Arch Resources Inc (ARCH) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Arch Coal Incorporated fourth 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, Government Investor and Public Affairs. Please go ahead, sir.

Good morning, from St. Louis. Thanks for joining us. As usual and before we begin, I want to remind you that certain statements made during this call including statements relating to our expected future business and financial performance, may be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties which described in more detail in the annual and quarterly reports that we file with the Securities & 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 also would 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 section of our website at archcoal.com. 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 therefore will be happy to take your questions. Steve?

Thank you, Deck and good morning thank you for joining us on our conference call this morning. Today, Arch reported earnings per share of $0.44 in the fourth quarter of 2008, and earned $163 million in EBITDA, representing our third-best quarterly performance, and our best fourth quarter performance in the Company's history. Before we begin our current outlook, I would like to spend a few moments highlighting Arch's strong 2008 results. The foundation of this Company was built on three key pillars, safety, environmental stewardship, and financial performance. We have always felt that excelling in these core areas would ensure the success of the Company overall, and it has. We just finished Arch's best year on record in 2008.

In terms of safety performance, we made a 26% improvement over last year, surpassing our previous safety record set in 2006. In terms of environmental stewardship, we finished the year with an 8% improvement over our previous record set in 2007, and in terms of financial performance we excelled, earning $2.45 per share, and $753 million in EBITDA, all with only a slight increase in volume. As you can see, we have positioned Arch to shine in strong market cycles, as demonstrated by our 2008 results, but we have also set the Company up to succeed in weak market cycles, which is where we find ourselves today. The relatively swift market downturn in the second half of 2008 was triggered by the unprecedented crisis in the financial sector, and the subsequent global economic slowdown.

Since you already aware of the challenges faced in this uncertain economic environment, I will spend a few moments discussing the specific actions that Arch is taking to profitably ride through this market trough and to prepare ourselves for the next market up-cycle. As we have discussed in our earnings release, we are reducing our production targets in response to weakening market demand. We are lowering our projected volume levels by around 10 million tons in 2009. This reduction is spread generally pro rata by region. Specifically, we have idled one of our highest cost increments of production at Black Thunder and Coal Creek, parking a drag line and two shovels in the process.

We're also ratcheting back our lowest margin production in Central Appalachia. Beside's reducing volumes levels we're also adjusting our capital spending to better align with market demand expectations. We estimate that our maintenance capital needs to be between $215 million and $245 million for 2009, with an additional $40 million to complete the E-Seam transition to the West Elk -- at our West Elk mine. Our land-reserve acquisition should total between $155 million, and $185 million for 2009. We firmly believe that rationalizing production targets and exercising tight fiscal discipline in the current market are in the best long-term interests of our company, and our shareholders.

Turning to the market demand, we're seeing the impact of the weak industrial and commercial activity in electric generation trends. According to the Edison Electric Institute, US generation demand has declined approximately 1.4%, through the first four weeks of January admittedly off of a very tough weather comp in 2008. Also, aggressive steel industry production cuts around the world have reduced demand for met coal, while some inventory destocking has no doubt occurred and proposed a government infrastructure spending should boost future electric, steel, and coal demand, we can't predict with certainty when these conditions might improve, so we're taking a conservative view of our coal sales.

During 2009, we have the capability to supply up to 6 million tons of metallurgical coal into ether the met coal or high-quality steam coal markets depending on demand. Or we may choose to leave some of those tons in the ground if market conditions warrant. On a global basis, supply rationalization is underway, both in the steam and met coal markets. Clearly while the economics of the market are forcing the supply response, the market is also setting up for a strong upswing when the US and world economies start to improve. In addition, we expect more global and domestic supply cuts in the near-term, driven by geologic and regulatory hurdles, lack of access to credit, as well as cost pressures. At current pricing levels, future coal supply growth is just not sustainable in many regions. The energy information administration data supports this with US coal production trends declining 1.4% so far this year.

Switching gears, I would like to spend a few moments mentioning some of the positive sign posts we have seen in the market. As I have always believed that the market is forward-looking. First, we are successfully completed test shipments to China in January and have reached agreements to ship 2 million tons of coal from our Black Thunder mine to the Asia-Pacific market. This development is significant, in that we're gaining traction and building relationships with Chinese and India customers, to serve as an additional source of supply in a region that relies heavily on coal for its growing electric generation needs. We believe that these first agreements are really only the beginning. We're also see interesting from other non-traditional users of PRB coal despite a world economic slowdown, driven by growing global demand for coal and supply constraints from traditional export nations.

We also believe the pull from Asian markets as demand recovers will create market opportunities for PRB coal over time. Expanding the PRB's reach internationally will help to unlock the additional value for this region going forward. Second, new coal plants build-outs remain on track despite significant hurdles. Since our last update, we have seen two new plants, one in Arkansas and one in Montana move in to the under construction phase, and we now expect 16.5 gigawatts to start up by 2012, with half of the source tonnage for those plants to likely be supplied from the PRB. Also it, it is important to remember that the long-term fundamentals of pull -- coal markets remain very favorable. Coal has been the fastest growing fuel on the planet since 2000, with consumption growing rapidly in emerging economies. This trend is likely to continue despite, or perhaps because of the weaker economic conditions around the world. Coal remains one of the most affordable energy sources for many people around the world.

