Arch Resources Inc (ARCH) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Arch Coal Incorporated third 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, and thanks for joining us. As usual, before we begin I want to remind you certain statements made during this call including statements relating to our expected future business and financial performance may be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties which are described in more detail in the annual and quarterly reports that we 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 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 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 Operating 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 will be happy to take your questions. Steve?

Thank you, Deck, and good day, everyone. Today Arch reported earnings per share of $0.68 and EBITDA of $160 million in the third quarter of 2008, adding to what we expect will be the Company's best financial performance on record. Our Central Appalachia operations achieved an outstanding performance this quarter while our operating regions in the west contributed, as well, but to a smaller extent. In particular our Western Bit operations were impacted by two long well moves in the quarter while the PRB market suffered from milder summer weather conditions, a slowing economy and declining SO2 values, which weakened our operating results in that region. ,Our trading function also had a challenging quarter giving back a portion of the gain it recognized in the first half of the year. The loss was driven by declining index price levels across major US coal supply basins and the resulting markdown on our portfolio. Year to date, however, we've recorded a substantial benefit from this function while using the market intelligence gained in trading around our assets.

Now, I'd like to spend a few moments discussing trends we see evolving in our largest market by volume, the Powder River Basin. We anticipate an improving outlook for the PRB over the next year driven by several factors. First, as noted in our earnings release we have elected to idle a dragline and shovel in the fourth quarter. We believe operating at a lower volume level is the right decision for Arch, since unfavorable weather and weakening economic trends have impacted short-term demand. We also believe this decision is in the best interest of our shareholders since the returns offered by the current spot market for these valuable coal reserves are not sufficient to justify higher production levels.

Second, new markets are beginning to develop for the PRB coal, which should help narrow the price gap with eastern coal. While 50% of the coal from this region moves east of the Mississippi River today, we believe there is considerable potential for further penetration. We're booking meaningful volumes of coal with traditional customers to increase our burns of PRB coal and have ranged -- have arranged several test shipments for new PRB customers, both in the west and in the east, who are looking to add PRB to their plant fuels mix. We expect this trend to continue as generators look to secure their 2009 coal needs. Furthermore, meaningful demand growth from new coal plant start ups has finally arrived. Our internal forecasts indicate that at least 55 million tons of new incremental coal demand will be needed over the next several years to service these new plants and nearly half of that tonnage should be supplied by the Powder River basin. This buildout, along with the growth in existing plants already serviced by the PRB, should translate into above average demand for growth in the region next year.

Lastly, expanding the PRB's scope internationally should help unlock additional value for this region. Arch will begin test shipments of the PRB coal off the West Coast in the fourth quarter. Our initial test shipments will be for use in Chinese power plants. These test shipments should lead to an additional volume committment in the Pacific Rim with customers who value a secure and competitively-priced supply. At this second -- as this secondary market grows in size and scope it should increase competition, both domestically and internationally, for PRB coal and provide upside for future pricing.

Shifting gears I'd like to briefly address how the current financial crisis is impacting the coal markets. In his prepared remarks, John Drexler will highlight the steps that Arch has specifically taking to help bolster the Company's already strong balance sheet In light of these events. Despite the significant decline in coal equity value since July, the underlying coal supply demand fundamentals remain positive and suggest to us that the correction has been over done. The last time ACI traded below $20 per share was in 2005 when Central App pricing was approximately $60 per ton, Western Bit pricing was below $30 per ton and the PRB pricing was at about $6 per ton. Looking ahead we continue to expect the US to export nearly 80 million tons in 2008. That's roughly a 30 million ton increase from the 2006 levels. Our forecast is marginally below previous levels, as we expect the impact from recent hurricanes and the slowing economy to curtail the peak levels we were forecasting a few months ago. More importantly, however, we still see 2009 exports growing 8% to 10% from 2008 levels.

We also -- excuse me -- we also expect coal imports from the US to decline, as more Columbian coal is diverted into the Atlantic and now the Pacific seaborne trade, and we expect imports to be down approximately two million tons in 2008 and remain flat in 2009. Of course, the forces behind strong US net export trends remain the same; growing global coal consumption coupled with a serious supply and infrastructure constraints. Coal has been the fastest growing primary energy source in the world over the last five years and this trend is not likely to fundamentally reverse course, even with a weakening global economy. Coal remains the lowest cost energy source for most of the world.

Even after adjusting for an economic slowdown our internal forecast continues to point to a cumulative global coal supply deficit over the next three to five years. In fact, we believe much of the steam coal demand slackening since last spring has been weather related and could correct upward rather quickly when weather normalizes. The US has had a cooler-than- normal summer and Europe has had "a year of no summer" according to the media reports on the continent. Of course the other side of the equation is supply and conditions remain very tight. Challenges in bringing on supply are apparent across the globe. In fact, conditions in most of the major exporting countries are worse than they were at the end of the second quarter, especially in South Africa, Russia, Vietnam, Indonesia, Venezuela and Poland. Collectively we expect exports from these countries to fall short by nearly 25 million tons in 2008.

In met markets, however, we do believe some demand slackening is related to economic activity and could weaken if we fall into a long global recession. However the good news is that we expect strong demand for US coking coal through 2010 and beyond if the global economy recovers by the end of the next year. This demand growth is being driven by solid competitive steel fundamentals that we continue to see out of the US, Brazil, and Eastern and Central Europe, the most logical markets for US met coal.

Turning to the domestic coal markets electric generation demand is estimated to be down approximately 1% year to date through mid October, driven by the milder summer and a weakening US economy. Our internal forecast suggests that coal consumption for power supply was down roughly 0.05% through September. However, it's important to remember that coal consumption is insulated to some extent from economic downturns, since people continue to use electricity in both weak and strong economies. Historically, electric generation demand for -- has remained flat or declined only four times year over year in the past 50 years and has recovered strongly in subsequent years following the downturn. Simply put, people still turn on the lights.

