U.S. coal markets in 2007 was robust export and steam markets. Coal imports into the United States were basically flat while coal exports increased almost 10 million tons last year. More than 70% of this growth occurred during the second half of the year as markets began to heat up. To date in 2008, we have seen global coal markets strengthen even further in the wake of severe supply constraints in traditional coal export nations particularly Australia, South Africa, and China.

These global supply constraints along with a weak U.S. dollar have aided the movement of American coal to new places. The timing of our Mountain Laurel longwall start-up has been ideal allowing Arch to participate in a more significant way in strong export trends.

We've exported Central Appalachia coal from our partially owned DTA terminal in VIrginia as well as western bit coal through the Gulf of Mexico to countries in Western and Eastern Europe, South America, Africa, the Middle East, and recently, Asia. And we are in serious discussions to export our PRB coal through the Gulf of Mexico, a move that was last executed by Arch in 2005, as well as off the West Coast.

Given tight international supply conditions, we believe that these movements are all but inevitable. We estimate that U.S. exports could reach nearly 80 million tons in 2008 representing a 30-million-ton increase over 2006. Concerns have arisen over the potential U.S. port constraints as the industry is challenged with coordinating the logistics for rail, barge and port movements. However, we do believe it will be manageable, especially considering that the U.S. consistently exported more than 70 million tons annually in the 1990s and surpassed 100 million tons annually earlier in that decade.

Turning to the domestic market, no one seems to confidently know whether we are headed for or are perhaps already in a recession. But it's probably safe to assume that slower economic growth is likely for the first half of 2008. We have taken this into account in our forecast and currently expect power generation in 2008 to grow at roughly one-fourth of its growth rate in 2007 .

But normal weather trends and continued strength in the global coal markets should mute the negative impact of a weak U.S. economy in the short run. Additionally, the U.S. is moving forward with the buildout of new coal-based generation. We estimate that 14 gigawatts of new coal-fueled capacity will start up over the next four years, representing approximately 50 million tons of incremental annual coal demand. At least 7 gigawatts will be starting up and running by the end of 2009.

Another 8 gigawatts, representing an additional 30 million tons of annual coal demand are in advanced permitting stages. While this buildout is the largest in the U.S. in over 30 years and is encouraging it represents only a fraction of what is truly needed to expand and upgrade the country's energy infrastructure. Just look at the electric generation shortfalls that South Africa is experiencing today resulting from poor public policy decisions.

We need to build more base load generating capacity in the U.S. to meet rising demand, to replace antiquated plants and to prevent rolling brownouts and blackouts. We believe coal is the best choice of fuel for that capacity.

To combat coal's poor perception by some, our industry, armed with the support from coal-based generators, railroads and others, has launched a campaign to educate the public about coal and to empower them to embrace America's greatest domestic energy resource. Our vast domestic coal resources can help us meet our growing energy demand needs with continued investment, and with continued investment in clean-coal technologies can provide for a secure and clean energy future.

It is also important to note that the rest of the world understands and appreciates the invaluable coal, role that coal plays in meeting rapidly growing energy requirements. Global coal demand is growing at a staggering pace, up 30% in just the past five years. In fact, China's coal consumption could approach 3 billion short tons in 2008, which is nearly three times the size of of the U.S. market.

India is targeting a seven-fold increase in its generating capacity by the end of the decade, much of it coal-based, and the rest of Asia is following the same business model. Even European nations are in the process of doing an about face on coal due the concerns about excessive dependence on Russian gas, the inherent limitations of renewables for base load power and the still strong opposition to nuclear power in some countries.

In addition, there's a growing view in Europe that the developed world must drive advances in clean coal technologies, thus providing the emerging Asia with the tools it will need to address greenhouse gas emissions. According to Platts, Europe has announced plans to construct more than 60 gigawatts of coal-based power plants with roughly 10 gigawatts of these plants now under construction.

Lastly, oil continues to trade at elevated levels despite suggestions that crude has cratered when it falls below $90 per barrel. Research shows that paying $3.00 a gallon for gasoline over an extended period of time does impact the U.S. economy. That's why we think it is good public policy to advance alternative sources of domestic fuel.

Current coal to liquid projects such as our investment in the proposed DKRW Medicine Bow plant in Wyoming could greatly enhance America's energy security and provide real economic benefits to our country by bringing to market additional supplies of diesel and gasoline. We can also greatly reduce the carbon footprints of these clean fuels derived from coal by using the CO2 for enhanced oil recovery in our domestic oil fields such as our DKRW project envisions.