We believe that supply rationalization in 2009, coupled with the restart of the global economy economic activity later this year, and demand from new coal plants coming online should cause markets to dynamically rebalance this year -- over this year. Lastly, I would like to reiterate that Arch is strongly positioned in the current market cycle to deliver solid results, to generate shareholder returns, and to pursue opportunities to transform the Company. Clearly, assets are much more attractively priced than they were 12 months ago, and Arch has historically grown via acquisition by buying assets during periods when valuations were depressed and below their long-term replacement value.

It is extremely difficult to forecast 2009, given the uncertainties surrounding the economy, and the state of the steel markets, and as a result, we are committed to reducing our production targets, and capital spending programs in light of the near-term weak market trends. I will now turn the call over to our President, and COO, John Eaves for further discussion of Arch Coal sales and operating performance. John?

Thanks, Steve. Like to spend a few moments discussing key developments in each of our operating regions during 2008 and provide a preliminary outlook of our expectations for 2009. In the PRB, our 2008 volumes increased 3 million tons while price realizations rose thanks to stronger pricing on contract and open-market tons. Operating cost per ton increased as well, driven by higher sales sensitivity and commodity costs in 2008.

Looking ahead, as Steve mentioned we are targeting lower volume levels due to weak market conditions. This approach ensures that our value of our low-cost reserves is preserved until markets are more attractive. At the same time, we continue to layer in contracts that are attractively priced. In the fourth quarter, we committed an aggregate 20 million tons of PRB coal for ratable delivery in 2009, '10, and '11, at prices that reflect more than a 40% weighted average premium to the regions fourth quarter realized price. We have also agreed to ship 24 vessels to the Asia Pacific market through Vancouver's port in 2009. Laying the ground work for future market growth opportunities for the PRB.

On the cost side we are entering 2009 with 70% of our diesel consumption hedged at an average price of over $3.50 a gallon. As you can see, these hedges are above the current market price, but we expect to benefit from the current depressed oil prices through the unhedged portion of our portfolio, which will help to lower the average hedge cost in 2009, and through the hedges that we are layering in for 2010.

Taking in to account the expected impact of the reduced production levels, as well as the increase in diesel cost, we estimate that our operating cost in the PRB, excluding sales sensitive, could increase between 5 and 10% in 2009. Of course, we are working hard to control these increases. Additionally, we're always looking at process improvement initiatives, designed to reduce our cost structure. We're idling our highest cost increments of production at our mines, and with the start up of the new West loadout at Black Thunder we have begun to realized savings on diesel consumption due to shorter haul distances.

In Central App, full-year 2008 volumes increased thanks to a full-year contribution from Mountain Laurel. Per ton price realization rose more than 40% year-over-year given the strong met and steam markets that prevailed in the first half of 2008, while operating cost per ton increased largely due to higher sales-sensitive costs.

In 2009, as Steve mentioned, we're scaling back lower margin production in the region in response to weak market conditions. We're also shifting some of our met coal volumes back to the steam market as our cost structure allows us to profitably do so. As mentioned in our release, we have committed 2 million tons of Central App coal for 2009 delivery at an average price exceeding the region's fourth quarter blended realized price. On the cost side we're focusing on significant cost control, including reducing overtime hours and shift lengths. Taking this in to account along with the expected impact from reduce production levels and higher diesel cost, we estimate that our operating costs in Central App excluding sales sensitive could grow 5 to 10% in 2009.

In Western Bit, volumes grew in 2008 due to increased shipments from Arch's Utah operations. Per ton price realizations grew 11% over 2007, benefiting from contract roll-offs, and attractive open-market sales while operating costs averaged $21.77 per ton in 2008. In 2009, we expect our volumes and price realizations in the region to be significantly impacted by the adverse geological conditions encountered at the West Elk mine that have slowed our initial production and reduced our coal quality. These problems are projected to diminish as we mine through the panel with the greatest impact in the first quarter.

Offsetting the volume impact at West Elk, to some degree, will be the increasing production at our Elk Mountain mine in southern Wyoming. We are increasing production at this mine to satisfy diligence requirements, but we also believe there is currently an attractive market for this coal. Our all-in costs in Western Bit will take a step function up this year as larger percentage of production will come from higher-cost mines in the region, in particular, the addition of the Elk Mountain mine will boost costs in the region around a $1 per ton. Additionally, our cost will be impacted by the current issues at West Elk and more frequent long wall moves moving forward as compared with years past. As a result, we are targeting average cost structure in the 24 to $27 per ton range for 2009.

As a result of our sales commitments signed in the quarter and our decision to target lower volume levels, we now have unpriced volumes of between 14 to $18 million tons in 2009, with half, already committed, but not yet priced, 55 to 65 million tons unpriced in 2010, and 95 to 105 million tons unpriced in 2011. Lastly, I want to recognize Arch's outstanding accomplishments in safety and environmental performance, we earned 6 national and 12 state awards for achievements in safety and environmental stewardship.

Last year also marked Arch's best year in history for safety and environmental compliance. We are very proud and would like to thank the 4,000 employees that made this achievement possible. I will now turn the call over to John Drexler, Arch's CFO, to provide an update on our financial achievements in 2008. John?

Thank you, John. And good morning, everyone. I would like to highlight Arch's key financial achievements in 2008 and discuss our current balance sheet and liquidity position. From a financial perspective, 2008 was the best year in Arch's history, we set company records for revenues, EBITDA, net income, and earnings per share. Each of our key operating regions contributed to these results, including Arch's expanded trading function that add $55 million of pre-tax profits in 2008. We converted approximately 1/3 of those trading profits in to cash last year, and expect almost all of the remaining existing positions to convert to cash during 2009.