On the supply side the EIA currently estimates that the domestic coal production is up 1.5% through October 18th. Almost half of that -- this estimated production increase is attributable to Central App, a region that has seen record pricing yet is being challenged by cost pressures, difficult geology and regulatory hurdles. Further supply growth in this region is just not sustainable over the long term and we expect to see production decline, especially if pricing levels deteriorate much at all.

To summarize let me continue -- to summarize let me say that we continue to see strong demand and serious supply challenges in the east. Our customers continue to buy coal despite healthy stockpiles in the west and we continue to achieve better pricing on our available met and steam coal tons that we commented, despite a glowing -- a slowing global macro environment. However, we do think that the anxiety of the global slowdown is creating or causing our customers to be cautious and we have adjusted down our guidance for the year to reflect the expected softer demand in the fourth quarter driven by milder weather and the threat of the global economic recession. Despite that fact, we continue to expect to finish the year with strong liquidity, a strong balance sheet, and record EPS and EBITDA. We are confident that Arch is strongly positioned to perform well over the full market cycle and that the current financial crisis -- or crisis in the financial market will present opportunities for Arch and conservative companies like us who have committed an available liquidity, stable capital requirements and are experiencing growing cash flows.

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

Thanks, Steve. I'd like to start by highlighting Arch's price realization and cost performance by region in the quarter and then discuss our sales strategy in light of the recent market events. In Central App per ton price realizations rose nearly 14% from the second quarter of 2008 and increased 70% versus a year-ago quarter. Price realizations benefit from a larger mix of met coal volumes, as well as higher average pricing obtained on those met volumes during the quarter. In fact, more than 35% of our Central App sales volume for three months ended September 30th went into the met and PCI markets. Looking ahead we expect to ship between 4.5 and five million tons of coal in the met and PCA mark -- PCI markets in 2008 and continue to target met and PCI shipments of up to six million tons in 2009. These targets are predicated upon the continued demand growth in global met markets, which we anticipate, but as Steve discussed, may be growing more slowly than originally envisioned due to the slowing steel demand.

On the cost side our year-to-date Central App performance, excluding sales-sensitive cost, is trending below the rate of inflation thanks to the contribution of our lowest cost mine in the region, Mount Laurel. Looking ahead we have one longwall move at Mount Laurel during the fourth quarter. In Western Bit, third quarter 2008 price realizations were down $3 per ton from our second quarter performance, primarily driven by fewer spot sales out of West Elk mine in Colorado. Quarterly production at West Elk, as anticipated, was impacted by an extended longwall move, as we transitioned to the final shortened panel in the BC. We expect that our new longwall will become operational in the fourth quarter, as the mine makes its full transition to the new [E-seam] development. Our cost performance in Western Bit trended up modestly in the third quarter, reflecting impact of two longwall moves, one extended, which resulted in an incremental 15 days of lost production during the quarter. Going forward we expect only one longwall move in the fourth quarter as we officially move to the E-seam at West Elk and will continue to target an average cost structure near the top of the $19 to $ 21 per ton range in 2008.

In the PRB our third quarter volumes increased one million tons, fully rebounding from the heavy rainfall and floods experienced last spring, while our average price realizations declined slightly compared to the second quarter, reflecting lower premiums on SO2 credits. On the cost side our year-to-date PRB performance. excluding sales-sensitive cost, is trending above the previously-communicated levels, driven mainly by commodity cost and pressures in the region. The main commodity cost pressures that we face in the PRB are related to petroleum-based products and natural gas. We continue to execute on our dedicated hedging program, whose goal is to smooth the volatility and earnings related to cost increases but not necessarily to reduce our operating cost. Currently we have 68% of our diesel needs hedged for the fourth quarter at an average price of $2.98 per gallon and we're 50% hedged in 2009 at an average price of $3.87 per gallon. Going forward, we will continue to layer in hedges to average down the cost for diesel next year.

Additionally we're always looking at process improvement initiatives designed to reduce our cost structure. Over the last few years we've implemented a conveyor system at Black Thunder designed to help us shorten the truck routes of our existing fleet and lessen the need for new trucks and thus reduce our diesel use. And that's why, as Thunder transitions west we will begin to realize savings on diesel used, due to the shorter hauls of the new West load-out, which we expect will become fully operational during the fourth quarter this year. Looking ahead we are targeting lower volume levels from Company-controlled operations for the full-year 2008. Our volume ranges reflects our decision to idle production equipment in the PRB given the weaker market conditions.

Now, I'd like to spend a few moments discussing Arch's sales strategy during the quarter. While coal index pricing has declined during July it remains substantially above the year-ago levels. We also believe that the paper index market hasn't been impacted by forced liquidations of financial and trading arms and is not fully representative of the current physical market. In the quarter we sold meaningful volumes of PRB for 2009 delivery at roughly 60% above the regions third quarter average realized price. We also committed volumes for 2010 delivery at 80% premium to the regions third quarter 2008 benchmark. In Central App, we selectively committed coal and the PCI Markets for 2009 delivery at an average netback price in the $175 to $195 per ton range. We've also sold met coal for 2009 delivery at a netback at the mi -- at about $200 per ton, and in Western Bit we sold a modest amount of coal for 2009 at 2.5 times the regions third quarter average realized price.

So as you can see, Arch is well positioned to capitalize on continued pricing strength as we seek to place our remaining uncommitted volumes over the next several years. We've also chosen to leave tons in the ground where sufficient return has not been achievable. We believe this market-driven strategy is in the best interest of the Company and the shareholders. As a result of our sales committment signed in the quarter and our decision to target lower volume levels we now have un priced volumes of 30 to 40 million tons for 2009 and 75 to 85 million tons in 2010. Our third quarter results reflect a solid operational performance in unprecedented economic times. Our business is running well, but there are larger events unfolding in the global economy that are outside our control.