Looking ahead, we believe that 2008 will be a record earnings year for Arch, given the favorable market trends we are currently experiencing, the strategic positioning of our operation to supply coal markets and the long-term energy needs of the global economy.

I'll now turn the call over to our President and COO, John Eaves, for further discussion of Arch's coal sales and operating performance.

Thanks, Steve. We had a strong operational performance (inaudible) in the fourth quarter. All operating regions contributing almost equally to enhance the Company's operating income in the quarter, a testament to Arch's multi-region strategy and to operating a diverse, but selective, mine portfolio.

We are also pleased with the excellent start-up of our Mountain Laurel longwall mine in Central Appalachia. With an extremely competitive cost structure and substantial opportunities to sell in the robust met and polarized coal injection markets, this mine's performance has exceeded our expectations to date. In 2008, we believe the expected contribution from Mount Laurel should help us significantly expand the region as well as the overall Company's operating margins.

Today, I'd like to recognize some of the most accomplishments in 2007, and then provide some color on Arch's sales and cost performance. In 2007, Arch ranked the first among major coal industry peers for safety performance as measured by total incident rate. Last year's performance also represents our second best year on record for safety thanks to the success of new initiatives and our deep safety culture here at Arch.

We'd like to thank each and every employee for their efforts and for keeping safety a core value. Going forward we will continue to remain focused on achieving our ultimate goal of zero incidents. 2007 also marks Arch's best performance on record for environmental stewardship and the best among our major coal industry peers as measured by the rate of Surface Mining Control and Reclamation Act violations. We take our commitment to being a responsible stewards of the land seriously and go above and beyond in reclaiming former mine sites to natural and productive states.

Turning now to Arch's sales strategy, we're pleased with the pricing levels achieved on our sales commitments signed during the quarter. With average spot pricing in the PRB and Central Appalachia up 50% and 34% respectively during 2007, we believe that adherence to our market driven strategy has paid dividends. To date we've committed a substantial volume of coal, principally for 2008 delivery, into a strengthening market. We also retained significant upside as we head into 2009.

In Central Appalachia, the positive export story continues. We've committed significant volumes of met coal from Mountain Laurel at prices up to 70% above the current domestic steam coal index price levels. We've also been successful in blending some of our Lone Mountain Pardee coals for sale in the domestic and export met markets. And we're committing steam coal for export for 2008 delivery at premium indexed prices.

In Western Bit, we've committed tons for export via rail and via Gulf of Mexico at a substantial premium to prevailing fourth quarter index pricing for the region. We've also sold coal to eastern generators at attractive pricing to fill the gap in supply as eastern coal increasingly moves offshore.

In the PRB, we've committed coal for delivery in 2008 and to a lesser extent 2009 at pricing that exceeded the prevailing fourth quarter index pricing for the region. We've also priced a meaningful amount of PRB coal that was previously committed, but not yet priced for 2008 delivery at attractive levels. Our objective to date has been to focus on near-term agreements while preserving our upside potential in future periods.

Looking ahead, we'll continue to be market driven and we'll layer in commitments that offer an attractive return, while leaving upside potential to benefit from our positive long-term view of coal market fundamentals. In 2008, we have unpriced volumes of between 15 million and 25 million tons, a meaningful portion which is already committed, but not yet priced. Additionally, Arch has unpriced volumes of between 85 million and 95 million tons for 2009, and between 95 million and 105 million tons for 2010.

On the cost side, we'll remain focused on maintaining nimble operations that are flexible to respond to the market demand. We will also remain focused on managing our controllable costs by eliminating non-essential capital spending, streamlining our operations and implementing programs that aid in containing rising commodity and input costs.

On a regional basis, our operating costs in the PRB were essentially flat in the fourth quarter as we were able to offset commodity cost pressures with cost reductions and controls in other areas. Operating costs in the Western Bit region declined over $3.00 a ton in the fourth quarter due to an absence of any longwall move. Going forward we'll continue to target average operating costs per ton in the $19 to $21range, which incorporates the expected impact of future longwall moves.

In Central Appalachia, cash costs declined to under $39 per ton benefiting from the start-up of our low cost Mountain Laurel operation in October. This strong cost performance was able to essentially offset higher sales sensitive costs and higher DD&A expenses as well as significant commodity cost pressures in the quarter.

