Arch Resources Inc (ARCH) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal Incorporated second quarter 2008 earnings release conference call. Today's call is being recorded. At this time, I would 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 related 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 Security 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's section of our website 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 Operator Officer, and John Drexler, our Senior Vice President and CFO. Steve, John, and John 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. Today, Arch reported second quarter earnings per share of $0.78, and set a new EBITDA record of $241 million, surpassing our previously quarterly record that was set in the first quarter of this year. We're well on the way to delivering the best financial performance in Arch's history.

In particular, our central Appalachian and Western Bituminous regions, and our trading arm again delivered strong operating performances while our PRB operations performed well considering that the region was negatively impacted by heavy rainfall and floods during the quarter. Looking ahead, we anticipate an improving outlook for our PRB operations, assuming more normal weather patterns as well as better market conditions. However, as noted in our earnings release, we continue to target lower volumes in the PRB this year partly due to the impact of the flood, but most importantly because of the prompt returns offered by these valuable reserves are not sufficiently justified to increase volume levels. Given that the published pricing for the PRB is in sharp contango, we believe the market is forecasting a continued strong improvement in the PRB. This is being driven by continued strong demand for central Appalachian and Western Bituminous coals, as well as strong pull from the international coal markets.

During the second quarter, our enhanced trading optimization platform had another strong performance with an after-tax contribution of $0.23 per share. The trading group's performance was driven by record pricing levels across several major US coal supply basins. We have widely used our market intelligence gained in the trading around our assets to build positions that benefited from strengthening coal market fundamentals as the quarter progressed, and to protect the down side risk of these trading positions.

Going forward, we expect this function to continue to enhance the Company's earnings and cash flows, but the timing and magnitude of the contribution will likely vary significantly from quarter to quarter. Consequently, we are currently anticipating a more modest contribution in the second half of the year, but a positive one nonetheless. Our goal for this function is -- remains the same as our goal for the overall Company, to optimize long-term returns and to maximize margins while managing risk.

Now I'd like to shift gears and discuss key demand drivers for the US coal markets in 2008 and beyond. While there have been significant volatility recently in the financial coal markets and they have come off their record highs, the physical coal markets remain strong underpinned by favorable supply/demand fundamentals. We continue to expect above average coal demand growth over the next several years driven by several factors.

First, we expect increased utilization of the existing coal fleet. Over the past ten years, coal plants have been able to achieve a 1% gain in utilization per year on average, and we expect this trend to continue. In fact, we're seeing this pattern so far in 2008 as growth in coal consumption is outpacing overall demand growth in the electric power sector.

Second, new coal fuel plants in the United States are coming online a meaningful amount in 2009 and 2010. In fact, the western plant in Wisconsin, a 600-megawatt plant, just started up in June. Dominion's plant in Virginia has also moved into construction since our last update and we expect to see more plants break ground over the next 12 to 24 months. As we've discussed, new coal generating capacity will expand domestic coal demand with the majority of this growth likely to be supplied by the Powder River Basin coals.

While the domestic drivers account for a majority of the expected growth in the coal demand in the US over the next several years, the robust international markets are also providing significant support. We think that the US has enough available port capacity in the seaborne coal export -- port seaborne coal exports to reach 100 million tons by 2010. We have already revised our forecast upward for 2008, and now believe exports will reach 83 million tons. In fact, exports in May, the latest data available, represents the highest monthly export total since December 1995 and the highest level for May -- for the month of May since 1992, a year in which the US exported over 100 million tons.

We also believe coal imports into the US are likely to climb year-to-year as more Colombian coal is being diverted into other seaborne markets. We now estimate that imports will be down by 4 million tons in 2008, compared to 2007 levels. Of course the forces behind strong US net export trends are the structural changes we're seeing in global coal supply flows. Arch expects the growth in global coal demand to continue driven by the expanding economies in China, India, Brazil and Russia, as well as the rest of the Pacific Rim.

Even if the collective growth rates of these countries slows, we still expect global coal demand to outstrip supply. In fact, we expect the global coal supply deficit to reach nearly 35 million metric tons in 2008 and we see a growing deficit over the next five years. In particular, we're seeing supply that traditionally served the Atlantic Basin market being pulled into the Asian Pacific market to satisfy growing demand in that part of the globe.

Since 2003, South African exports into the Asian Pacific markets have grown by nearly 11 million tons, and that trend is expected to continue. As a result, South African shipments into the Atlantic Basin have declined, creating opportunities for North and South American coal producers to fill the gap in supply. Interestingly, we're seeing a similar Atlantic Basin supply drain begin with the development of Columbia's increases of coal shipments into Chile.

Turning to the domestic supply trends, we continue to estimate the coal supply is up less than 1% year-to-date, despite record pricing levels across key US coal supply basins. In particular, overall production east of the Mississippi is up approximately 0.5% while production west of the Mississippi is trending up 1.3% through the first 29 weeks of the year. Growth in the Powder River Basin has slowed considerably since the first quarter impacted by the floods.

At present, we estimate that US generator stockpile levels have fallen in June and now represent approximately a 51-day supply. Eastern stockpile levels are trending below last year's levels and have dropped below the five-year average while western stockpile levels are comfortable and are approximately at target levels. Of course, as noted on previous calls, we believe the generators are targeting higher inventory levels as a hedge against future supply disruptions. We would also expect Western stockpiles to decline in the second half of 2008.

Shifting gears, we believe that the long-term outlook for BTU conversion technologies remains very positive. Despite some of the recent price declines, both in crude oil and natural gas, they are trading at elevated levels providing a compelling reference point for coal. Specifically, natural gas pricing for January 2009 delivery is currently trading at approximately $10 per million BTUs and crude oil is at approximately $21 per million BTUs, compared to the PRB which is approximately $1 per million BTUs. Obviously, there is considerable -- opportunity here.

In an environment of skyrocketing energy costs, advancing alternative development fuels, particularly coal to gas and coal to liquids, is in the best interests of American consumers. We believe that the projects like the proposed DKRW medicine bowl plant in Wyoming in which Arch is an equity partner, could enhance America's energy security and provide real economic benefits to the country by bringing to the market supplies of domestic synthetic gasoline. We also significantly reduce -- we can also significantly reduce the carbon footprint of the fuel derived from coal and further enhance domestic supply by using CO2 for enhanced oil recovery in domestic oil fields.

So we expect 2008 to be a record year for Arch. Our tighter and stronger guidance is indicative of our confidence in the coal market fundamentals and in our ability to capitalize on these strong market trends. I will now turn the call over to our President and COO, John Eaves, for further discussion of our coal sales and operating performance. John?