Perhaps even more importantly in this tight credit environment, we are earned a record cash flow from operations during 2008. More than doubling our 2007 level. This record cash flow aloud us to fund all of our capital requirements in 2008, and still grow our cash position by year-end. Also, we returned more than $100 million to shareholders last year, by repurchasing nearly $54 million of Arch Coal stock, and by increasing the quarterly dividend in April.

Turning to credit markets, since the crisis began to unfold last fall, we have continually focused on bolstering our strong balance sheet and protecting our liquidity. We ended the year with our balance sheet in excellent shape. Cash on hand exceeded $70 million, debt totaled $1.3 billion, and debt to total capital finished the year at 43%, down from 46% at the end of 2007. Our liquidity position also remained solid. At December 31, committed and available liquidity totaled $712 million, consisting primarily of cash on hand as well as availability under our revolving credit facility and accounts receivable securitization program. The revolving credit facility, which is the Company's primary source of short-term borrowings does not expire until June of 2011. In short, despite the problems in today's financial markets, Arch's financial condition is quite strong.

With that, let me now discuss our outlook for 2009. We expect volumes from company-controlled operations to be in the range of 120 to 127 million tons, total CapEx of between 255, and $285 million, which consist of roughly 215 to $245 million for maintenance capital, and roughly $40 million to complete the transition to the E-Seam at West Elk. Reserve additions of 155 to $185 million, including our final LBA payment for the Little Thunder lease reserve in the PRB. Typically, we expect a significant portion of our CapEx and reserve addition spending to occur in the first quarter. And DD&A is expected to be in the range of 300, to $310 million.

By focusing on cost control, and capital containment, on reducing production targets, on maintaining liquidity during this market trough, we are taking the appropriate actions to position ours selves during this market downturn, and more importantly for when the market recovers. With that, we are ready to take your questions. Operator I will turn the call back over to you.

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator instructions). We'll take our first question from John Bridges with JPMorgan.

Good morning, Steve, everybody.

Good morning, John.

Good morning.

Congratulations on advancing the PRB market in to China.

Thank you.

Could you give us a bit more detail on what is going on with the West Elk. I saw that piece of machinery, it was very impressive. It was at the equipment show in the fall, but what is the problem there?

Yes, John, this is John Eaves, you know, as we transition in to E-Seam with the new long wall, we started to encounter some problems in December and as we progress into January it got a little worse. Basically driven by sand stone channel that was a little bit thicker than our drilling showed. So, we're working through that, it's causing a little bit higher ash, it has impacted our production volume, we had an outage of about 10 days here recently. But if you look at our future drilling on our development panels, it really doesn't show the problem in those future panels, so I think it's something that we're managing through. We have got a couple more weeks in this thinner coal, and then we get out of it, and then we touch on it a little bit again in the late March time frame, and then it should be progressively better. We actually move in the next panel -- the E-2 panel, sometime in the third quarter, so we think -- we think things are progressively going to get better. We worked shipping plans without our customers, but it certainly is going to have an impact on quality, cost, and our financial results for the first quarter.

Of the 24, $27 a ton, is that an average for the year, or is that going to be skewed?

That's a range for the year, and I would hope we would see the higher end of that early, and as we progressed through the year, those costs would get better, but clearly, while we are in this problem in the E-Seam, our costs are going to be up, and we had the addition of the Elk Mountain mine, which we are actually mining to satisfy some diligence that allows us to maintain a lease, and that's a little bit higher cost production, but we are developing a new customer base there, those are development tons, but longer-term if we found some customers, I think we could bring those costs down over time. So those two factors are really going to drive up the costs earlier in the year in Western Bit, and hopefully we'll improve on that as we move out.

Thanks, guys, good luck.

Thank you.

Our next question comes from Luther Lou with FBR Capital Markets.

Hi, guys.

Hi, Luther.

Hi.

I noticed in Central App fourth quarter that the price realization came down quite a bit, is that because some of the met coal shipped in to the steam markets?

I think it was a couple of things Luther. I think it was more steam shipments, and just really kind of product mix. We still had some met tons that really didn't get sold in the market in the fourth quarter like we had planned, and I think it just drove the overall realizations down because of the higher percentage of steam shipments.

Yes, it was more product mix than any really issue there, Luther, but -- over all it -- looking at the metallurgical coals, really, deliveries more or less went on schedule, and we haven't seen a lot of deferrals as a result of that either.

On the Central App cost, cost also drops quite a bit. Is that because of the surcharge of the steel roof coming down, and this is trend going to continue in this coming year?

Well, I think it is a couple of things. It was the Black Lung excise tax benefit, as well as sales sensitive costs were probably a little bit lower .

(Operator Instructions) . We'll take our next question from Jim Rollyson with Raymond

Hey, good morning, guys.

Good morning.

Steve, last quarter was when you announced the drag line and shovel idle at Black Thunder and I think this morning you mentioned another shovel operation at Coal Creek. We didn't see a huge drop in volumes from Q3 to Q4. Just kind of -- have you got not got to the timing of when that started impacting your productions, or were you shipping some coal out inventory or just trying to understand how this plays out over the next 12 months.

Well, when you are parking equipment, you really let the mine park it at the best optimal point in their mining sequence, and really they ended up parking the equipment near the end of the fourth quarter, and is fully parked as we go in to the 2009 time frame.