Our employees remain focused on the Company's core values and continue to deliver strong safety and environmental performance, as demonstrated by the national Good Neighbor awards recognized in the quarter, along with Black Thunder sweep of the 28th Annual International Surface Mine Rescue competition in August. Looking ahead, we are pleased to already have some of the best assets in the coal space under n the roof and we will continue to look to expand this strong base as opportunities present themselves. However, we have been and will continue to be extremely cautious deploying our capital, especially given the current prices in the financial markets, as we look to improve our cash flow in the coming years,

I'll now turn the call over to John Drexler, Arch's CFO. John?

Thank you, John, and good morning, everyone. I would like to take a few minutes to discuss Arch's key financial developments in the third quarter. First, our liquidity position remains very strong, despite a tight credit market. During the quarter Arch generated cash from operations of more than $172 million, the second best quarter in the Company's history. We use this cash to reinvest in the business, return it to shareholders, and bolster our already-strong balance sheet. For example, we spent roughly $78 million on our capital program, with roughly half to finalize the new west loadout at Black Thunder to transition to the E-seam at West Elk and the balance for maintenance. We returned more than $60 million to shareholders in the form of dividends and share repurchases. In the quarter we repurchased 1.5 million shares at an average price of $35.62 per share. Finally, we added $40 million of cash to our balance sheet to insure adequate short-term liquidity in response to the turmoil in credit markets. Arch finished the quarter in excellent financial shape. Our debt-to-capital ratio continues to strengthen, enable -- ending the quarter at 43%, while our committed and available liquidity totaled roughly $660 million at September 30th. In summary, although there has been significant uncertainty in the financial markets over the past month Arch's financial strength has allowed us to keep our focus where it should be on our operations.

I now would like to take a few minutes to more fully discuss the income tax benefit recorded in the quarter. This benefit resulted from a settlement with the IRS that allowed the Company to fully realize the value of its NOL tax assets and AMT tax credits. In August, we reached an agreement with the IRS related to its review of the Company's 1998 acquisition of [Arco's] coal operations and the creation of Arch Western Resources. As a result of the agreement Arch received nearly $400 million of additional tax assets, which will reduce the cash taxes that we expect to pay over the next several years. Additionally, due to the significance of the agreement, the accounting rules required us to reevaluate the recoverability of all of our tax assets, both new and existing, which included previous NOLs and AMT credits. This evaluation, which has resulted in partial releases in each of the last two years, traditionally occurs during the fourth quarter in connection with the completion of our budget process. The evaluation, which is based on our outlook for future profitability levels that would allow us to utilize these tax assets, resulted in the release of our remaining valuation allowance. In essence, the combination of the tax agreement, the release of the remaining valuation allowance and the provision for income taxes resulted in a net tax benefit of roughly $27 million for the third quarter. As you can see from our guidance we expect to return to a more typical tax rate in the fourth quarter.

Lastly I would like to comment on our revised 2008 guidance. We now expect volumes from Company-controlled operations to be in the range of 132 to 135 million tons, earnings per share of between $2.30 per share and $2.55 per share, EBITDA in the range of $726 million to $781 million, DD&A in the range of $287 million to $292 million, and an income tax rate, including the impact of the valuation allowance release, of between 10% to 13%. Our CapEx guidance remains the same.

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

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to David Khani, Friedman Billings Ramsey.

Yes, hi, guys. Could you talk a little bit about how much met coal you have available for pricing of that six million tons that you think you're going to be able to produce for 2009?

Dave, certainly, our guidance for 2009 is net five to six million ton range. We're having a number of discussions with some of our customers. I don't want to give you the exact number for competitive reasons, but I think I indicated in the release that we have already sold some PCI volumes for 2009 in that $175 to $195 range. We've also sold some limited amounts of met coal at the plus $200 range. But we're currently having discussions with domestic customers, international customers. I don't think it's any great secret that a lot of the customers are pretty hesitant with what's going on in the credit markets so we really haven't settled a lot of our volumes. So I really wouldn't want to give you an exact amount, but we expect those conversations to continue between now and the end of the year and probably into thir -- first quarter before we settle out all of those volumes, so I'd be a little hesitant to give you an exact number at this point.

And then maybe as a follow-up question just how much tonnage do you think you're going to export out of the US this year in total?

In 2008 we're going to export between nine and ten million tons. Now that includes some PRB tons that are shipped to Canada, as well as some Western Bit tons shipped to Mexico and to Europe, in addition to our met and steam coal out of the east, so it'll be somewhere between nine and ten million tons for 2008.

Great. Thank you.

Our next question is from Jim Rollyson, Raymond James.

Good morning guys.

Morning, Jim.

First off, nice to see you sticking to your public strategy of not just producing coal for the fun of it. With that in mind can you maybe talk about the dragline and shovel cut, what you see that doing to your volumes and costs over the next few quarters?

Jim, I think -- we obviously dropped our volume ranges for the balance of the year and I think that's in there, and we certainly are mining in sequences out there and at time this shutdown, probably in the back half of fourth quarter. I think as we see the market in the first quarter, too, of 2009 it certainly will have an impact on our volumes, but to give you an exact number I'd be a little hesitant to do that at this point.

How about just relative factors on cost, because you're obviously cutting some equipment out of the equation, as well, so you thinking it's gong to increase costs or things stay relatively level all else being equal?

Obviously. Jim. we're going to do our best to try to manage our cost. I think it will have a minimal impact on our cost. We have a lot of fixed cost out there, but I don't think it'll be significant, quite frankly.

Okay. And then just as a follow up, trading operations? You had a great first half of the year, obviously in a volatile market a little bit disappointing third quarter. Thoughts on how things are tracking and what you're expecting for fourth quarter?

This is Steve, Jim. It's one of these things that the market has fallen all through the third quarter and more or less has stabilized, at least the US domestic market, here in the first part of the fourth quarter, but we'll just have to see. There are [companies] trading each and every day, and again our expectations, as we said in the call for the second quarter, was that we didn't expect them to repeat the first half and the second half and unfortunately I guess we were more than accurate there. But we still expect them to put on trades. We have drawn some cash out of the market or really turned some of those trades into cash. They've had a great year in total, but we wouldn't expect any big numbers plus or minus, but with a caveat on that as we enter and go through the fourth quarter from the group, just given the dynamics of the marketplace.