Thanks, Steve. I would like to start highlighting Arch's price realization and cost performance by region in the quarter, and then discuss our sales strategy in light of recent market trends. Starting with Central App, we are pleased with our results for the second quarter and first half of 2008.

Per-ton pricing realizations were up more than 14% over the first quarter of this year and up more than 40% since the second quarter of 2007. These strong pricing levels were driven by increased shipments of met coal as well as higher average pricing obtained on met and steam sales. In particular, met coal shipments increased to 33% of our Central App sales volume while average price realizations on those volumes averaged nearly triple digits in the quarter just ended. By comparison our average met coal price realization was up nearly 55% from last year's average met price level, and our met coal volume has more than tripled.

Looking ahead, we now expect to ship between 4.5 million and 5 million tons ever coal into met markets in 2008. We are also targeting met shipments of up to 6 million tons in 2009, the high end of the previously communicated range. This target reflects our ability to increase production out of Mount Laurel with the additional fifth continuous miner unit next year, as well as incremental opportunities to expand production at satellite operations and to increase coal blends from Cumberland River and Lone Mountain. We now expect our production in Central App to reach 15 million tons in 2009 with 40% of this volume headed for the met markets.

On the cost side, our per ton operating costs in Central App rose largely due to higher sales-related costs. As expected, our costs are trending at a rate of inflation plus a percent or two, compared to the year-ago quarter. Moving to the Western Bit region, second quarter 2008 price realizations increased nearly 12% since the first quarter, reflecting a favorable mix of customer shipments and an ability to capitalize on strong pricing trends with spot sales in the quarter. Volumes were up as well, despite two long wall moves during the quarter as we drew down inventories at our mines.

Looking ahead, we expect shipments in Western Bit region to be up roughly 10% over 2007 levels driven by attractive market conditions. Our cost performance in Western Bit trended up modestly in the second quarter reflecting higher sales related costs, the impact of an additional long wall move compared to the first quarter, and a greater volume contribution from higher cost mines in the region. Going forward, we continue to target an average cost structure in the range of $19 to $21 per ton for the full-year 2008, although ongoing commodity cost pressures will likely push us to the high end of that range.

In the PRB, average price realizations rose a modest 2% in the second quarter, benefiting from higher pricing on market index price tons. However, our quarterly shipments in the region were down by about 1 million tons due to heavy rainfall and floods, all of which adversely impacted our per ton cost. We were able to offset some of this lost production with increased higher cost brokerage activity during the quarter. Excluding sales-sensitive costs, our per ton operating cost rose 5% compared with the first quarter and were up 8% from a year ago quarter. These higher per-ton-unit costs were driven by reduced shipments as well as commodity cost pressures for petroleum-based and explosive products in particular.

As a result we remain focused on holding the line on costs as we progress to the year's second half. Looking ahead, we are targeting lower volume levels from the Company controlled operations for full-year 2008 compared with our original plan. Our new range of 133 million to 137 million tons reflects adverse weather impacts in the PRB during the second quarter, as well as our decision to leave tons in the ground.

Now I'd like to spend a few moments discussing Arch's sales strategy during the quarter. We reached record pricing levels in several key US basins in June and chose to selectively sign sales commitments that will provide a solid foundation for the Company's financial performance in future years. We continue to follow a layering approach that will allow us to commit coal once a sufficient return has been achieved. Yet we have also chose to maintain a meaningful on price sales position, heading into next year that will give us exposure to the coal markets. And we have elected to leave tons in the ground this year where sufficient returns have not been achievable. We believe this market-driven strategy is in the best long-term interest of the Company and our shareholders.

Since our last update, we have signed some very attractive sales commitments during the quarter. Specifically in Central App, we've committed met volumes for 2008 and 2009 delivery at an average net back mine price approaching $200 per ton. We also selectively committed steam coal for delivery in 2009 and 2010 at an average pricing in the triple digits with some contracts well above that threshold. Additionally, some spot sale coal sales were transacted in the quarter at pricing approaching $150 per ton. In Western Bit, we layered in meaningful sales contracts for delivery over the next three years at more than 60% premium to the region's second quarter averaged realized price.

As a result, we now have less coal unpriced in this region for delivery in 2009 and 2010 when measured on a pro rata basis compared to our other operating regions. In the PRB, we selectively committed and priced coal for delivery over the next two years at a 55% premium to the region's second quarter average realized price. More recently we committed volumes under multi-year contracts at pricing that is 100% above our average realized price in the region for the quarter just ended.

Our result of our sales commitments signed in the quarter and our decision to target lower volume levels, we now have unpriced volumes at 4 million to 8 million tons in 2008, one third of which is already committed, but not yet priced. We also have unpriced volumes of 65 million to 75 million tons for 2009 and 85 million to 95 million tons for 2010.

Clearly our second quarter results demonstrate that Arch's diverse asset base is a key strategic competitive advantage. We believe we have the scale and breadth of operations to offset challenges in one region with strong performances in other regions. Additionally, managing our controllable costs and escalating cost environment remains a key priority and a core strength for Arch. Our goal is simple. We want to maximize the value of our unpriced sales position and control our costs. All in an effort to enhance margins.

Looking ahead, we expect a strong performance during the second half of 2008, but somewhat weighted towards the fourth quarter. We expect a strong August and September, but July will be impaired by miner vacation and an extended long wall move as we transition into a new seam at our West Elk mine. I will now turn the call over to John Drexler, Arch's CFO, for discussion of our current full-year expectations. John?

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 most recent quarter. As we've noted, the second quarter of 2008 marks one of the best financial performances in Company history. With our national scope of operations and low cost operational profile, we believe the Company is strategically positioned to capitalize on current coal market trends.

In particular, I'd like to provide an update on Arch's capital spending program and debt and liquidity position. Capital expenditures for the quarter totaled $92 million, primarily related to the ongoing construction of the west load out at the Black Thunder mine in the PRB and the development of the new coal seam at the West Elk mine in Colorado. We are on schedule to have the west load out complete and operational late in the third quarter, and expect to transition to the E seam at West Elk during the fourth quarter, which will allow us to continue to capitalize on this strong demand that Steve spoke to earlier.

For the first half of 2008, our capital spending needs totaled $213 million, excluding reserve additions. As you know, our capital spending program is typically weighted towards the first half of the year. Going forward, we expect our capital spending needs for the second half of 2008 to be significantly less than the first half of the year.