So volumes ought to kind of come down -- step change down in first quarter, basically?

We would expect it, but it's always dependent upon market conditions.

Okay. Thanks.

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

Yes, good morning, everybody.

Good morning.

Wanted to walk through the met coal assumptions for the year. I know you talked about a range of near 6 million tons of met quality and then kind of gave some quantification of how that would be a little bit lower. I was wondering if you could probable put some ranges around what you think is likely to shift in to the markets, and also, obviously market dependent , but what could possibly be left in the ground and then as well, maybe what you have already signed up, so we can kind of see how those numbers tie

Yes, Brian, this is John. I think as you look at our met opportunities as Steve indicated we had the ability to ship up to 6 million tons. Given current circumstances, we don't see those opportunities, but those could play out over the year. We haven't had any material settlements, thus far. We expect those to probably start taking place sometime in April or May. Coming into the year, if you look at where we are committed on our met, we are probably a little bit less than a third of that total opportunity of met. So we'll continue to monitor the market. We think we are fortunate. We have a cost base that allows us to participate in the steam market if that's what we choose to do. If we don't think we can get the appropriate return on the steam side, we'll leave those tons in the ground. We have the flexibility to look at those, evaluate the market, and determine what makes the most sense for the corporation.

Just to clarify, 2 million tons roughly signed already. You didn't see much pushback Q4, so maybe assume that those are former than not, and then the additional between 2 and 4 -- or excuse me, between 2 and 6 the 4 million is all in the ground and is market dependent?

That's correct. It's probably a little bit less than the 2, Brian. We think we are solid on those. As Steve indicated we hadn't had a lot of deferments. We feel pretty good about on what we have booked in terms of getting those shipped, but it is probable a little less than the 2 million.

And then if you could quantify what you think of the remaining is high quality versus low quality.

I think most of it would be high quality. I mean, we sell a high-some met product, and when we make that transition in the steam market, we can put in the high BTU steam market, or we can blend that down. So I think we have the ultimate flexibility there.

Thank you very much.

Thank you.

Our next question comes from Shneur Gershuni with UBS. Please go ahead.

Hi, good morning, guys.

Hi, Shneur.

I was wondering if you could walk us through how the production cuts did impact labor costs. You didn't mention pulling back shifts and so forth. When you think of productivity on a tons per shift, or ton per man hour and so forth, is that effectively going to go down, historically when we see production costs we see costs skyrocket, or are you taking off expensive shifts? If you can give us a little bit more color with respect to that.

We're looking at everything obviously trying to manage our costs. I indicated in my comments we felt we could see cost go up 5 to 10%. But obviously we have a lot of fixed costs with these operations, so as we drop our volume, it could effect -- very well raise our cost so we're looking at shift lengths, contractors, we're doing everything we can to manage our cost, and, we have managed in tough conditions for many years, and we think we can do a good job. We have a number of initiatives that I really can't talk about for competitive reasons that we think will have a positive impact on our cost. But, our best guess right now is that 5 to 10% range in the PRB and Central App.

Do you anticipate any more like reclamation work being done as a result of as you keep these guys on idle?

When you look at the labor force, we were pretty thin in 2008, so when we come in to 2009, as we look at our work force, we think we'll be able to manage our work force through attrition, whatever. So at this point yes ear really not scheduled to have any layoffs per se. So we'll manage it. I mean, can we do additional reclamation from time to time. We usually do some of that with contractors. So given the fact that we're cutting back on contractors, we'll have to play it by ear.

I guess my follow-up question is kind of with respect to our outlook. What if we have a situation where a generation is down greater than 1% or approach 2, maybe even 3% and so forth, how many levers to you have to pull to bring in production, if you find the outlook continues to deteriorate further?

Well, that's something that we'll continue to monitor, really, on a week-by-week basis, and we have always said we are a market driven company. We can manage our mines at smaller levels than we're forecasting right now. We'll evaluate the met market, the steam market, and make those determinations, but I think if the market is not there, we will pull these mines back further that's what -- that's required.

Yes, Jim, this is Steve. I mean, we have really focused over the last four or five years on trying to take more of our costs in to the variable category, where we recognize the coal business as a cyclical business, and that where we want to be successful in the trough, and excel in the peak, and I think as we look over the last three years, we have been very successful, and we have gone through a complete Michael -- market cycle here, and we have had the best three years in total in the Company history, so we're feeling pretty good about it, and the large part of it is exactly what we have been talk about. Pulling back capital and managing capital on the balance sheet, so you are just not getting killed when you have to pull back production, and have a good sense of what is your highest cost increments , and given the diversity of the Company and the range of our products, I think is playing out very, very well, and frankly I'm looking at '09 -- I think there is going to be some significant opportunities for Arch to seriously evaluate acquisitions in terms of reserves or companies of some of our other competitors that may not have the same

Okay. Great. Well thank you very much, guys.

Thank you.

Thank you.

Our next question comes from Paul Forward with Stifel Nicolaus.

Good morning.

Good morning, Paul.

On this guidance of 120 to 127 million tons produced -- that's produced your own coal production that you are planning to sell in 2009. What is the comparable number in 2008? Because you gave a total coal sales number, but some of that is -- is not your own production. What is the comparable number, so we could see exactly how much production in 2008 is being taken off line. And if you could also give us a sense of if possible toward the low end of that range. If you are at 120, then what are the mines that would be most impacted by this?