Looking ahead, we're off to a good start and believe that we have positioned the Company well to capitalize on a stronger market in 2008. With that, I'll now turn the call over to our CFO, Bob Messey.

Thank you, John. And good morning everyone. I'd like to briefly highlight some key items from 2007 and then focus on our outlook for 2008. We ended the year with total debt of $1.3 billion and a debt to total capital ratio of 46%, which is essentially the same level at which we began 2007.

In a year that included significant investments for the start-up of Mountain Laurel operation, the third of five reserve payments in the PRB and an opportunistic reserve addition in the Illinois Basin, we consider it a notable achievement to have held this ratio constant. We are comfortable with a debt level in this range going forward and coupled with our very low level of legacy liabilities believe that Arch has one of the strongest balance sheets in the coal industry.

During the quarter, we announced that we will further streamline our capital structure by redeeming any remaining preferred shares as of today. This process will simplify our capital structure without having any material impact on our operations.

We also expanded our commercial paper program by $25 million as we continue to improve our balance sheet with attractive sources of low cost liquidity. On the tax front, we recognized an income tax benefit of $35 million from a reduction in our valuation allowance in the quarter.

Previously we had established a valuation allowance to reserve for NOL carry forwards and AMT tax credits that were not expected to be utilized. Based on our current projections of future profitability, we expect to utilize more of these assets and have reduced the valuation allowance accordingly.

Now let me turn to the outlook for 2008. We currently expect earnings per share of between $2.00 and $2.50 and adjusted EBITDA in the range of $680 million to $790 million. These will be records for Arch.

Sales volume, from Company controlled operations, will range between 135 million and 140 million tons. This range excludes all brokered activity that Arch employs in its trading activities with the goal of maximizing margins, as well as the pass through tons that Arch currently services. We expect capital spending, excluding reserve additions, to range from $310 million and $340 million with approximately $250 million allocated for maintenance capital to sustain Arch's current level of production.

At least $100 million of this $250 million maintenance capital bucket will be earmarked for the transition to a new coal seam, the E seam, at our West Elk mine in Colorado and includes the cost of purchasing a new longwall. We will also spend $65 million to complete the construction of Black Thunder's West loadout.

We currently anticipate spending between $135 million and $165 million on reserve additions. This estimate includes the fourth of five payments on our Little Thunder reserve in the PRB and anticipates additional reserve plays as opportunities arise throughout the year. As is typical in our operations, we expect to spend a significant portion of our capital the first quarter of the year.

DD&A expense for 2008 is expected to range between $280 million and $290 million. Further, we expect our annual tax rate to be between 8% and 14%. This guidance includes the realization of excess tax depletion, NOL tax benefits, AMT tax credits and contemplates the potential for additional valuation allowance adjustments.

Looking ahead, we expect the first quarter to be a solid quarter. However, you should note that because of the expected timing of international shipments, as well as contract repricing, it'll likely be weaker than subsequent quarters. As you can see from projections, we expect to generate free cash flow in 2008 and we will deploy that cash where we believe it will provide the greatest incremental return to our shareholders.

Our four-pronged approach will consider these opportunities as we evaluate returns offered: Organic opportunities that will further expand and upgrade our reserve base; Acquisitions or divestitures, if they are accretive to earnings and enhance value; Other strategic investments, including BTU conversion technologies, that not only expand the market for coal but also change coal's value proposition in the market; and consider shareholder returns in the form of share repurchases and dividends.

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

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Jim Rollyson with Raymond James and Associates. Please go ahead.

Steve, Peabody gave us their view yesterday on kind of the sustainability of the recent pop in PRB prices. I want to kind of get your thoughts on where you see that sustainability? Are you guys starting to actually book coal in the mid-teens for PRB or are you still, at least based on your contract position, you're still holding out a lot of production for maybe even higher prices? What's the thought there?

Well, I think we published our unsold or unpriced positions for 2008, 2009, and 2010. Our view of the marketplace has not changed. We see continued strength building into '08 and into '09 certainly. We continue to have a significant, unpriced position for all three of those years, and the pricing is building.

I think one of the things, or the demand is building. One of the things that we spend a lot of time in doing is trying to think through where PRB might go, and you've certainly seen kind of a normal base load growth assuming we grow at about a quarter of the rate we did last year in electric generation, but that's 3 million to 5 million tons of PRB additional demand year-over-year.

And we've seen new demand in the eastern market as being the story and we are being contacted by customers as the eastern coal gets exported or gets consumed or the supply constraints get realized. You certainly see additional coal moving East, and that could be anywhere from 13 million to 15 or more million tons per year.