Turning to our debt and liquidity position, we generated a record $202 million of operating cash flow during the quarter, more than $110 million of which was used to reduce outstanding borrowings under our resolving credit facility. At June 30, the Company's total debt balance represented $1.3 billion while our debt capital ratio fell to 44% from 47% at the end of the first quarter. At the end of June, our borrowing capacity under our resolver totaled approximately $647 million. Although our cash and working capital needs fluctuate from quarter to quarter, we expect to generate increased free cash flow during the second half of the year.

We will continue to be judicious in how we deploy that cash, seeking ways to further enhance shareholder value. In April, our Board of Directors announced the approval of an increase in the quarterly cash dividend from $0.07 to $0.09 per common share. This event marks the Company's fourth dividend increase over the past five years.

I now would like to share our tightened and stronger 2008 guidance range as follows. Sale volume levels have been reduced and now are expected to be in the range of 133 to 137 million tons, excluding purchased coal from third parties. Our earnings per share range has increased to $2.50 to $2.85 per share, up from our previous range of $2.40 to $2.80 per share. Adjusted EBITDA is now projected in the range of $767 million to $853 million.

Our effective tax rate is now expected to be between 11% and 15%, given our expected higher profitability levels. Our annual tax rate is also subject to benefits from percentage depletion as well as the utilization of our deferred tax assets. Our capital spending projection and our depreciation, depletion, and amortization forecast remain unchanged. We expect capital spending, excluding reserve additions, in the range of $310 million to $340 million and DD&A to be between $285 million and $295 million.

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

Yes, sir. (OPERATOR INSTRUCTIONS.) We'll take the first question from Lou (inaudible) with Friedman, Billings, Ramsey.

Hello?

How are you?

Good. How are you? First question is for John. Could you quantify the impact on the cost with the Midwest flooding?

Luther, we really hadn't planned to quantify the impact. The impact on Arch volume wise was a million tons. We haven't really identified the financial impact for the flooding.

Okay. And for -- and this is for the CFO, John. Why is the tax rate still at 11% to 15% given that second quarter was significantly higher than that?

Luther, we determine our tax rate based on our overall annual profitability levels. The rate actually in the second quarter was slightly stronger reflecting our outlook for the remainder of the year and our increased guidance. However, similar to prior years, that tax rate can become a little bit lumpy from quarter to quarter, from the stand point on how we utilize our deferred tax assets and the way that we're utilizing our NOLs and our AMP credit carry forwards. We're targeting a rate that will be higher than that.

Okay.

Circle back just real briefly on the PRB impact. Certainly what we tried to do, because of the Midwest floods, we went back and tried to do any maintenance or anything we could do during the quarter which would free us up once we got back to normalized shipments where we could manage and mine more effectively. I think we've done that and hopefully, you'll see some improvement in that cost number in the third and fourth quarter.

Luther, in the quarter -- back to the tax rate question, for the quarter, also, the trading results do not get the benefit of percentage depletion. There's a higher corporate tax rate there that comes into play, 36%.

Okay. Got you. And if I may ask one more question on the Colorado Western Bituminous coal that you guys signed, any for export? Do you have any met coal from that region?

Luther, that's all steam coal out of the Western Bituminous region. We're currently exporting coal to Europe as well as Mexico. The sales during the quarter were all steam sales, multi-year agreements.

Okay. Great, thank you.

We'll go next to Jeremy Sussman from Natixis Bleichroeder.

In terms of your PRB pricing, you obviously signed some business close to $22, $23 a ton if my math is correct. I assume this would be for your premium quality PRB coal. If that is the case, it's a fairly big spread between 8800 and 8400. Could you just comment on how you see that playing out and how relative to your position, of course?

Jeremy, your math is pretty close. That was for a 0.8 SO2 coal for longer-term, 3-year type agreements. But there has been quite the spread between the 8400 and 8800, and I think it tells you that more and more the 8800 coal is moving further and further, east and it travels much better to the Eastern utilities. I think that's why you've seen that spread widen out a little bit.

Okay. Great. And then the terms of your met coal pricing, Mount Laurel, relative to the $200 number that you threw out here, do you have a sense of where you see that shaking out for 2009, first part. Second part, are you seeing any evidence that steel producers are looking to begin '09 discussions maybe earlier than normal?

I can tell you we're very bullish long term on met prices. We see steel production growing at 4% to 5%. We see blast furnace capacity increases at plus 5%. Long-term, we see the fundamentals very strong for certainly high vol met coal.

I will tell you we're having a number of conversations with our international customers right now. We're reasonably close to a 5-year agreement with one of our international customers, and saying in a five-year agreement that will be priced annually. We do have discussions with some of our domestic met customers as well, where there may be opportunities to do multi-year agreements there where the pricing is actually locked in. I would tell you we feel pretty good about where we are and where we're headed on the met side.

For multi-year, potential multi-year deals, you would have pricing locked in for the first year, and then it would be a reopen up for discussion, I assume?

That's correct. That's usually done and effective April 1 of each year and goes to March 31 of the following year. But what we would have on the five-year agreement would be fixed quality, fixed tons for a five-year time period.

Great. Well, thank you very much for all the color here.

We'll take our next question from John Bridges with JPMorgan.

Hi, Steve, everybody.

Hey, John, how are you?

Fine, fine. Just digging a bit deeper into that %22, $23 price, I'm just surprised that you went from a 50% premium to a 100% premium over that time period. What changed? What led to that big number?

What we did, John, we did sell smaller volumes at that 55% level, but that was a combination. It was more heavily weighted with Coal Creek and Black Thunder. That's a weighted number. If you look at the PRB prices and you look short-term, there's certainly softness in the PRB price, But if you look at '09, '10, and '11, there's tremendous strength out there.

It was quite a spread. We expect to see that spread narrow, but like much more of what we're seeing '09, '10 and '11 versus what we're seeing back half of 2008 right now. Therefore, that's why we chose to not only have the impact of the Midwest floods in PRB, we chose to leave some of those tons in the ground until we see better pricing.

Interesting. Could you also remind us of how much exposure you got to the higher oil prices? Is that going to hurt you later in the year?

Well, we're at about 65% hedged at about $3 for the back half of 2008.

Anything into '09?

We've got about 30% hedged at about that $3.90 to $4 level for 2009.

Okay. Excellent. Thank you.

Thank you.

We'll take our next question from Brian Gamble with Simmons & Company.

Good morning, guys.

Good morning, Brian.