Okay, thank you.

We'll go next to Pearce Hammond, Simmons & Company.

Good morning.

Morning Pearce.

Just curious, as we look out to 2009 with some of the commodity costs coming down -- diesel, steel, explosives, et cetera -- how should we think about cost inflation by region for next year?

Pearce, as we take a look at it obviously, we've priced out our capital for the most part in 2009 so those increases are in there. Certainly we hope to realize some cost savings potentially on some of the materials and supplies. We're 50% hedged on our diesel, so we hope as diesel continues to come down, if it continues to come down, we'll continue to layer in those hedges and drop that cost. So I would think we'd stick to that inflation plus several percent right now. We're in the budget process right now, still going through numbers. We really don't have hard inflation numbers to throw out, but we're going to do everything we can to manage the cost in each of our three producing regions. And certainly diesel and natural gas have been pretty hard on us certainly in the PRB for 2008 and steel prices through equipment, et cetera, on some of our deep mines it put some cost pressures there. So it's something we continue to manage. It's going continue to be a challenge, so right now I'd just be a little hesitant to give you an exact number.

Pearce, this is Steve. I'll just add to that. I look at the third quarter numbers compared to second and what the guys did and John doesn't really want to pat himself on the back but I thought we did a pretty good job -- really a very good job of managing costs. And if you back out the sales-related costs and you look at it and you sit there and say, you know, the numbers were pretty reasonable, so I think we can tackle them. There's going to be challenges. It does take time for some of these lower steel costs or lower petroleum-related costs to work their way entirely through the system, but I'm pleased with the way the mines have been performing and there's been an absolute passion for cost control by John and his team.

Great, thank you, and then a second question. On your capital budget, more your growth CapEx and your maintenance CapEx, but given this credit crisis and slowdown in general, how much flexibility do you have in adjusting your capital expenditures as you go through the budgeting process thinking about next year?

Well, that's what we're looking at right now. We've indicated that our maintenance capital really to run our business is about $250 million and as we work through the budget process I'd say that's probably a decent number in a range. But obviously, if the market continues to be soft we'll look at projects and potentially pull back on some of those, But I think you can figure, Pearce, that $250 million to $275 million maintenance capital is probably a pretty good number going forward.

And Pearce, this is John Drexler. We've got plenty of liquidity to be able to handle any needs that we have as we move forward.

Great. Thank you very much guys.

Thank you.

We'll go next to John Bridges, JPMorgan.

Good morning, Steve, everybody.

Morning, John.

The earnings trimming for Q4, does that suggest that there's some more negatives in the trading book that are going to come through in the fourth quarter?

I don't think so. It really is just taking a look at the overall market conditions and the global economy and what we are seeing, as I had mentioned in my remarks, is our customers are anxious and they certainly deserve to be. and so we're sitting there and saying all right, what could happen out there, what kind of slowdowns might we experience in the short term and we've seen some declines in the stock market so we just bake that in to what's the realistic number that, frankly, we think that we should guide everybody to. And the world changed a lot in the third quarter, so it's a combination of everything going on in the world, not one specific element of one of our mines or one of our operating groups.

Okay, great. And then as a follow up, could you give us a little bit more granularity on the transition steam to steam at West Elk? When will you be fully into this new steam and delivering stable tonnage?

Yes, John, the longwall move we had last quarter was really to move to a smaller panel in the [B-seam]. It's our last panel in the B-seam. We'll be moving in the next two weeks to our new panel in the E-seem and be fully operational say by mid to late November, and we expect good things from this new E-seem, so been real pleased with the way it's performed. The move this recent quarter was an extended move. It was 38 to 40 days so that's well over twice the length we typically have in a western longwall move which is around two weeks to 18 days typically.

Okay, great. Thank you.

You're welcome.

Our next question is from Brett Levy, Jeffries & Company.

Hey, guys. Given the amount of optimism you guys have about 09 and the periods beyond, I get a real sense that the fear about the capital markets has really taken hold. Do you have any thoughts of buying back your shares here or alternatively using some of your excess liquidity to pursue opportunistic acquisitions in the relatively near term?

i would answer yes to both, but obviously both issues would be things that the board considers along with the management. but clearly, we're seeing opportunities we think that will form and it'll take a little bit of time, probably, into the 2009 timeframe -- first and second quarter would be my guess -- of people being squeezed by the liquidity crisis, particularly perhaps some of the smaller miners or junior miners, as the international guys might say. I think there will be some growth plans by a lot of people that might be delayed that might change their outlooks. At the same time, as I said in my remarks, we look at the current pricing of at least Arch Coal and we think the correction has been overdone, so that's always something that we think about. So I think for companies that are well positioned with positive cash flow and strong liquidity and a strong balance sheet, every crisis has enormous opportunities and if you're able to take advantage of it and I think Arch is going to be a company that's positioned to take advantage of it.

At this point are you more inclined towards acquisitions or just stock buybacks?

It's going to be opportunistic and you just can't say one or the other or even internal growth, but it'll come down to what creates the largest long-term shareholder value and every acquisition will be different and obviously, at different points in time, the evaluation of internal projects or stock or any dividend policy will be board decision.

Thanks much, guys.

Thank you.

We'll go next to David Gagliano, Credit Suisse.

Hi, good morning, everybody.

Morning, David.

You just mentioned, obviously, a lots change during the third quarter. I was wondering when did you sign the majority of your PRB volumes for the third quarter. Was that July, August or September and when was the last contract that you signed from the PRB and what was the price of that contract?

Dave, I don't remember exactly when we signed all of the agreements but it was the first 30 to 45 days. We're always negotiating and signing agreements throughout a quarter, but I would say a lot of those were in the first half of the quarter.

And then in terms of the last contracts that you signed if you just give us a better feel for where the market is now?

I would say over the last three or four weeks probably is the last one that we signed.

Okay.