Then throw in the export market which is developing for PRB, which I think is open yet to see where that number finally comes out, other than we're pretty confident there's going to be some. A lot of folks haven't thought through the new plants coming online in the second half of 2008 and into the first half of 2009. You have two developments, you start testing the coal, you start building your base for the stockpile and then, obviously, you start building the stockpiles and running the plants.

We see another four million or five million tons being absorbed out of the marketplace. We're feeling pretty confident and we continue to believe that there's more upside than downside. Having said that, we've said we're not smart enough to pick the tops and bottoms in markets, and in a rising, strengthening market, we'll layer in sales as we move forward and that view hasn't changed.

Obviously, based on your portfolio you're not ready to concede the top yet, that's good. Just as a follow-up, could you guys possibly provide any guidance, or detailed guidance on your shipment volumes that you've given us, maybe between regions? Kind of roughly what you expect out of the three regions?

You know, we really have, haven't got into that in the past, we prefer not to again, but we've always suggested as you look at our past production numbers that a pro rata modeling is always a pretty sound assessment.

Fair enough, thank you.

And we'll now take our next question from John Bridges with JPMorgan.

Hi, Steve. John Bridges.

Hey, John. How are you?

Fine, fine. Congratulations on the results.

Thank you, the guys throughout the Company did a very nice job this last quarter.

Well done. On the PRB export thing, that, there had been talk about shipping that stuff out of Vancouver, now we're talking New Orleans. Could you give us a little bit more sort of color on that? And how much you think could go through New Orleans?

Well, it remains to be seen. We're in some serious discussions. In the past we've seen exports through New Orleans, both eastern and PRB coal and we've done that as a Company.

It really comes down to the marketplace and the shortage in the international marketplaces, but there's, within a reasonable number, I don't see there's a limit on the upside, it's just what the marketplace will demand. So if it's 500,000 tons, a million tons, a couple million tons, it's all doable, it will depend on the market.

Interesting, And then as a follow-up I was intrigued by your comment about energy security. I was talking to one our of our utility people the other day, and they were pointing out that there were areas where the reserve coverage on the eastern seaboard was getting down towards that magical 15%. I just wondered, any thoughts on that?

I do, it deserves a lot more discussion than we have time for, but we've spent time with various utility customers and consultants and [picturely], if you project out 10 or 15 years and have the government's forecast of 1.8% annual growth on average in electric needs, the entire nation, for the most part, starts facing those energy reserve questions. And given the fact that we're not building probably enough power plants as quickly as we need, I think it is almost inevitable outcome that those two lines end up crossing and we face some issues down the road.

The exact timing will obviously depend on economic growth and demand, but we're going to need all of our energy sources. And we're seeing that in the world. I mean South Africa is a great example where energy choices were suggested in the late 90s that they needed to build the plants. They didn't do it for budgetary and other concerns. We see the condition that they're in today.

Of course, China is growing so dramatically they just can't build them fast enough. So at the end of the day, more people use more electricity, and we're going to need to use every energy source that the world can provide to meet those demands.

Okay, great, thanks, Steve. Good luck.

Thank you.

Our next question comes from Pearce Hammond with Simmons and Company.

Yes. Good morning, and congratulations on great results.

Thank you, Pearce.

Bob, your comments on Q1. I actually couldn't catch it. Were you saying Q1 was going to be a solid quarter? And what were you seeing in longwall moves? Just trying to get a sense of Q1?

I didn't touch the longwall moves, but basically we see Q1 being a little weaker than the rest of the quarters because of the timing of our international shipments and the way that, the repricing of contracts rolls into the year.

And then, for cost guidance for next year, by basin, if you were to give a rough percentage increase '08 over '07, that would be helpful.

You know, Pearce, this is John. As we said last call, we're in probably the 3% to 5% range on our costs. As you can see by fourth quarter, we've done a pretty good job in managing our costs and we'll continue to do that, but there's certainly a lot of cost pressures on the diesel side, on the tire side. So that's things we continue to monitor.

Certainly in Western Bit we didn't have any longwall moves during the fourth quarter. As we go into the first quarter, we're actually in a longwall move right now at one of our Western Bit mines. It will have some cost pressures. We feel pretty good about where our costs are moving forward right now.

So again, that 3% to 5% is a good percentage?

Yes, I think that's a good range to look at.

Okay. Thank you.