Paul, I think the apples-to-apples comparison is about 134.

Okay. So, potentially you have got 14 million tons coming off line, can you quantify where that might come from?

Well, I mean, obviously we'll look at all regions and determine the markets in those regions, and where we need to pull back, but I think, you know, obviously, you can look out on a pro ration basis and come up with a number, but the one market, quite frankly we haven't seen a whole lot of deterioration in right now is the Western Bit market, so we look at each market and make those determinations and make the production cuts accordingly.

Okay. Thank you.

Before we move to our next question, I would like to remind everyone that you may ask one question, one follow-up question, and for any additional questions, you must queue up again. We'll move to our next question from Meredith Bandi with BMO.

Hello, everyone. Good morning.

Good morning, Meredith.

I just wanted to ask you a question, you talked a little bit about the improvement you have seen in exports going out of Canada, what are you expecting -- how are you expect -- exports to be next year?

It's open. It's kind of interesting if you look at -- I was talking to some transportation people this last week, and they have actually seen a little resurgence in January from a pretty quiet December, and -- but we would expect to see exports on a US basis across the entire industry to drop, 15 or 20 million tons from the record 2008 levels -- or 2008 levels that -- again, will -- it remains to be seen, I guess, because of the world economy, it is hard to predict, but that's kind of a working number as we see it today .

Operator, are you there?

Yes. And we'll take our next question from Mark Liinamaa with Morgan Stanley.

Hello, guys.

Hi, Mark.

You attribute most of your expected 1Q weakness to the problems at West Elk, can you talk about sequentially how you expect the PRB and Central App to perform from an operating contribution perspective, and I would also be interested on your comments on how much of a supply overhang the industry has to deal with given the various production cuts that have been announced? Thanks.

As we look at Central App and the PRB both, the mines are running well. Obviously, we are layering in some of these production cuts at different operations, and they'll have to make their adjustments, but, you know, we're pretty pleased with the overall operations of the mines, and even West Elk, when you look at it, I , they are -- I mean, they are dealing with a temporary problem here that we think the worse is actually behind us at the moment, but they are going to fight it for the quarter, I mean, that's just coal mining when you get right down to it. So I expect more of the same in our PRB and our Central App operations except for as they address productionist

So overall a little bit better than what 4Q was?

I wouldn't say they will be better or worse, it's -- I wouldn't expect a great deal of change except for as they deal with declines in production because we have chosen to leave some tons in the ground. In the overhang, we're sitting there in that 30 to 40 million ton, range, as we look at it today, and I think if you are fair at it, you would have to look at another 15 or 20 million tons of destocking that needs to occur to really rebalance the entire market.

Okay. Thank you very much.

Thank you.

Our next question comes from Jeremy Sussman with Natixis Incorporated.

Following up on the -- your acquisition -- talking about acquisitions, there any particular area that you are looking at where valuations are particularly attractive?

Well, I think given the pricing of assets that have occurred here -- or the decline in the pricing of assets, we have seen from -- in every region we're interested in, we are not going to really isolate our discussions on one area or the other, but we are actively look and we see opportunities out there, and, you know, there's a lot of companies that are just stressed in the credit markets, or in the permitting market, or even in reserves that might be bolt-on for Arch, and then there's larger opportunities too, so, again, if you look at our history, traditionally, it has been in the depressed markets, where we have made some of our best strategic acquisitions and moves, and we see it setting up again as we progress through 2009.

Great. And then, you signed a fair amount of tonnage in the quarter at some nice prices at $16 or so in the PRB. Was that signed basically throughout the quarter, or was there a particular time where you signed more coal?

Really, Jeremy, it was pretty much throughout the quarter.

Great. And then just lastly, trading results, can you break those out in the fourth quarter and then what should we expect in '09?

Let me just touch on it, John can give you the fourth quarter results here. I mean, we were really happy with the results for the year from a trading function. Certainly with the volatility we saw in 2008, I'm not sure we'll see that volatility in 2009, but I will tell you it is still going to be a critical piece of our marketing function, but I don't think you'll see, one, the volatility in the market, and two, the kind of numbers that we saw in 2008.

And Jeremy, this is John Drexler. For the fourth quarter we ended up with the ongoing decline in the markets we saw, we ended up with a loss position of about $10 million. However, I will they as we look at our position at the end of the year, we felt comfortable that we have done a good job of locking in the vast majority of what we have experienced for the year, and as I indicated in my prepared remarks, we expect the majority of that remaining mark-to-market to convert to cash throughout 2009.

Thanks very much for all of the color, guys.

Thank you.

Our next question comes from Gordon Howald with Calyon Securities.

Good morning, guys.

Good morning.

Thanks for the call. What kind of -- this is related to China and India and a series of questions, if I could. What kind of PRB volumes do you see going out to China and India? What kind of capacity is there on the West coast? What is the opportunity for Asia over the say, next five years? And who are the current and targeted customers at this point?

Well, certainly we know the 2 million tons that we have committed for China and India. I wouldn't speculate on others, but I do know there have been test shipments out of the West Coast. We currently think that there's about 5 million tons of available capacity at West Shore, in Vancouver. We think over time what you are seeing going on in countries like Indonesia, where there is tremendous growth domestically, they forecasted pretty significant increases in their exports. At the same time they have a major deterioration in quality. We see a real opportunity for PRB coal in that market. Really, we're talking to all of the utility customers in China and India, and have gotten tremendous interest in our PRB coal. So I would see over the next 3 to 5 years some real opportunities for some significant volumes going off of the West Coast.