Dave, the marketplace is still functioning out there. The decision-making time's probably extended a little bit. Interestingly enough some of the met and PCI deals were done within the last 30 to 35 days, so it's still moving out there. It's just we certainly anticipate and we're seeing signs of it that our customers are in the marketplace but they're reluctant to pull the trigger just given all of the events going on in the global scale.

Okay, and then just a follow up. There's, I think, about a 35 million ton change if we just compare Q2 and Q3 press releases in terms of the 2009 remaining unpriced lines and I was wondering if you could just break that down between contracts that are actually signed in Q3 versus lower 2009 volume assumptions?

Dave, I won't break it down. What I'd say, we signed significant volumes during the third quarter and also in that number is some reduced volumes certainly in the first, second quarter 2009. What I will tell you is we have about 35% to 40% of our volumes next year that are priced -- or they're committed but unpriced, so --

Okay, and they're included in that

They're included in that 30% to 40%.

Okay, great. Thanks very much.

We'll go next to Schneur Gershuni, UBS.

Hi, good morning guys.

Good morning.

I was wondering if I can just revisit the dragline shovel, the plan to reduce volumes in the fourth quarter and so fourth. I guess first and foremost I was trying to reconcile your numbers and guidance and so forth and so is it fair to say that basically you're lowering your production in the fourth quarter by idling the equipment and that's responsible for your reduction in your guidance, but also that's effectively your unpriced tons that you had available still for the fourth quarter that probably won't be going out the door at this point?

I think it's fair to say yes to all of those -- that it has an impact on all of those and it's really again following our strategy of responding and meeting market requirements. And we've gone back and done a lot of this analysis since we've implemented our market-driven strategy and it's been a firm approach for Arch over the last three, four, five years and as we look back over that same timeframe we've strengthened the balance sheet, had two of the best years in the history of the Company, assuming that we meet our guidance for 2008, and we just think it's the right thing for our shareholders and recent history would say it's the right thing to do, just given the performance of the Company.

And how long do you anticipate it being down? Is this going to be back up at the end of 1Q or at the end of 2Q or is it going to have a material impact for volumes coming out of the Powder River Basin in general for 2009?

Well I think as Steve said, it depends on market conditions. We're market driven, we're always evaluating the market and we have the ability over time to bring that equipment up. We can't do it tomorrow, but over a period of several weeks we can bring both of those pieces of equipment back up, but it will solely depend on what we see in the market and can we truly create long-term value for shareholders by bringing that equipment back up and running it.

Okay. And do you have to reassign your labor as a result or is it going to involve layoffs at all or you'll be able to find other spots to slot everybody? And the fact that your guidance came down so aggressively for the fourth quarter relative to the amount of tons lost is that just because you're incurring higher fixed cost as a result of this, as well?

I think that's part of it and we don't anticipate any layoffs. We think we can manage through this without doing any of that.

Okay, great. And just one last follow-up question, a very (inaudible) question. The PCI methods you contracted for in the third quarter, was that just domestic customers or international customers?

It was a little bit of both, little bit of both

Okay, perfect. Thank you very much.

We'll go to David Lipschitz, Merrill Lynch.

Hi, everyone, sorry about that. I might have missed it in the press release, in terms of the dragline and shovel is that at Black Thunder or Coal Creek, one of each, where is that equipment right now?

That's at Black Thunder.

It's at Black Thunder, okay. In the east, in terms of the production second to third quarter, is that down due to maintenance, holiday, all that type of stuff, vacation during the summer?

Primarily minor vacation during the third quarter and that's pretty typical.

And where do you stand on inventory in the east heading into the fourth quarter?

At the mines?

Yes.

Well, our inventories we manage it quarter to quarter but it's -- I'd say it's typical. We're not swimming in coal, it's pretty much on average.

Okay, will you use some of that to ship to make up for the longwall in the fourth quarter?

We will, yes. We have a longwall move at Mount Laurel and we planned around that with putting inventory in place to manage through our shipments export and domestic.

Okay, great. Thanks.

Our next question is from Paul Forward, Stifel Nicolaus.

Good morning.

Good morning, Paul.

Couple questions here. What would you say just looking at the 404 permit issues right now, what do you think your likely impact is 2009 and 2010 if the outcome from the courts is unfavorable to the industry, both for yourselves and maybe if you'd want to take a stab at the whole industry, what do you think the volume impact might be?

Well again, for ourselves, there's probably on just the 404s, we don't think it would impact Arch for the next couple years. We've been very proactive, so probably given the history back to the Hayden judgment on our permits and really Arch is only operating the [coal mac] operations surface mine right now of any size and they're in pretty good shape for the next couple years. If it extends beyond that we would see some impacts, so through 2010 really no impact. I think as you look at the 404 question and you combine it with reserved aggregation and with just the difficulty in the new regulatory environment, it's our view that the Central Appalachia, Eastern Kentucky, Southwest Virginia, probably spilling even into some of the Pennsylvania and Northern Appalachia mines that it will be very, very difficult to sustain production and it will likely decline and if the court upheld the Chambers ruling, it's hard for me to imagine that we don't see a ten to 20 to 30 million ton decline on an annualized basis by the end of 2009.

I think people will do all sorts of things and people are very ingenious in maintaining their productions and trying to find ways to stay alive, but yes, at the end of the day it will have a dramatic impact on production as we get through the second half of 09 and on into '10, but we'll have to see how the court rules. But the interesting part is, even if they rule favorably towards the industry our view of it is that the likely outcome would be a remand to Judge Chambers court, and we'll have to see how the plaintiffs and the defendants try to work it out. But we think within that scenario the permitting system doesn't get fixed for at least another year or two and that's the optimistic view from the industries' perspective. What does that all mean? That means that probably you'll see a lot more PRB coal moving into the east to that supply that shortfall and eventually that will result in also a further resurgence, if you will, of the Illinois Basin.

Okay, thanks. And just to follow up on that, is there any potential impact to Arch from the -- your sale of your old mines to Magnum Coal in 2005? You're still guaranteeing some price on some older contracts. What volume is left on that and is there any potential impact from a negative 404 ruling that might impact those mines and their ability to keep delivering coal that might flow back to Arch ?