The next question comes from Michael Molnar with Goldman Sachs. Please go ahead.

Hi, good morning, everyone.

Hi, Mike.

Can you just remind us, how much do you export now and where could you see that going in 2009? I'm just trying to get an order of magnitude of the tons that you could export in a couple years and what you do now?

It's really hard to say right now because we're in so many discussions with a lot of our international customers, but I would suspect we'll have exports in excess of 5 million tons for the corporation during 2008. Like I said, we still have discussions going on right now. We have a lot of domestic metallurgical agreements that go within the states, but I would say five plus million between steam and met will be exported this year.

Okay, and, I apologize, I missed the number of the reserve additions. I know you have the CapEx of $310 million to $340 million, what was the reserve addition number again?

$135 million to $165 million, and the majority of that, again, is our Little Thunder payment.

Great, thank you very much.

Thank you.

And we will now go to Michael Goldenberg with Luminous Management.

Good morning, guys.

Good morning, Michael.

Sorry, I might have missed part of the call, but can you go over about Western Bituminous' lower cost per tonnage and if that's exacted to continue? Because I do remember you guiding to somewhat higher costs a while back and now I'm seeing they are considerably lower. If you can talk a little bit about that?

Yes, we didn't have a longwall move during fourth quarter, so we didn't have that cost impairment, but I will say the mines ran very well during the quarter. We expect them to continue to run well as we move into 2008. We do have one longwall move during the first quarter that will impact our costs, but the range that we've given you of $19 to $21 per ton is a good range for 2008.

So even though you're actual cash costs were like $13, you're still saying that would be $19 to $21, or you mean all in?

I'm saying all in will be $19 to $21.

Understood. And, secondly, I just wanted to understand when you say you sold up to 70% high of current spot prices. Spot prices as of which date because, obviously, those are moving around very quickly? Is it average spot prices for Q4? Is it today's spot prices? Which ones are you referring to?

It would be from recent spot prices.

And that would be from met shipment.

Yes, that's met and that compares, I think, to the steam index.

70% versus today at somewhere in the $70 range for that steam price.

So 70% higher than $70?

Yes.

Got it, okay, thank you very much. Thank you.

Our next question comes from Jeremy Sussman with Natixis Bleichroeder. Please go ahead.

Good morning. Congratulations on Mount Laurel.

Thank you.

First question is, in terms of exports, what are you seeing on the scene, on the steam side? Are you seeing a lot of Central Appalachia steam coal making its way out of the marketplace? And I guess, what's the opportunity for that as we look forward?

We see a lot of interest on the utility side. We're exporting a number of vessels right now on the steam side. We see that interest continuing and we've had a number of discussions for multi-year agreements. We would expect that to continue as we move into 2008.

It's not just in Central Appalachia, you're also seeing Western Bituminous coal move into the steam markets in export. And then the last corollary question there would be we're seeing steam coal indirectly leave because it's being, the really high quality steam coal is being drawn into the metallurgical market and in turn being exported as met coal.

Sure, I guess, piggybacking on that last point, for 2008 as it relates to Mount Laurel, can you give us a rough idea of how much of that will be making its way into the met market versus steam market?

Our goal is to put as much in the met market as we can given the current market conditions. We've given guidance in the past between 4 million and 5 million tons and we'd still stick with that guidance. That'll be between domestic met and international met and maybe a little steam in there depending on what happens in the market.

Okay, but the majority looks like it will go into the met market?

That's correct.

Okay, well, great. Thanks very much.

Next up is Laurence Jollon with Lehman Brothers.

Good morning. I, your comments around free cash flow use in '08, I can appreciate that, I just curious to know about your revolver borrowings. It's roughly, I guess, about $250 million right now. I know you're prohibited from paying down your notes and most of the other debt's permanent, but I wanted to get a sense for how willing you are to pay down some of your revolver borrowings in '08?

Actually, the revolver borrowing at the end of the year is only $160 million. We also have a $75 million CP program that's in that short-term debt. That leaves us approximately $640 million of liquidity. You know, as cash would come in, we'd definitely pay down that revolver. That would be the first thing we do is look at other opportunities.

Okay, and then secondly, your free cash flow in the fourth quarter seemed a little light. There seemed to be a significant use of cash from working capital. Do you have any color there? That's a seasonality, or --

I'm sorry, I missed it.

I'm not sure that we've thought about that. There might have been between vacations and payment, there might have been movements back and forth, but there wasn't anything particular.

Okay, thanks very much.