Just wanted to get a little clarity when you're talking about lowering the total volumes. But then also, you talked about potentially speeding up the maintenance work in the PRB during the quarter. Are those volumes that you're taking off of the 2008 guidance directly from the PRB? It seems like that's what you're saying and the only way to get to that type of volume decrease,. At the same time, it also seems like the operations are probably in better shape than they were during the second quarter to produce. Am I hearing that correctly?

Brian, really, it's mostly pro rata, but, yes, it's pretty much ratable.

Okay. When we look across the regions, you gave some guidance by region last time on how you saw costs trending. I think you even included the sales-related costs on the royalty side in Central App. How do you see your '08 costs shaping out over '07? And then how does that forebode for the '09 increases as well?

By region, I think what we said that we would see -- inflationary costs plus one or two . I think we're seeing that. What we are doing, we're looking for opportunities for incremental expansion, which typically in Central App, those would be higher cost expansions. As we move forward, you'll see some of that, but certainly at tremendous margins.

I think if you look in the PRB, our costs were up certainly because of the million tons of volume impact. Certainly, we had some other expenses during during the quarter. As we move out, we hope to see those costs improve as we get to more of a normalized shipment level.

I guess in Western Bit, we had an additional long wall move during the quarter. Certainly, those costs are at the upper end or even above the range we communicated. We're going to continue to focus on that. But if you look at the commodity pressures we're seeing, really in all regions, the geology challenges we're seeing -- and if you look at the four operating mines we have in the Western Bit, one or two of those are higher cost mines, Certainly in second quarter, we shipped more volume from one of those higher cost mines to reduce some inventory. That's what you're going to see for the back half of this year.

As we move forward into 2009, we're certainly in the budgeting process right now. I really would be a little reluctant to talk about

Just to clarify for the PRB, you think the first quarter cost number out of there is more reflective of what you're going to be able to realize in the back half of the year versus that second quarter number?

Brian, I would hope that would be indicative of the cost, back half of the year.

Thank you very much.

We'll go to John Hill with Citigroup.

Thank you. Congratulations on a strong result.

Thank you, John.

Just wondering if we could dig into the $53 million income statement item on the derivatives and the brokerage. You did indicate that was $0.23 to net income, but how much of that was derivatives? How much of it was brokerage? How much of that was physical stuff that you touched? What are some of the cash characteristics? Just a bit of color would be great.

John, we're not going to get into a lot of the detail there, but as John Drexler said, when you tack the fact that it's statutory rates, it is different positioned. Obviously, there was lots of volatility in the financial coal markets and the trading group has done very well. When we gave guidance from the first quarter call, we had some visibility on really how the month had started and how things were trending in the coal markets. We built that into our guidance that we provided at the end of that first quarter call. Again, we've built it into the guidance as we look towards the end of the year.

What we're very pleased with is just how they have performed. But at the same time, we'd be remiss in trying to say that we expect them to duplicate that kind of number. When you look at the $53 million, it is essentially all in EBITDA-type number. We have solidified, if you will, some of it with building in a down side, buying puts, those sorts of things, that today are out of the money. But if the market would deteriorate, then we have protection on the down side. We have also taken some of it to cash, but we still have a substantial amount exposed to the mark-to-market.

All right. Thanks for that perspective. Very helpful. And just as a quick follow-up, is there any derivatives component to some of these high-term deals we're talking about, plus $20 in the PRB? Or is that pretty much plain vanilla, very simple, what we see is what we get?

It's plain vanilla. What we do do within the trading group and our physical coal sales, we do from time to time -- we'll make a sale. And we may in the financial markets, buy back up coal for that, so we still have an exposure out there. On these particular deals, they're just plain vanilla.

That's great to hear. Thank you.

We'll take our next question from Brett Levy with Jefferies and Company.

Hey, guys, most of my questions have been asked. As you guys look forward? Can you talk about regions or met versus steam? Anything along those lines in terms of what you're looking for or what your priorities are in terms of an acquisition standpoint?

Arch has a tendency, we look at virtually everything and very few things can pass our screens. At the same time, when you look at where we operate at in Western Bit, PRB and Central Appalachia, certainly we always are examining bolt-on acquisitions or positioning acquisitions. We also have significant reserves in the Illinois Basin and operated there for over 30 years. We do see a resurgence in the Illinois Basin. As I've often said, we think it's in the second decade of this century, not the first.

The recent [Kammer] overturning by the courts -- or [care], I'm sorry, I said Kammer. But care's regulations out of the EPA, we think has some interesting aspects and implications because you could certainly make an argument that it puts more uncertainty into scrubber build-outs and actual operating of some of the scrubbers that might get built. At the same time, SO2 allowances would likely be at lower pricing. You have a negative from our perspective as we've always been a low sulfur producer principally. But we are looking in each one of our existing operating basins. We continue to look at Illinois as a future basin, but it's still a few years out.

Any priority between steam and met?

We're optimistic. Obviously with the -- let's call it red hot met markets, we think that we're always interested in that. We're seeing continued pressure to pull high quality steam into the met markets. At the same time, the steam markets are very, very robust and we continue to see a global shortage. It's -- we're open to either one is the best way to describe that.

All right. The last one is a tad sensitive and some of the smaller guys have very apparently been renegotiating some of their existing priced coal for 2008, particularly. Is that something that is more limited to the smaller guys? Or is that something that's sort of more widespread to folks like yourselves?

It's specific to customer base and individual companies. The best way to think about Arch and we saw this market developing and really with the strong balance sheet that Arch has, we were able to position the Company with a large open market position for really '07. Which we may have been a little early there, but certainly '08, '09, '10 and beyond. In that, it's really not an issue for us where maybe some others have committed at different times earlier in the curve, and they need to do things that we don't have to.

Thanks very much, guys.

Thank you.

Our next question comes from Gordon Howald with Calyon.

Hey, guys. I guess everyone is doing the math here. Wanted to confirm what you said earlier about the Western Bit. Seeing three-year deals for Western Bit, 60% above second quarter price realizations. Is that for all three years? As you were going through negotiations, were customers attempting to work any backwardation into your contract pricing? Just trying to get a sense of that.

Certainly those agreements typically have some kind of escalation mechanism in them. A lot of those transactions were made early in the cycle. We continue to have contract rolloff as well as open market sales in future years '09 and '10 that we'll be able to take advantage of the even stronger pricing we're seeing at market right now. We were pleased. We think with our cost structure out those, those agreements give us a very attractive margin that we can only build on as we move forward.

Those are locked prices for three years out of what you did at that level?

With some kind of escalation mechanism, typically.

Well, excellent. Thank you very much.

Thank you.

Thank you.