You're right, we do ultimately stand behind some of those contracts in our legal agreement, but you would have to go through all of Patriot and we think we're in very, very good shape and they've gotten better, if you will. It was strong when we sold the Magnum properties, it got stronger when Magnum and Patriot merged together. So really it's not one of those things that we are concerned and it's a couple contracts and one of them I think goes to 2017, so they're extended periods of time. In the worst case we'd have to supply some coal to them, but we don't see that happening.

Okay, thank you.

We'll go next to Jeremy Sussman Natexis.

Morning.

Morning.

I just wanted to make sure I heard you correctly. You said you have 35% to 40% of your coal unsold for 2009 -- or unpriced?

Unpriced.

Unpriced, okay.

Jeremy, that was 35% to 40% of the -- 35% unpriced was committed but unpriced.

Okay, I understand. And then in terms of the Chinese shipments -- or the test burns there, where is it going out of and if the test burns go well how much -- were you able to quantify maybe some of the potential tonnage that you could actually see leaving the country going forward?

Well the initial shipment's going out of Vancouver and we see some real opportunity in China, given some of the challenge that we've seen as some of the other producing regions, such as Indonesia. We think they continue to challenge -- be challenged with their exports. A lot of the coal they're exporting is lower-quality coal and we think the PRB can be competitive. I think if you look at port capacity right now on the West Coast we see as it stands today about five to seven million tons of available port capacity that we could export our PRB coal, so I think we -- we think over the next couple of years we see some real opportunities. We're anxious to get these tests in, see how they work, but we're having some meaningful conversations with several Chinese consumers about additional coal over the next year or so.

Be great to see. And then just lastly I'll pose this scenario. Given the cutbacks that we've seen in Powder River Basin growth, do you think we could actually see negative production growth in 2009 versus '08 or what are do you guys see as the regional growth rate over the next year or so?

The PRB is the most wonderful energy resource in the entire world, perhaps other than the Saudi oil fields, and it has grown every year at different rates, at different times. I think with the new power plants coming online in both not only 2009 but '10, '11, and '12, as well, the anticipated global demand of somewhere around a billion ton increase in coal demand around the world it's hard for me to model or think that the PRB would actually decline. I think what you're going to see is significant declines in Central App driven by the reserves if nothing else, PRB will expand to fill that and reach further east. It will also reach export markets and then it has its own indigenous growth with a new power plant of which, when you look at it logically, PRB should supply about half of the new power plants coming online. So I think it'll be a slow and steady growth from Arch's perspective and will match market demand.

Great. Thank you very much.

Hey, Jeremy, one follow up I just want to make sure we're clear on. On the uncommitted volumes we have 30 to 40 million tons unpriced of which 35% to 40% of that is committed but unpriced.

Great. Thank you very much.

Thanks, man.

Our next question is from Justine Fisher, Goldman Sachs.

Good morning.

Good morning, Justine.

The first question i have is about your contract posi -- your unpriced position in the PRB versus some of your peers. foundation and peabody are all sold for '09 in the PRB whereas you guys clearly still have some coal open to pricing and I was wondering that -- wondering whether, if the demand environment keeps prices at a point that is not -- or I guess not attractive for you guys to continue producing coal do you think that you guys might have to cut production more than your price peers next year in order to right size supply in the PRB to demand just because they will have committed some of their coal but you wouldn't have committed as much?

I think we're always looking at that. We are market driven and we're going to continually look at the market demand versus what's being produced in the market and I think what I would tell you is we see long-term demand developing, we see coal moving east, we're testing coal at a number of plants that have not used PRB before, we're shipping additional PRB coal to existing users of PRB, we continue to see opportunities on the export market. So right now, I really don't see us having to do that, but with that said we're always evaluating that and we'll make th right business decision.

Okay. And then in terms of lease payments I know you said that $250 million is maintenance CapEx for the PRB, are there lease payments that we need to be including in our CapEx estimates for next year in the PRB aside from what you may spend in maintenance and some expansion project?

We have the last of our annual LBA payments on the Little Thunder track of $122 million. As you've followed us that's always made in the first quarter, which is our heavy CapEx quarter.

Okay and then the last question --

Just remember the $250 million is total CapEx, not CapEx for the PRB

Right, right. That's total maintenance CapEx and then we'd have to add in whatever is the expansion projects plus the Little Thunder lease payment.

And we also have land additions in addition to those LBA s from time to time each year that go on top of that $122 million.

Okay. And my last question is on the met coal market. Is there a met coal price at which you would say that you're probably not getting the right returns on that mine's production just as you said on the PRB, because I think everyone thinks that met coal prices will come down this year versus last year but there's still a pretty healthy margins in my view. so I'm wondering if there's a limit at which -- I guess not a limit but a price at which you'd say, it's not attractive to my met coal either?

I think the advantage that Arch has when you look at our cost structure in the east and when you think about some of the met coal production out there, at least anecdotally on some of the costs, we're not likely to be the guys who get impacted by reduced price because our mines are so efficient in the east, particularly the Mount Laurel mine, that frankly it should supply good returns on any reasonable met coal pricing out there.

And we'll go next to Michael Dudas Jefferies.

Steve, wanted to elab -- I want you to elaborate a little bit on your expectations for exports at the end of this year and into 2009. I assume you're expecting that the global infrastructure and a shortfall we've seen in the Atlantic and Pacific basins will continue into the future. Do you expect that the export, I assume.\, will be much more sticky in shipments out of our country than maybe people would have thought otherwise given significant global pressures?

I think we do. Obviously, with exports particularly on quarter to quarter you can see a boat slip from one quarter to the next, but when you look at the supply basins there's real trouble in all of the production basins almost around the world, everywhere perhaps except for the Powder River Basin, domestically are internationally, and clearly, global economic growth and weather are the two drivers here, but that's on the demand side. On the supply side, it is very hard to get your arms around the troubles out there, but you can't hardly pick up a paper on a weekly basis without seeing some production issues in one of the big producing countries. We don't think those will go away. In fact, if you look at the credit crisis and the global concerns on the economy, we think a lot of the infrastructure plans in some of these countries just frankly will get delayed or get financed and -- or won't get financed and it's likely to really extend the issue, not shorten the issues. And as the economies of the world come out of this, which they inevitably do, the business cycle hasn't gone away, we really think that the upside potential might be even greater for companies like Arch and for companies in good export position.