We'll now go to John Hill with Citi.

Great, and thanks for the detailed presentation.

Okay, John. Thank you.

Just on the subject that was discussed a few moments ago on the kind of migration from thermal to, for steam markets to met, in the past we've talked about opportunities from Cumberland and Lone Mountain to switch back and forth between steam and met. Are we doing this now and if so, are we buying coal elsewhere to offset prior commitments into the steam market?

John, we're doing that. We're actually out, our trading group has been buying coal pretty regularly to free up tons to go on the met market. So they'll buy against our steam for steam shipments and free up the met.

We've also been very successful in blending our Cumberland River and our Lone Mountain products on the met, as well as the pulverized coal market. So we continue to be optimistic that those two operations will play a bigger role in the met market with Mount Laurel.

How much, how much does that add, do you think to the total met volumes as we go from '07 to '08? Not from Mount Laurel, that's pretty well understood, but from this migration effect?

It could add plus 25%. We're trying to maximize that as much as we can. It would be at least 25% of the total.

Great, great. And next question, any update on diesel fuel hedging and what is essentially the planning basis for fuel costs that is embedded in the cost guidance?

We currently have 40% of our volume, which is around 40 million gallons hedged to date.

Total volume requirement is 40 million gallons.

Right and we have, so 40% of that and we have, and we expect to be closer to 70% to 80% hedged in the latter part of the year as we move into the market.

We're hedged at about 280. That's where we see the market right now. We're layering that in as we see opportunities. The 40% range is a pretty good number right now at 280.

Very good, thank you.

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

Good morning, gentlemen.

Good morning, Michael.

Pretty cold in St. Louis today, isn't it?

It's gorgeous outside.

Of course.

Ten inches of snow (laughter)

I figured that. First question, last, obviously, on the met side, maybe for John, your Mountain Laurel product, you probably priced that last week or so, two weeks, to maybe $120 per ton at the mine. Is that a reasonable price?

You know, Michael, I won't give you prices, but what I will tell you is we're very pleased with some of the pricing we're seeing. You've been reading in the trade rags about recent pricing and I can tell you most of that is true plus some, so we've been very pleased with the pricing we're getting on our Mountain Laurel recently.

Okay, so the answer is, yes, on that. Now, secondly, just to follow up that part, how are you thinking about, are you thinking, get it contracted quickly? Obviously, if you waited a week you might get a better price. How are you thinking about layering that in and can you use this as an advantage to maybe lock in two or three-year term business with maybe potentially some customers, and to lock in such a pretty good margin?

Well, Michael, we still have a meaningful volume to place in the met market. We've been patient, but we've had some good opportunity as well. We have placed multi-year agreements for our met coal at very attractive pricing. We continue to focus on that. We have serious negotiations going on right now about further contracts on the met side, but we have completed some multi-year agreements.

My second question is for Steve. Looking at the Company this year, certainly you're going to be generated some strong free cash.

You finished up your eastern expansion, how's Arch going to look differently over next 12 to 24 months? Are there enough organic projects to grow the Company? Is there something bigger and better out there? Where do you see the Company positioned after you've gone through this pretty strong capital spending program to grow the Company to get bigger or to position it differently either domestically or internationally?

Well, I think you hit on it. We're wrapping up a fairly significant capital program, the timing looks awfully good on that. We think between the combination of where the balance sheet is, where are really non-debt liabilities lie, we're in great shape. There's certainly opportunities, we believe, over the next year to two years for potential acquisitions.

We will look at them as they make economic sense and strategic sense. We will look at them. If they make economic sense and strategic sense we will take a very hard look at them, and we can act on almost any size we want to. Flip side to that, there are some additional internal growth projects that we could start to implement if the market demands that coal. And then, thirdly, and we've always believed this, that our goal is to create shareholder value, if we can't find good investments for that cash flow, then one way, shape, or form it'll get returned to the shareholders.

Our next question comes from Luther [Liu] with Friedman, Billings, Ramsey.

Hello, Steve, and John.

Hey, Luther.

Congratulations on a great quarter.

Thank you, sir.

My question is related to the Western Bituminous coal. How much of these legacy contracts do you still have left? How fast is it rolling off?

Luther, I can't give you an exact volume, but we do have significant roll-offs in 2008, 2009. I think you'll continue to see that margin expansion in that region over the next 12 to 24 months.

Okay, great, and you gave the contracted volume for 2009, but what is your rough production target in 2009?