Our next question comes from Paul Forward with Stifel Nicolaus.

Good morning.

Good morning, Paul.

On these $22 to $23 PRB contracts, I'm just curious if you're talking about a three-year deal. When you sign those these days, are you now able to add some diesel cost protection into the contract? Or is that just a basic fixed price?

Certainly, Paul, we're trying to get all the terms and conditions we can get in these new agreements. Some would have those, some wouldn't. But I would tell you typically, the agreements we're looking at these days are typically two to three years in duration. Any cost pass throughs that we can get, we're certainly trying to do that.

And -- okay. And on the Western Bit, you talked about, I think, somewhere around -- you implied around $48 a ton average pricing realized during the second quarter. Can you go through that market now? I know you talked about forward pricing continuing to strengthen in that market, but what's your ability to sign multi-year contracts levels -- 20% above that level? Let's say somewhere in the order of $60 a ton longer term deals.

Paul, historically, that's been a pretty thinly-traded market. We've always said that when you look at the market dynamics, that the Central App coal is the first to move and that's happened this time. It's followed by the Western Bit and then, eventually see a pretty significant pick up in the PRB. We have discussions going on with customers right now. I really can't talk about the pricing. What I can tell you is I think we have opportunities to sign Western Bit coal up for more than what our 60% premium to the second quarter price would be.

Those discussions are ongoing and I really couldn't give out any more information, because of the sensitivity of it. But that market continues to be strong. We continue to see interest in the East for the Western Bit, as well as export opportunities.

Okay. And then also on the trading and derivative gains plus $53 million this quarter, I think you had said earlier that you think that's a smaller deposit of contribution in the third quarter. Can you you tell us, I guess, considering the rollover that we've seen in some of these paper markets for coal over the last few weeks, what's your -- why do you have the comfort level that you're able to tentatively say that the next couple of quarters, that that -- there won't be some reversal of those gains that you've already seen?

Again, it is trading and you're always at some market risk. We did say we expect a positive contribution in the second half. Part of it is because we have built in down-side protection in many of the positions. And the volatility in the market, the traders are taking positions as we speak. They can be on both sides of the trade, or opposite sides at different points in time in the cycle.

We're -- our forecast includes some positive contributions, but certainly we don't expect a repeat in the second half of what we saw in the first half. But I would love it if they did.

All right. Thanks a lot.

Thank you.

Our next question comes from Mark Liinamaa with Morgan Stanley.

Thanks. Can you give any color on how much PRB coal you actually left in the ground because the returns weren't there?

That's really in our range production. We didn't break that out. We said that the new range of 133 million to 137 million tons was due to the Midwest flooding and leaving some tons in the ground, but we really haven't been more specific than that.

Okay. In addition to the rollover in the financial markets that you were just talking about, a lot of people are concerned about natural gas coming in and the competition between the two. I think I know your answer to this, but could you just give a comment?

Sure. At $9 or $10 natural gas, if that's the [majorment] against the coal-fired power plant, coal wins in every case. When you really do the math, it still wins -- coal has to get down substantially lower than that $10 pricing. The reality of it is the nation needs all of the generation that it can get a hold of. Could we see gas dip for some reason? Sure. The markets are the markets. But if you start cranking up additional gas demand or generation, it is a self-correcting mechanism.

We're very comfortable where we're sitting, both in our exposed positions for coal. And the real issue is we're seeing a global supply shortage and the US has transitioned over the last five or six years from the regional markets to national market to now, the global market. Gas plays a piece of it, but it's interesting to watch some of the gas markets. If you look at the Texas utility market and natural gas down there in the coal-fired power plants, I would love to have a coal-fired power plant in Texas today.

Okay. And just quickly, a little bit back to the financial markets. For those of us that are using those to make some sort of prediction of pricing, how would you talk about your price discovery process? How tough a position you would take in holding out for whatever value you see fit?

Again, we'll be the first to tell you that we don't think we're smart enough to pick the tops and the bottoms of a particular pricing cycle, but we look at the supply/demand on a global basis. We look at what's happening with our customers; how they're acting when their shipment gets delayed or missed because of a train problem or a plant problem or maybe we have a problem at the coal mine. Are they looking for the coal to be replaced immediately? Are they looking, say, let's just add it to the end of the contract? You watch for the stockpiles and -- what we found is the financial markets historically, have certainly gotten the direction reasonably well. But the physical markets can be very different.

I think in the last three or four weeks, when you think about the disruption, let's call it, in just the financial community and people being forced to liquidate positions. Or being forced to raise money because they're getting calls, we think we're in an abnormal time here. What we're seeing in the physical market and in actual sales are very different than, say, the quoted price on an indices today. We bring it all together, the trading functions in their minute of every day. They've added a whole new aspect to our intelligence to optimize margin. All of that together we would argue the fundamentals have gotten stronger as we've seen it from a supply/demand basis over the last three weeks, last quarter, from a quarter ago, then what you might see in just the trading in a couple of the financial coal markets.

That's great. Thank you very much.

Thank you.

Our next question comes from Michael Dudas with Jefferies.

Good morning, gentlemen.

Good morning.

First question, Steve, you're pretty optimistic about export opportunities into 2009. Any thoughts to -- do we need to make investment to get to that level at the port, such as maybe your interest in DTA? If you could comment a little about that. And how much you think we could see through the Gulf or out even to the West Coast as to try to get to those types of numbers?

We've spent some time trying to analyze and the guys are looking up the numbers right now. But we think we can easily really take it above 100 million tons of exports. You're going to hit a wall at some point in time. One of the uncertainties is mid-streaming in the Gulf certainly is doable. The question is, is there any limit on that. But in walking through it, we've added -- we estimate that DTA's a plus 20 million-ton a year terminal. Given the exports, we added -- went from 17.5% to a 20% -- 22% of the capacity. It cost us about $1.5 million. It turned out to be a great investment, we think, and will continue to be so.

When you think through the ports themselves, in DTA at that 20, 21, 22 million tons depending on stockpiles. If you look at Lambert Point, it's plus 40 million tons if it operates both sides. If you think about Baltimore, it's around 20 million tons of capacity, we believe. You add in the Mobile, some of the other southern ports, you can add another 10 or so million tons, then the Gulf Coast through New Orleans.

We can get well above 100 million tons. We think demand's out there in the global short fall. At some point, some additional would be required. We don't see that occurring necessarily in '09 or even '10. You also have the West Coast where things are certainly more limited. But up through Canada and Vancouver, we think you could see a 5 million or 6 million tons, and then maybe 2 million tons total in all of the other West Coast ports.