And there could be an expansion in the West Coast port. We have had discussions with some of the Canadian imports along those lines, and it's not a tremendous amount of capital that would allow that number to grow, and it's always a tradeoff from the Canadian point perspective -- port perspective, because they are looking at their met coal shipments, again, to the Pacific rim, and depending on where those stand, it affects the volume for additional steam coal shipments. So we see the opportunity -- the important number here -- or point, I think, is we have established the -- the product in to the marketplace, and it will grow when you look at the need over a five-year time frame, of the developing Pacific rim. I mean the limit could very easily be the port capacity, because the demand is going to be there, which we think has great implications for PRB as a second market, and it's just one more development, that I think really help realize true potential of the Powder River Basin.

Sure. What kind of quality is the Indonesian export coal?

A lot of it is is a sub of bituminous coal, but as I said, it's deteriorating pretty significantly over the next couple of years.

I appreciate the color, guys. Thank you. All right. Thank you.

Our next question comes from Michael Goldenberg with Luminous Management.

Good morning.

Good morning.

I wanted to focus on Central App and Mount Laurel. It seems if I look back at press releases, when you stated signing contracts at percentage, higher than realized and so on and so forth, at least from where I sat, it seemed pretty clear that part of the stuff that was being signed was met coal, so I -- I thought that -- at least portion of 6 million tons at Mount Laurel entering 2009 was under contract. Am I wrong on that? Or did those contracts get abrogated? Or what?

Well, I mean, when we opened up Mount Laurel, we felt like we had a very attractive cost structure, but I will tell you the majority of that volume was put in to the met market, we had some agreements that went into 2009. We all have the ability to ship met coal from some of our other locations, such as Loan Mountain, and Cumberland River, so our met products ship from a combination of locations, but the majority of Mount Laurel in 2008 was shipped at a metallurgical product.

For 2009, do you currently not have many contracts for metallurgical coal?

We have less than a third of our overall opportunity of 6 million tons committed in the met market with a portion being shipped out of Mount Laurel, a portion out of Cumberland River and maybe a lesser extent out of Loan Mountain.

Unlike the steam coal markets, which often have one, two, three, or five-year, 10-year contracts even, the metallurgical market for almost all sales tend to be one-year contracts, and they tend to run on the Japanese fiscal year to April 1st to March 30. So you always have an overlap, of course, in a calendar year, and then there are from time to time, agreements, and we have some too, where you might do a two or three-year deal, but often the pricing will be open in the metallurgical sales or colored or something like that, and we don't have many of those, but they are a distinct minority in the traditional way met contracts are signed.

But you didn't sell any Mount Laurel in to US met, which generally runs much close January to January of '09.

We have sold some.

Yes, we do have some of those.

But not significant if I understand that only a third of overall production is signed up?

Yes, I guess a third is significant, we think in the met market, but, all of the -- the US Steel companies and the International Steel companies in the fourth quarter of the year, we're looking at their steel markets, and they -- while we had discussion going on at the end of the third quarter, they basically just stopped for 2009 because they -- they said, we want to talk to you. We think we'll be buying metallurgical coal, but we have no clue what our market looks like, and until we do, we're not prepared to move forward.

Right. But you had no contract abrogation where people signed and then said we can't pay you?

We have had none of those.

I'm also on Western Bit, I am also trying to reconcile previous press releases on pricing to the current tone that I'm hearing on the call, and I understand costs are going to be up, but once again if I go back to previous press releases, it would imply that pricing in 2009 should be well above 10, 20, 30, 40, percent higher than $27 realized in 2008. Should there be a considerable step-up, or is that also not generally happening?

We do have a step-up in 2009, and I don't want to get in to exact numbers, because we have sensitive discussions going on with our customers, but as I think as you get to the end of 2009, you going to see a significant step-up as we move in to 2010 out of Western Bit.

(Operator instructions). Our next question comes from an Sanil Millennium with Sentinel Investments.

You mentioned about the Western Bit cost, 24 to $27 per ton, when you look out in to a year ahead of that, do you think that the cost may come back again or it might remain in this range?

Well, I mean, when we put the range together, we were looking at, what the possibilities were, the impact of the first quarter, at West Elk, the additional production from Elk Mountain, but as I indicated earlier, I'm very hopeful as we move out through the year, that we can improve on those costs, and hopefully we're hitting the higher part of that range in the early part of the year, and we'll see that drop throughout the year, but certainly -- I mean, we're going in to more and more challenging reserves, a lot of the cost for the input materials and supplies has gone up, so it's something that is a challenge, but we're doing everything we can to manage those costs and bring them down, where the opportunities exist.

Okay. On the [diesel] hedging program an avenue price of $3.50 a gallon, is it like 100% hedged for 2009? And what are the hedges for 2010? (Inaudible - highly accented) operating costs? Is that --

We're about 70% hedged for 2009 at prices that are north of around $3.50. And for -- 2010 our diesel hedging program goes out about 12 months, so we have started looking in to 2010, primarily in the -- first quarter. We're about 10% hedged in the $2 25, $2.50 range somewhere around there.

(Inaudible - highly accented) for the cost fall in 2010.

Yes. Correct.

Yes.

And fuel cost (Inaudible - highly accented) if I remember correctly, 20% of the operating cost; is that correct?