Thank you, Steve. And when you think about the shortfalls you may anticipate in Central Appalachia through 2009 because of maybe 404 for productivity losses and the stronger export market, is that some of the reasons why you think Eastern steam price physical market may belie what's happened currently in the financial side and may ride through this relatively in reasonable shape?

Yes, and then I think you have to look at -- if you look at the financial crisis and as it affected some of the banks and investment banking houses and hedge funds, we have seen and certainly anecdotally believe that there was forced selling, if you will, not only of coal equities but also of trading books and on those financial markets people were just liquidating trying to turn things into cash and we were looking at the -- our trading company was seeing one aspect of the marketplace, yet as our marketing groups were selling coal to physical customers we were seeing a much different dynamic. And that may still continue to play out here in the fourth quarter, but the reality of it is eventually those financial tons do get liquidated and will move on, but we're very pleased with the overall physical market. It's (inaudible) for the times, but it's certainly not bad.

Thanks, Steve.

Thank you.

We'll go next to Lawrence Jollin, Barclays Capital.

Good morning. Can you provide details on your various debt balances at September 30th? Specifically I'm curious what your revolver, your accounts receivable securitization facility and your commercial paper facility balances were?

Yes, that -- this is John Drexler. As of September 30th we were drawing $210 million on our $800 million revolver, we were $127 million drawn on our AR securitization -- that's $175 million program -- and we were $98 million drawn on our commercial paper program -- that's a $100 million program. On the CP program since that time we have seen some weakness. As of today we're at about $70 million. But obviously with $660 million of available liquidity if we continue to see pressure in those markets we have more-than-adequate liquidity to handle any shortfall or continued decline in the commercial paper program.

As I recall from your 10-K in '07, at the time I guess it was a $75 million CP facility that matured in June. I assume you just put in place a new facility and termed it out?

Yes, we increased that facility to $100 million program during, I believe, the first quarter of this year.

And that matures next summer -- Summer '09?

The commercial paper as we place it in the markets it's a continual maturity, but that program is in place through that time, yes.

But isn't it supported by an unsecured revolver?

Yes. It's an unsecured program, yes it is.

But that's supporting unsecured revolver matures August '09 or something?

That's correct.

Okay, thanks a lot.

Yes.

We'll go next to David Silverstein, Merrill Lynch.

Hi, there. I'm sorry if I missed this earlier but can you give us a snapshot in terms of your trading book and where things stand? Clearly we've had a lot of volatility that contributed to the $18 million loss in trading during the quarter and prices have accelerated their downward movement since then. If you could just give us a snapshot in terms of where your positions are, your volumes, or maybe your price sensitivity that we can be expecting? And then on top of that, what are you doing going forward into '09 in terms of closing these positions out?

David, this is Steve. We're not going to give specifics of the book for obvious competitive reasons, but I will say that we have taken steps to lower some of our exposures in the eastern markets, but we still have them. We have also put in put in some other things to really try to protect some of the downside. And as we look at the disconnects between the physical and the financial markets, they will be adopting strategies to try to take advantage of some of those things that we see going forward into '09 and beyond. The trading group will be part of Arch's ongoing business. It really has been for a long time, it's just we've finally broken out the trading group and report them completely separately for more transparency. But in these kind of volatile markets there are going to be some larger swings up and down that as we sit here today are very difficult to predict. But we're really trying to dampen that down with some of the steps they've taken, but it'll be part of our ongoing activities.

Understood, thank you. And just to clarify then, with respect to the updated guidance for the year, you tightened the range and lowered it a little bit. I'm assuming that reflects a mark that you've taken on that book and you're expected realization on that book as of when ?

It would reflect all of our business activities, including the trading group, from what we know today looking forward.

Okay, so that's basically -- theoretically wherever we closed yesterday that that could be -- we could be done on that?

We would be thinking about -- we would include our latest knowledge as we look forward in all of our projections.

Got you. Thank you so much.

We'll go next to Mark Caruso, Millennium Partners.

Good morning -- actually it's good afternoon guys. Just a quick -- two quick questions. First was going back on Steve's question earlier about the PRB pricing in the current environment, we're seeing 09 in sort of the low teens -- in the 13 range. Want to see if that's an accurate representation. I know you said that customers are being a little bit more slow to sign contracts but I want to see if that's a really good representation,obviously with assuming some premium to that, but could you just give a sense of that?

On the forward-index curves, yes, it's at 13, 1350 but we're seeing higher prices on the physical market, not only in the east but in the PRB, as well. So when we go out and sign a multi-year agreement we wouldn't do them at these forward marks. We're seeing a spread there between those two. Don't want to give you exactly what that is for competitive reasons but it's material.

The other thing to watch there in its recent development is, of course, last quarter, the Care legislation was stayed by the federal courts and then within the last week -- well and SO2 declined to below $100 and then kind of settled down into the $130 to $150 range, then the last week the court has come back and said to the plaintiff and the defendant, perhaps we should revisit this and what would you like to see in terms of the Care legislation and our stay and a modify. We don't know what's going to happen but we did see SO2 trade up to the $180 range, so for the PRB producer that's a positive. Frankly, we'll have to see how it all shakes out. That type of movement doesn't mean a whole lot, but if it would go back to prior to the courts stay, which was in the $250 to $300 range it would have some positive impacts to the PRB, too.

Got you. And as far as RFPs out there, are we talking -- you guys talked about you signed some meaningful tonnage. Are the balance of the RFPs still meaningful tonnage or is it mixed here and there as the utilities review their need in the current demand environment?

Well you'll have opportunities from a half million tons a year up to a couple million tons a year so they just vary. It depends on the customer and their particular needs so we're seeing a variety of different bid requests right now.