Thank you for the details, Steve. My follow-up question is, you made a very interesting, very correct comment earlier in the call relative to the markets in the -- the coal markets in the US becoming regional to national and now, certainly international. Do you think that could support higher level of industry consolidation in the United States?

I think for a long time, certainly last several years, the industry observers both in and within the industry, and outside of the industry thought consolidation was going to occur. We're certainly starting to see it, I think. You've seen the announcements over the last several weeks of different combinations. Maybe the deals get done, maybe they don't get done.

And you've seen steel companies, at least announce that they're buying private companies. Obviously, we just saw the approval by the shareholders of the Magnum Patriot deal. It's starting. We think that it's likely to continue. It's both by more traditional domestic coal producers, and I think you're seeing some of the international players and new players enter into the marketplace that probably wouldn't have been predicted a year or two ago.

Would you expect that probably out West as well?

Well, Rio made the announcement they're selling Rio Tinto Energy America, so presumably somebody will do a deal with them, so yes.

Thanks, Steve. Appreciate your time.

Thank you.

We'll take the next question Schneur Gershuni with UBS Securities.

Hi. Schneur Gershuni calling. Most of my questions have been answered and I hate to come back to trade in the brokerage. But I want to get a clear understanding of the purpose that you put forward with respect to the traders. Are they able to take naked positions and so forth? Or is it really trying to just optimize and really trying to get more for what you have?

They have -- within a very finite regulated position, they can take positions and have a view of the marketplace. But we start with trading around our assets and they do have a bar that they're allowed to have that risk.

Okay. And I guess just a follow-up to Luther's question before about the tax rate and so forth. Can you give us an idea of the NOLs that you have outstanding and credit you have available? As pricing goes up and so forth, I would expect your earnings to materially increase and obviously, you're going to have to eventually use up the NOLs and so forth. I wanted to know what your long-term thoughts were.

Yes. From a tax perspective, we have a fairly substantial deferred tax asset, primarily in the form of NOLs and AMP carry-forwards. As our profitability increases as we look out over the next many years, we're going to have several years where we're able to utilize that deferred tax asset, projections for the next several years. What that leaves us is if you're looking out over the next several years is we're essentially going to be an AMT taxpayer with a rate anywhere from 22% to 25% as we utilize those deferred tax assets as we move forward.

Okay. Great. And just with respect to priorities for cash flows. If cash flows come in a lot stronger than you're currently forecasting right now, where do you see -- where would be your priorities of where to place the cash? Would it be in the form of share buy back, set repay, CapEx? If you can give some color on your priorities.

All of the above. Really we look at it and right now given the forecast, we do expect free cash flow this year. Given the marketplace, one would be -- we would make some assumptions about 2009 and '10 as well. But really we look at what will give us the greatest long-term return for our shareholders. It can be anything from organic growth, as we have evidenced over the last couple of years with Mount Laurel moving into the E seam out at our West Elk mine, to looking forward you would have some expansion opportunities in our Eastern operations.

We mentioned earlier, the industry does look like there will be consolidation. Not many things can make it through our screen, but if it makes sense, we would certainly look at it and be very serious about it. I think we've demonstrated in the past that if we're not getting a proper return on our assets, that we're willing to do things with those assets to be a buyer or seller. We have certainly done both in the recent past over the last several years. Share buy back and dividend increases are something the Board looks at really every Board meeting we discuss, we look at the opportunities of cash.

Having said all that, I think it's also important to maintain a strong balance sheet. Because one of the things that is really different in this pricing cycle for us is that we saw it coming. And we had the balance sheet that said if we've got our timing wrong, let's just face facts. And that maybe we could have been wrong, it doesn't look like we were. The balance sheet allowed us to not have so much coal placed and hedged at what turned out to be much, much lower prices. Where in previous cycles because of demands and commitments and the balance sheet, often we would have to enter the cycle at a much larger sold out position. It's really all of them.

I don't think about them as a simple priority. I think about them as what can maximize the return for our shareholders over the long term. You have our commitment that we're going to be very, very serious about each one of those factors. It wouldn't surprise me to see us do some or all of them.

Great. Thank you very much.

Thank you.

We'll take our next question from [Sineal Dapptagard].

Thanks. On the Gulf structure, if I hear you correctly. You mentioned that average costs structure to be $19 to $21 per ton for 2008?

That's correct.

If you look at the first half, it was about $16 per ton, so are you expecting a sharp rise in the second half?

Could you repeat that?

If you look at the Gulf structure, operating cost per ton in the first half, it was an average of $16 per ton. If you're looking for the full year of $19 to $21 per ton, which means that you're looking for a sharp rise in the operating cost in the second half 2008, for the third quarter and the fourth quarter, is that the right way to put it?

Well, when we looking at -- we are looking at cost of sales, all in cost. We're typically looking at $19 to $21, all in cost FOB rail car. Western Bituminous region, so we're trying to stay within that range.

Then the first half also the cost including the rail was about $19 -- was in the range of $19 to $21, basically?

First quarter was $20.17 -- I'm sorry. Yes, first quarter was $20.17. Second quarter was $22.07. All in cost.

Okay, all in cost. If I had to look just at the operating cost, given the price ratios in terms of operating the mines, do you think that the costs in the second half will be higher than the first half or it would be flat with the first half?

I think we're doing everything we can to arrest these cost increases, but there are a lot of pressures, certainly on the commodity cost. We'll be certainly at the top end of that range that we gave you earlier in the year. We're going to do everything we can to manage within that range, but there's a lot of cost pressures out there. We have two long wall moves going on in the third quarter. Then we have two long wall moves, one of those in Western Bit in the fourth quarter. Those will have an impact on our cost.

Okay. And another question was on the hedge program that you talked about for oil. It's about 65% hedge for 2008 and 30% hedge for 2009, I believe. Now, when you look in those numbers, the range that you are looking at $19 to $21 will obviously go higher, and the range of $23 to $24 -- on hedge for of your oil requirement in '09? Is that the correct way to look at it?

Not really. This is Steve. You're focusing on the Western Bituminous region and essentially those -- not essentially, those are all underground mines. They're just not a big user of diesel fuel. If you look at our Powder River Basin operation which has a much lower cost structure, for the second quarter, the operating costs per ton were 1044, that's our biggest usage of diesel fuel in the Company. That's where the largest pressure of diesel fuel would be.

We'll take our next question from Zach [Trebor] with UT Capital.

Guys, thanks for the time. Congratulations on the solid quarter.