I don't know that we've given guidance on it. It's going to be comparable to the 135 to 140 total volume right now. You can just prorate that to come up with the various regions.

Okay, great, and the multi-year contract you mentioned for Mount Laurel, is that for met or for steam?

Well, it's the, the ones we've done thus far are for met, but we've also had some success on some multi-year agreements on the steam side. We're finalizing negotiations, but certainly in our Western Bit region, we've had some success on export multi-year agreements.

And by multi-year you mean three years or more?

Two to three really.

Yes, two to three is probably a good way to look at it.

Okay. Is it a large amount or half million tons? Million tons?

It's a meaningful volume, Luther.

Okay, thank you very much.

And next up is Paul Forward with Stifel Nicolaus.

Thanks, good morning.

Good morning, Paul.

You gave the $19 to $21 numbers for Western Bituminous, do you have comparable all-in costs expectations that you could share with us on Central Appalachia and PRB?

You know, Paul, certainly we've been pleased with the start-up of Mount Laurel and we continue to expect it will perform well, but I think if you look at all-in costs and we published those in the mid-40s range, that you'll be pretty close. Obviously, our cash costs will be much less than that, but all-in costs in that mid-40s would get you pretty close on your modeling.

And for PRB?

PRB, again, we're 4% or 5% increase, or 3% to 5% increase in costs. The one number that a lot of people kind of get confused on sometimes, and it's hard to model in one respect, is when you're doing all-in you have to take the sales sensitive costs so as pricing improves, that cost number all-in goes up dramatically or can go up dramatically, which is a good thing.

Right, I'm sure we're going to see some of that over the next couple years. Just also, with the increased capital expenditures and the development projects you're working on, your customers are seeing sticker shock. Are you seeing sticker shock on equipment or anything else as you go through the process?

It depends on your starting point, of course. We've all seen steel prices and equipment pricing jump over the last three, four, five years. I think, gosh, truck loader spreads probably have doubled or major tripled from four or five years ago.

It really becomes critical when you think about those things because it's time and money and the easy expansion opportunities on all basins, have pretty much been done. It's not to say that some basins couldn't eventually expand further, they can, but it takes time and it takes additional money, of large amounts, to add a truck and loader spread to a PRB mine or whatever. So we've seen those sticker shocks, all we're doing is trying to pass them through.

Okay, thanks a lot.

We'll now take a question from Gordon Howald with Calyon.

Good morning, guys.

Good morning, Gordon.

What is the likelihood or maybe you can just discuss the opportunity, even if you've considered accelerating Illinois Basin production given the position that you have out there? Just trying to get some color on the opportunities you might see at this point from that region?

Gordon, I've been almost the other way. As I look out and look at the Illinois Basin, particularly the big reserve basins in the Illinois 6, it's a very high sulfur coal, and until the scrubbing base really gets established and up and running in the East, which is still several years away, I just have trouble walking into the board and asking for $300 million or $400 million to put in a 6 million or 7 million-ton-a-year longwall mine.

I think it's coming, but I would say it's more, it's closer to the middle of the next decade than today because, just where the scrubbers sit in the East.

So today's market developments, the global coal story really hasn't changed your outlook for, at least for Illinois Basin at this point?

Not at this point. Obviously, we're always open and we always test our views and internally, and through, with external folks trying to look at it as well.

But we see real opportunity for Western Bit, I think northern Appalachia is going to be what northern Appalachia is, they certainly have some opportunities. And Central Appalachia is going to struggle, even with today's pricing to maintain production and more likely will decline given the reserve base permitting and all the issues they face, and then there's the PRB. And we really see Illinois Basin as the last development, not the lead development.

Right, no, I appreciate your comments here. Thanks very much.

We'll now go to Mark Liinamaa with Morgan Stanley.

Good morning, guys.

Morning.

Can you discuss any new transportation issues that you may be seeing emerging as coal flow patterns around the country change, if indeed you are seeing any?

Right now, the railroads are running reasonably well. We could always seek better performance, but we ship on really all four of the class 1 railroads, and I think the big challenge where the railroads are concerned is logistically as you see more coal leave the country on export and as the domestic buyers come into the market in 2008, what happens to all that equipment? Can they redirect it how and when they need to do it?

I think we've yet to see that certainly in the eastern United States. But I think given what the capital has been for the western railroads recently and what they're doing on the joint line, with their investments, they should have the capacity somewhere around 440 million to 450 million tons on the joint line. The limiting factor will be productive capacity out there.