And our next question is from Sanil Millennium, Sentinel Asset Management

Thanks. The new guidance that you gave -- the new guidance, when you look from the original guidance, what was the original volume you were planning for 2008 and what is the shortfall now?

I'd have to go back and look at the original but we've seen -- we're at that -- we were what, 133 million to 137 million I think last quarter and now we've lowered it basically to 132 million to somewhere around 135 million, so you've seen a -- percentage wise a small decrease but a few million tons.

And those are largely -- the part portion is coming from the shortfall in the Central App region because of the longwall and portion is basically shutdown in the PRB region?

Again, we would anticipate some of the tonnage in the east to be remade up -- or made up, but principally, it's the parking of equipment in the PRB.

And then do you think that in 2009 you would be bringing that back up in 2009 or you would be depending on the market condition you would bring back that -- bring that back?

It will be driven by the market conditions. We certainly anticipate and see increased PRB demand occurring in 2009, but again, the overall economy and demand of our customers, Eastern stockpiles are on the low side right now, western stockpiles are on the high side right now , so we'll incorporate all of that into the analysis and we'll provide a more recent and more in-depth update at the end of our fourth quarter conference call when we traditionally give guidance for the coming

Okay, on the tax rate, I think you've mentioned about fourth quarter to be between 13 and -- 10% and 13% and in case of the cash taxes it would be lower than what because of the resettlement here, so do you expect those -- on an accrual basis the tax rate to remain within that range for 2009 in that case between 10% and 13% if you look at what you said that it would go back to the historical metric?

We've indicated previously that as we look out we expect to be an AMT tax payer at a rate thats between 20% and 25% for the next several years dependent upon our levels of profitability.

And we'll move on to Wayne Cooperman, Cobalt Capital.

Hi, guys. Just wanted to get a sense in your Washington, guys, it looks like Obama's going to win. What's your view of what he is or isn't likely to try to do on the coal side?

Well, I think it's hard to say on either candidate. Both candidates have talked about climate change. I think for the American people and the economy is the most pressing need. That's going to be the focus of the next administration regardless of who wins and it's going to probably dominate everything for the next year or two. So on the coal side both candidates have been very pro-coal. How many times in the last four elections -- presidential elections have you heard clean coal, investment in clean coal being discussed by --

Almost as much as I heard the word "change" and :Maverick." (LAUGHTER)

I agree. So we think that ultimately we are going to see some global climate change legislation. I really don't think you're going to see it next year. Beyond that who knows and the devils in the details and there's not a single person on earth that can tell you what the actual legislation --

You don't see anything specific coming out any time soon?

I really don't. And again, you can make very reasoned argument that given the concerns of the economy, we can call it cap and trade but at the end of the day it effectively raises all energy costs and can the economy take that right now and would the Congress be willing to take that on. And I think the last debate of the Warner/Lieberman bill really showed costs to the economy were somewhere between $6 trillion and $7 trillion over the next 42 years, which was a big number. And as the people dug into it the consequences and the unintended consequences got larger and larger, so I don't think anything's pending in '09 or frankly in my own personal opinion even '10. '11, I think we're likely to see something.

Okay, thanks.

Sure.

And due to time constraints we'll take our final question from Wayne Atwell, Pontis Capital Management.

Thank you and good afternoon.

Yes.

In view of the fact that you have sent some test (inaudible) over to China you must be fairly familiar with their market. We're hearing a lot of different things that it's a very attractive supply/demand environment, we're hearing inventories are building, can you give us some of your market intelligence on what you're seeing in China?

John and I were just there a couple weeks ago and you basically got different answers from different people, as one might expect, but the basic growth for the economy was centering around 8% to 10% with 8% being the more popular number. The expectations,they're stunning numbers and particularly when you talk a bit longer term than just the next quarter out. There was a presentation that we listen to where they were expecting over 500 million people to move from the rural economy to the urban economies over the next 22 years, and from other conversations, we had their power needs of a person moving from the farmlands into the city rose by about four times and the electricity growth, the addition of power plants continues to be a priority for the government.

We do believe stockpiles have grown from probably five to six days to somewhere between ten and 15 days, particularly in the south, but just given the supply chains -- what most people don't realize in China is most of the coal is actually produced in the northern part of the country and is then railed to the coast, put on freighters, shipped down to the south, unloaded and railed inland to the power plants and that's why we think the import arena is so interesting to some of the power producers. And then you add some of the other concerns in some of the traditional supply sources -- Indonesia, Vietnam -- that China's looking at and the fact that they have lowered import taxes and raised export taxes on our coal and coking coal -- or our coke products,we just see it as a market that will be slow to develop, will take time, but is going to develop.

Yes, it's my impression that China's almost like two countries. As you say a lot of coal's produced in the north and consumed in the couth. One would assume you'd be supplying your coal to the southern part of the country?

Yes, as principal that's where most of the population is and most of the power plants are.

And they like your coal because of low sulfur content?

They like the sulfur content, it's very competitively priced, and it really -- PRB, as Indonesia has progressively exported, I would call it, lower-quality coal, Indonesian coal and PRB coal look very similar.

Great. Thank you.

Thank you.

And that does conclude the question and answer session today. At this time Mr, Leer, I'll turn the call back to you for closing additional remarks.

Thank you and I appreciate everyone joining us on the call today. The last 90 days have been unprecedented, at least in my experience, on the global financial markets, the credit crisis. Certainly its confused and clouded outlooks across almost all businesses and industries, but we think Arch has weathered the storm very, very well and we really expect to maintain that strong performance as we go into the fourth quarter and on into next year. The strong balance sheet, the very strong liquidity, and free cash flow we think is going to be very opportunistic for us to utilize because, as I've said earlier, every crisis has tremendous opportunities and we think Arch is well positioned. So hopefully on each of the calls moving forward into '09 and beyond we're going to be able to talk about that more and we think we will emerge from this as a stronger and stronger coal company and the energy player. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may disconnect at this time.