Thank you.

I was just wondering if you can go over some of the numbers you talked about in your opening prepared comments about the global market. I think you talked about a 35 million metric ton deficit in 2008, growing over the next five years. Strong enough to absorb, I think you said, some slowdown globally. I'm just wondering if you can give those numbers again and talk about what kind of slowdown globally and in which key countries that forecast can tolerate? That seems to be the concern de jour, so I just wanted to address it.

Well, again, we're not necessarily forecasting a slowdown in -- I'll call it the brick company.

Yes, sir.

Countries. But we do believe there is enough growth, and it's a slowdown in the growth is the correct way to describe it. If China goes from 10% or 11% growth to 8% or 9% growth, it is still a very, very large number in terms of the demand.

But what we're seeing is just almost insatiable supply in the Pacific Rim -- excuse me, demand in the Pacific Rim, specifically China, India. If you total the other Asian economies, they're an enormous draw as well in terms of demand. China is adding roughly a power plant a week and their own production is up around 2.7 -- 2.6, 2.7 billion tons.

Globally, the estimates are that global coal demand will increase something close to 1.1 billion tons over the next five -- four or five years. If you think about that, if it's a billion tons, that's trying to replicate the US coal industry in, call it a five-year timeframe. It's not that the reserves don't exist on a global basis, because they do, but it's the infrastructure demand. You see it in Peck in Columbia or in South Africa or we just talked earlier about the ports in the US. We can grow to a point, but at some point it starts limiting us. Clearly, you see these infrastructure issues in Australia.

As we look at that global basis and start going through internal demand, people in some countries starting to say we're going to limit our exports because we have indigenous internal demands for coal. When we do the math, it ends up being -- admittedly, some countries that that is a little bit vague. That 30 to 40-million ton short fall this year and a continued short fall increasing as we go forward. But it is led by India, China, the Pacific Rim. Then it's compounded by infrastructure problems in the traditional supplying countries.

And so how many -- how much do you think this deficit grows to in '09 and by 2010?

Again, we're forecasting that it continues to increase 5 million to 10 million-ton deficit compounded each year.

Got it. And then just talking about the export facilities in the US, the 100 million tons of export facility at least in terms of nameplate. Are there any constraints in terms of operating them at full utilization? Do you think this country could easily export 100 million tons? Or would there have to be some changes and modifications to actually get to the 100 million tons? How substantial and capital intensive are those changes, if any?

I think the nameplates are actually much higher when you total them all up.

Oh, really?

I think with operating any mechanical system, as we get near those nameplates and really push them, two things happen. One, there's ingenuity and people end up increasing the capacity with some investment; and usually it starts off modestly and eventually you hit a wall and it has to be substantial.

But right now, most of the ports are exporting and it becomes more the -- to me the concern would be more the logistics. Do we -- can we manage all the logistics of the continued huge surge in exports? What we forecast is a pretty significant surge in internal demand and it will be a challenge. The system, I think, can do it, but if you have an inopportune inop or tune derailment or floods in the Midwest as an example or we break something at one of the mines, the system is wound pretty sight tight. And the ability to make that up will be a huge challenge.

Then on the care implications, which you delved into as it relates to potentially some commoditization of your historical sulfur premium combined with evaluating the Illinois Basin. Just wondering if you could go a little deeper in terms of i.e., does care being vacated make you more inclined to develop the Illinois Basin? Or does it make you less inclined to develop the Illinois basin because the uncertainty that it creates could actually slow down some of the scrubber installations.

And then make -- but then ultimately, there will be some care-type rule. It could be more stringent, actually. I just was wondering if you could share with us your thinking about care. How it relates to the existing portfolio? How it relates to Illinois Basin? [Relatedly], how many tons you think come on in the Illinois Basin in the next two or three years? Thanks.

Everybody is trying to figure out what the care litigation and ruling means. On a very preliminary analysis, you have to sit there and say well, because we will continue to trade SO2, but it won't go for two admissions from the current one in 2002. You would argue that the pricing of SO2 is more likely to be down than up from, say, the recent history. On scrubbers, I think the likelihood of some decisions to slow down the build out of scrubbers or perhaps even not turn them on, depending on the needs of individual units. A scrubber has a parasitic load of a couple of percent -- the output of the plant and they are costly to operate. You'll see some -- the uncertainty it creates, probably some conditions where things do slow down. That would be a negative for the Illinois Basin.

We think people will be able to meet their emission needs now perhaps through low sulfur coal burns and the use of maybe a slightly higher sulfur coal with emission allowances because they're lower pricing. It's really a mixed bag. But from our perspective, and that's all I can comment on, Illinois Basin, I think it's a negative for the development of Illinois Basin. Because we've often said that for us to put in a $300 million or $400 million long wall mine that takes -- from the decision point today 'til actually having it up and running would be a four to five-year process to reach full production.

Until the scrubbers are built, I am not going to put that kind of shareholder money at risk, and not have the market be there because people can't burn it because it is 5% and 6% sulfur coal in many cases. It's coming. It's going to develop, but I don't see it developing tomorrow.

We'll take our next question from Ann Kohler with Caris.

Good afternoon, gentlemen. I have a question that follows up on all of that. Certainly, Steve, you painted a very strong outlook over the balance of the decade, and probably into the next of the global deficit that we have on the coal side. How do you see the US? Is it going to be pressed upon the US to come up with that number or certainly I would assume Australia is in that mix as well. How do you foresee taking advantage of that given your reserve positions?

We -- I don't know if we're at an absolute record if we go back for 30 years of all the predecessor companies of Arch, but we think we're at record levels of export rates right now for Arch. The industry will pass the 100 million-ton mark here in the next couple of years likely, anyway. If putting pressure both on the coal supply domestically and our ability to do it, and every time that enters that international market, it makes it a ton that is not available to the domestic market. We think given Arch's position to export both through the East Coast, through the Gulf Coast; we think PRB will move through the West Coast. We have seen not Arch's coal, but we've heard anecdotally that some coal has moved through the West Coast out of Utah as well, that I think we're extremely well-positioned.

And all of the countries will be trying to respond to this market, both on the buy side and the supply side. But when you look at the infrastructure requirements in South Africa, in Australia, import capacity perhaps and rail capacity in Columbia. Over time, those things can be put in place, but it's longer than a two-year timeframe. We think it's a multi-year timeframe.

Someone once described the Australia infrastructure to me like freeways in Houston. When they start building them, by the time they're done, the capacity needs are they need a new free way. They're never caught up. I think there's some truth to that.