So right now I would say overall the railroads are doing reasonably well, but challenged with this export movement. It's something we haven't seen in these volumes in 10 plus years.

Okay. That's great, thanks. And just as you think about the delivered cost of BTUs can you discuss the ability of the coal industry to share in the economic gains with the transportation people?

Well, we always think we get the short end of that stick, but that's probably a biased view of that. But clearly right now we would argue we are sharing in it, and we've seen the rails establish their contracts and as new contracts come up, you would have to assume they have an old legacy contract, they're adjusting it to whatever current market is.

But right now we're pretty pleased with the improvement in pricing we've seen in all of our basins and we would expect to maintain that, at least in this kind of marketplace.

That's great, thanks. And very impressive cost performance. Well, done on that. Thanks.

Thank you.

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

Hi, first of all thanks for the patience, and, secondly, congratulations on a great quarter.

Thank you, David.

Clearly, good operating results, especially a good outlook for 2008 too. Just a really quick question, and I apologize if you covered this, Mountain Laurel 2008 met coal volumes that are still open for pricing. Can you give us some more visibility into the volumes that are still left to price out of Mountain Laurel?

David, this is John, we didn't give an exact number, but I guess what I would tell you is it's a meaningful percentage of the overall production. We have booked some, but we still have some to book. We're well positioned and we're in well-advanced discussion with a number of customers right now.

Okay. No problem. Just a follow-up, the capacity at Black Thunder after the completion of the loadout, what will that do to the capacity of Black Thunder?

You know, the new loadout, David, is replacing a 24-million-ton loadout at North Rochelle and we expect it to be somewhere plus 15 to 20 million above that when it's all said and done.

Great, thanks very much.

But of course, Dave, that doesn't suggest we have the stripping capacity for that, that's just the throughput capacity as the loadout.

Okay, understood, thanks

And we'll now take a question from Mark Caruso with Millenium Partners.

Hi. Good morning, guys. Great job. I have just two clarification questions. I thought I heard earlier in the call you mentioned 4 million to 5 million tons available for export. Is that correct? Is that a mix of all the different basins?

That's primarily in the East. We have the ability to export a little bit more out of Western Bit and the PRB.

Okay, and then, as far as going back to Mountain Laurel, I think you guys had said that you talked in the past about 4 million to 5 million tons at Mountain Laurel and a good percentage of that is met. Did I hear that right, as well?

That's correct.

Okay, great. Thanks.

You're welcome

We'll take our last question from Justine Fisher with Goldman Sachs. Please go ahead.

Good morning.

Good morning, Justine.

I just have one quick question on PRB pricing. I was wondering if you could you give us some color on the difference between prices for 8800 and 8400 because it seems that over the last few days we've seen 8800 prices run up significantly, people are talking 14, 16, but not the same for 8400, and why is that?

I couldn't explain why, I haven't looked at the indice pricing that's published for both of them. I have looked at the indices for the 88, but typically it could that there haven't been many trades in the 84.

It is a less liquid market, but historically we found that those two products move in a relationship with each other up and down, and sometimes the differential will widen a little bit or narrow a little bit. Typically in strong markets we've seen it narrow, but I couldn't answer that question exactly today.

Are you, I mean, I guess, you guys have 8800. Are there, is there a difference in foreign demand for 88 and 84. It doesn't seem that there would be because once they're going PRB type instead of Northern Appalachia type, it doesn't seem like there would be a difference but might that account for it or do you not think that way?

It's certainly possible. Obviously, if you're thinking about the transportation piece, if you have 8800 BTUs versus 8400 BTUs on a cents per million, it's better to transport the 88 a longer distance.

Historically, if you like at the various markets that the PRB serves and competes with other coal basins in, the 88 is by far the most competitive and faces the most competition with all of the other coal basins we go into. Because it travels further.

And that concludes our question-and-answer session. I'd like to turn the call back to Steve Leer for any additional or closing remarks.

Thank you, operator. Let me just thank everyone on the call. I can recall back two or three quarters ago when our unsold position and unpriced position was certainly a concern.

Today, I think we're seeing that being patient and really sticking to our guns on our view is paying some benefits for our shareholders. We feel the business looks very robust going into '08. Certainly, the international market is something that I don't think anybody could have foreseen the supply disruptions we're seeing in three of the major producing countries.

We think Arch is extraordinarily well positioned. We'll work hard to deliver the tons and to deliver any guidance that we provide. We appreciate your support. Thank you

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