Yes.

I'm trying to think. John says yes, so I'll take that --

15 to 20% range.

Okay. Thanks.

Our next question comes from Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

You mentioned the first quarter would be the weakest based on the West Elk base, but also the lease payments are also made in the first quarter, right?

That's correct.

The most pressure we might see from a cash flow perspective is in the first quarter too?

I guess that's right.

Cash use, I guess.

Yes, I mean we're just looking at the year, very comfortable with our cash flow and free cash flow projections, but obviously that's market depend , but the first quarter is always our largest

And working capital in the first quarter, that would probably be pretty negative too?

I wouldn't expect that to change that much.

Okay. And your commercial paper facility matures in the summer, I believe, of 2009. It is $100 million. Are you planning to roll that or to pay that down?

We'll expect to roll that -- that commercial paper program is rolling every day, but we expect to take that out another year with M&I Bank as we move forward.

And you haven't seen any issues regarding rolling that, given the commercial paper market -- the fact that you guys (Inaudible - background noise) impressive to begin with, so you haven't seen any issues with that.

We ended 12/31 at about $68 million. If you remember we were indicating in our third quarter conference call, we were beginning to see some weakness there. We kind of flatten in the $60 million rank, and things steam be rolling there pretty consistently. Something we watch every day, but right now continue to feel fortunate with the position we're in.

The AR facility, when does that mature.

The entire program runs through 2013. However, the credit backup matures on March 31, but similar to the CP program, we expect that to roll as well.

Okay. And then on the cost guidance front, I just wanted to clarify. When you say costs up 5 to 10%, is that total dollar amount cost? Is that unit cost in Q4 versus what it was in Q4 '08, or is that the average unit costs for '09 versus the average unit costs for '08.

That would be the per-ton cost forecasted for 2009 versus 2008.

And it's the average for the year, right?

Yes.

And then the last question I had was about share repurchases and acquisitions. It looked like you guys bought back a little more shock in the fourth quarter. And realizing you do have significant quickly available, but just given the pressures in the credit environment do you guys -- do you guys expect to continue to buy back shares because you may have to draw on your revolver to do it, and then would those acquisitions be debt financed?

Justine on the share repurchase portion of that question, we did not have any physical activity in the fourth quarter. We had some -- the acquisition in the third quarter set up a playable that on the cash flow then flowed through.

Okay.

Our activity ended in the third quarter. With what was developing in the fourth quarter, we felt it was prudent to preserve liquidity, and we were comfortable in growing our liquidity, and preserving everything on our balance sheet that we had, so, as we look forward, as Steve indicated, we do have tremendous opportunity. We continue to look freight a position that we're going to focus and be very vigilant in how we look at liquidity, how we look at our debt position, and try to put ourselves in a position where we're ready and able to act on opportunities.

Yes, and, obviously, Justine it depends on the size of an acquisition. Small ones would be from cash flow, a large one would be from perhaps its own cash flow, and our own -- and may involve debt or may not. So it's dependent on what the deal is.

Okay. Thanks, good to hear about the share repurchases I appreciate it. Thank you.

All right. Thank you.

Our next question comes from John Flanagan with Fundamental Equities.

Can you if us kind of an overview, Steve, of where the industry is at this point with our new administration and new Congress? Do you feel the coal industry picture has looked brighter or unchanged, or any incites there?

Well, I think it's, open to debate for -- from a lot of different perspectives. I think it's fairly clear -- and it's not really the change of administration driving it, as much as the general trends -- that -- our view is that the regulatory environment will always get tougher as we move forward in to any particular year and o '09 will be no exception and may get tougher. We think that favors companies like Arch that excel in safety in and environmental performance. The same in safety regulations, safety inspections, again, we think it favors the bigger, stronger companies that are able to put the appropriate resources on those issues, and, we look at this as, again, one of these things that are starting to differentiate different coal companies, which will come out on -- in pretty good shape on that. As we look to policies that would come out of the Congress on the administration, I think again, it's one of these things that there's going to be a great deal of debate on carbon, on climate change. I think with the economy and priority the economy takes, that those debates will be very intense, but action -- no one can predict the Congress, but actions probably not going to occur this year, but who knows, and the devil is in the details, and I don't think anybody can really respond one way or the other, but the reality of it is that 50% of the nation's electricity is generated by coal. I think the goal of growing renewables is a good goal. We're going to need that power when the economy recovers, but even going -- setting aside hydro, growing from 2% renewables to 4% is an enormous undertaking, and the President has said that he wants to try to achieve that. We'll see, and the first step has to be, the smart grid, and really rebuilding the grid system, because when you look at wind power, which probably has the most potential, when you look at where wind blows, people aren't, and that's because people didn't want to live where the wind blew all of the time.