Would you envision that the US, though, is going to be able to capture a large percentage of that deficit? How would you respond in being able to capture a good share of that deficit?

I do think the US is going to be able to capture a good share of that deficit, particularly into the Atlantic Rim market. It's going to come down to the US and Columbia has the best positions. In the Pacific Rim, obviously, you have to say Indonesia and Australia have the strongest positions, although we'll see some US coal enter that market. South Africa can go both ways. Right now, India is a logical buyer of South African coal. And you're seeing dramatic increases in their purchases over the last few years.

From Arch's perspective, again, as some of our legacy contracts roll off in the steam market, we can push some of that coal into the met market. In the current environment, that can be domestic or international. Given the ownership of DTA and our ability to go through the Gulf with really all of our Eastern coals, and through the Gulf with our -- particularly at Colorado coal and PRB coal. Then you could have the Utah coal go through West Coast or you could have the PRB go through the West Coast, probably through Canada.

Then I can't -- we sometimes don't talk about it, but we are exporting into Mexico today. We will likely see the needs there continuing and certainly the industry exports into Canada as well. We think we're positioned great. We're always looking to strengthen that position. But the unique position that Arch has in its uncommitted coal over the next several years, we think we can take advantage of this market both on the domestic basis and an international basis. I look back at the last few quarters and you're starting to see that come into play.

Due to time constraints, we have time for one last question. We'll take that question from Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

The first question I have is about comparing the current market to 2006's bull market. It's interesting because I think we're hearing a lot of the same commentary from PRB producers now that we did in 2006, which is the forward curve is very strong. The outlook is bullish, but because spot prices are pretty low -- or lower than we'd like, we're going to leave some coal in the ground until prices reach appropriate levels. A, do we need to see a flattening of the PRB curve for Arch to decide to take those tons out of the ground? And then B, what is if at all different about the current market versus 2006 that might make things pan out differently than they did the last time?

Take the second part of that first. Really if you look at the 2006 market, it started in late 2004 and 2005 and 2006 and didn't end until a very mild winter in 2007. And that was preceded by a mild summer. The major difference in this market compared to that market is the export market. Met was reasonably strong, but it wasn't nearly as strong as it is today.

And you were getting some draw of steam coal into that met market, but again, not nearly as much as we see today. You didn't have any export steam market in 2006 -- 2005 and 2006 to speak of and you see a very strong demand going on today. In a nutshell, that net change -- and if you think about it -- I don't have 2006 export numbers on the top of my head, but they were probably down in the 40 million-ton range. And 2007 was in that 56 million to 57 million-ton range. We're forecasting 83 million tons for 2008 in exports. That's a huge swing and if it continues on as we would expect, another 10 million tons or more next year and over a 100 million tons by 2010, that is an enormous change.

On top of it, this marketplace has occurred really and we've seen record pricing. We entered the year with very robust stockpiles East and West at our domestic utility base. That was unlike the run up that you saw in 2004/2005 timeframe. We've seen the stockpiles decline even with the record pricing. Really the utilities started in a better position. Those two together are significant differences and have real implications on the supply/demand balance moving forward.

And the decision calculus part of the question?

Could you repeat that?

I know you said previously and I understand that there's no price at which Arch will say, oh, great, now we'll mine the tonnage. Are there other trends, besides desperation on the part of your utility buyers, but trends such as a flattening of the curve? Or what are things that might make us think the coal will come out this time versus the last time?

Well, Justine, we can only speak for Arch. But we're always evaluating the market on what gives us the best return for our shareholders. We strongly believe that on a global scale, the world is relatively short of energy and it doesn't matter if you want to focus on gas or oil or coal. And when we're in that up trend, can we have a year or two where things dip, or a year or two where they really spike, and the answer is absolutely yes.

One of the things we try to think about is, what's the future cost of replacing the reserve. If you think about a PRB time, you've got to do -- when the LBA's in the future. You've got to think about your pricing, that that might cost you, the time frame to do the EISs, and ultimately get the permits. As we think about that, that goes into our view of committing the coal long-term.

Sometimes we'll go ahead and sell the coal short-term because we need to for mining purposes or to get it out of the way of the drag line. But we're here to create long-term value. The biggest mistakes we personally think we've made in some of the previous run ups is committing coal too early, because we had to because of a weaker balance sheet or other needs of the Corporation. Often we were not in a position to take advantage for our shareholders of the really strong market. We don't see this as the 9th inning in energy at all.

Okay. And then the last question is just about how you guys view your export customers versus the domestic customers. We talk about potential export capacity in the US and we might be able to throw out numbers of additional production that may be exported. But how do you as a coal company view serving your bread-and-butter domestic clients versus the export customers?

I know you're that signing some long-term export customers, but would you prefer to sign contracts with domestic customers for the longer term? Maybe a discounted price, but to lock in that business? Or would you guys send whatever you could abroad even if it was an incremental price point?

Again, we love all our customers. There's no such thing as a bad customer as long as they pay the bills. What we tend to do is we want a mix, because given the nature of exports, if you think about it, you're trying to load a ship or a set of ships in relatively a short period of time. Then the ships get scheduled. If you think about a coal mine, just a single coal mine, that's one of Arch's great strengths is we have multiple mines. We're trying to load the ship and we do. Then we may have 15 days with nothing scheduled for an export order, and then you're starting on another ship at the end of the month, let's say.

You need that mix to balance the production at the mine, because the mine can't cycle up to huge exports. No exports, huge exports and run efficiently. What our marketing team, and again we use the trading group as well, we try to balance the mine to operate as efficiently as it possibly can to meet the needs of the customer. We find that mix. And we mix the customers, export and domestic and we mix them by qualities. We also mix them between different mines. It is a balancing act to get the absolute most efficient operations at the lowest cost, but size does matter in that case.

And this concludes the question-and-answer session for today's conference. I would now like to turn the call back to Mr. Leer for any closing comments.

Thank you. I really want to thank everybody for joining us on the call today and your interest in Arch Coal. I think as you can tell, we are feeling very good about the business.

The fundamental supply/demand balance from a supplier's perspective, we feel has continued to strengthen throughout the year and has continued to strengthen through the recent roller coaster ride, if you will, in terms of the financial coal markets. We really believe that our strong open commitment on sales positions Arch to benefit from these stronger markets. We are looking forward to the second half of 2008. Each one of our basins that we operate in and our trading arm are contributing handsomely to the profitability. As we look forward, we look forward to reporting the results as we move into 2008 and on into 2009. Again, thank you for your time. We'll see you or talk to you in three months.

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.