So we have to connect those areas, and it's a long-term deal, but right now as we see it, in the next four years, the next eight years, the next 15 years, the coal will continue to do the heavy lifting in generating electricity, and I think the other interesting thing that is going on, and we didn't really get in to it anywhere in the call, but when you look at natural gas, on the margin, there's probably some natural gas displacing, perhaps, some of the worse-performing, oldest coal plants in the nation, and we're not entirely clear on that, but in our model, we kind of assume that to occur. Again, I'm not convinced that it actually is to a great deal, but we're assuming it does occur. And -- but you look at natural gas rigs right now, and they are down 30, 38%, I think -- or 35 to 38%, almost 800 -- over 800 rigs from their peak back in September, and it's below 1500 rigs. So the natural gas industry is responding very aggressively to the economic environment that we are all seeing and saying we're going to live within our cash flow, and by doing that, I think as the economy recovers, the upsurge in energy demand, and the ability for industries to respond is going to be an interesting dynamic, so, frankly -- I mean, it's kind of scary to say, but I see '09 as having tremendous opportunity for companies like Arch, and I think as we enter '010 given the resetting of some of our contracts that are well below today's spot market pricing, and if they just come up to where market spicing is today, that -- I guess I'm pretty encouraged as we look out at '010, and we'll weather the down cycle, and come out, again, to excel on the up cycle.

So you think 2010 will be a better -- a higher year of growth than 2009?

Almost -- certainly. Again, you can never be guaranteed things, but just looking at our contract mix, looking at -- I do believe the world economy starts to recover in the second half of this year, or the fourth quarter of this year, even the downturn here, I guess GEP was a little bit less -- or the decline was a little bit less than people were forecasting that came out this morning. I think there's more pain to come, but clearly governments around the world are implementing stimulus packages. There's a great debate on how effective some of them will be, but there's a lot of money flowing into the system. But we have seen the credit markets starting to function again, and, I mean, to me that is one of those sign posts that are critical for business to start climbing out of the kind of depressed environment that they see today.

Thanks a lot.

All right. Thank you.

Our final question comes from Wayne Atwell with pont Pontis Capital Management.

If you could give us a quick overview of the market steam and met. And as I said again, you have sort of go over this, and when you think demand might be picking up. It seem like the coal has been placed by yourself an others for the year and you can sit back and maybe be patient in terms of committing coal, and then also, how much capacity do you think has to come off both here and overseas?

Well, again, if you are looking at the met markets, I think on a global basis, we saw a real freeze might be the best description of it in the fourth quarter, where people are just uncertain what the '09 and, really, the fourth quarter looked like, and there had been a certain amount of de-stocking. I mentioned the conversation I had with the transportation company, that they were starting to see a little bit of -- or, a meaningful resurgence here in January. Maybe that was deferred shipments or maybe it was just timing. I wouldn't want to read too much in to that. But I think as we project forward and listening to a couple of steel company's press releases, that they are anticipating coming off of the lull, perhaps that occurred in the fourth quarter, and kind of a steady build, but not -- certainly not projecting a steady build through 2009 -- not projecting a return to the 2008 first half, but, maybe 20% or so decline year-over-year in total steel production might be a realistic assumption. In steam markets, I have said before, that overall when you look at recessionary periods in the US domestic steam markets, that, it's -- it's not recession proof, but it is recession resistant. I mean, people still heat their homes. Commercial buildings still turn on the lights, and where you see the decline, typically is in the industrial markets, and when you look at the mix of electricity, it's around 1/3, residential, 1/3, commercial, and 1/3 industrial, and the annual 1.5, 2.5% growth in the electric generation flattens to slightly declines and we're projecting a 1% decline or so in electric generation, but it doesn't go through the floor like you see in see in a more typical manufacturer facility of automobiles or maybe chemicals. So we expect a slowdown.

I think we mentioned earlier, we're in that kind of 30 to 40 million ton overhang today, and when you take de-stocking maybe another 15, 20 million tons added to that, and what is interesting is we read press releases from the industry, and obviously you don't get it from the private sector, that the cost structure, the reserve structure, the regulatory structure, the 404 permitting questions, and delays, I think we'll see a major reduction in overall global and domestic production as a result, and it looks like industry is taking those steps, either forced upon them or, they are doing it voluntarily, and the other issue is credit. I mean, in past recessions, the weakness -- you could kind of ride through it, because the credit markets would support your particularly smaller, weaker players, and today while we're seeing some positive movements in the credit markets, we don't see a robust credit market support for weaker credits, so, again, I see '09 as a transformation year, and an opportunity for companies like Arch.

So conceivably we could be setting up for a pretty good 2010, 2011 with obviously coal being cut back, no expansions being put in place, there should be some growth, I guess, which will be muted here for a while, but, as time passes more people have homes and they need to heat, so conceivably production capacity could be falling off here, some companies will have to hit the wall and have to close, so we could end up setting ourselves up for a reasonable 2010, 2011.

Really, that's exactly how I see it. That is a classic cycle in a commodity business, and as I said we positioned Arch to do well in be successful in the down cycle, and excel in the up cycle, and if you look at the last two cycles, the 2001, cycle, the 2004, 5 cycle, the 2008-cycle, I think there are a couple of observations that are fair to make is that each peak was higher than the previous cycle peak in terms of pricing and demand and each valley was better, or higher, if you will, than the previous valley. So the general trend line and secular trend in coal demand and energy demand is an upward trend, but it's sideways up and down, it's not a straight line.

So with that, you know, I would like to thank everyone for joining the call. Obviously your interest in Arch. I think I have said many times privately, 2009 is going to be an interesting year. It will have its challenges, I think companies like Arch and some others will come out the other side much stronger and in a better competitive position than we are even today. Liquidity, low-cost operations will always serve companies the best, whether they are in the up-cycle or in the down-cycle, and that's how we're manage Arch. So thank you for your interest. Thank you for your time, and we look forward to joining all of you in our April call for the first quarter. Thank you.

That does conclude today's conference call. Thank you for your participation, have a wonderful day. You may now disconnect.