Arch Resources Inc (ARCH) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Arch Coal, Inc. third quarter 2009 earnings release conference call. Today's call is being recorded.

At this time, I would like to turn the conference call over to Mr. Deck Slone, Vice President of 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 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 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 web site at archcoal.com.

On the call this morning, we have Steve Leer, Arch's Chairman and Chief Executive Officer; John Eaves, Arch's President and Chief Operating Officer; and John Drexler, our Senior Vice President and CFO. Steve, John, and John will begin the call with some brief formal remarks and thereafter, we'll be happy to take your questions. Steve?

Good morning, everyone. Thank you for joining us today. Today Arch reported earnings per share of $0.16 and generated $121 million of EBITDA for the third quarter. These results represent an improvement over the second quarter, but continue to reflect a weak domestic steam coal market compared with a year ago quarter. Each of our operating regions achieved margin expansion in the third quarter when compared with the second quarter. Our trading function also continued to provide a positive contribution to our earnings in the quarter just ended. We also realized improved other operating income, principally from an increased equity contribution from Knight Hawk's operations and a gain on broker tons previously designated as a physical sale that were settled financially.

Looking ahead, we see a resurgence of metallurgical coal markets driven by increased global steel utilization rates. In fact, domestic steel capacity utilization has climbed above 60%, which is up from only 38% in early January. While utilization rates are well below the 80% to 90% level that the steel mills averaged before the economic downturn last year, it is still a meaningful first step to recovery. Along with an improving domestic picture, we're seeing positive growth in the global economy. In particular, China has imported on a net basis more than 75 million short tons coal through September of 2009. Last year at this time, China was a net coal exporter of three million short tons. Through July of this year, India has imported on a net basis 33 million short tons of coal with 40% of those imports originating in South Africa. By comparison, India imported just 20 million short tons for the first seven months of 2008.

The fast-growing Asia Pacific market, along with the resumption of economic activity in the Atlantic markets, should open up even more opportunities for US met and steam coal to move offshore in the coming months. The challenges of growing supply on a domestic and global scale, due to reserve depletion, constraints on infrastructure, and increasingly stringent government regulations, are as apparent today as they were before the market run-up in 2008. It's just that these constraints have been overshadowed by the global economic recession and resulting rapid decline in energy demand during the past 12 months.

Turning to the domestic coal markets, the large drop in coal demand this year has caused stockpiles to build at US generators. We could end the year with as much as 200 million tons of stockpiles, which would represent a meaningful overhang as we head into 2010. If you assume that the stockpile target for utilities are around 160 million tons, then you're talking about the need to liquidate roughly 40 million tons. I'd argue that 40 million tons in a billion ton coal market isn't that much if you assume even very modest growth in power demand next year. And if growth is more robust as yesterday's GDP report and recent forecasts suggest, that drawdown could occur as early as mid 2010. The return of more normal weather patterns, increased nuclear refuelings, reversal of coal to gas switching, and the movement of high quality steam coal into the met market will likely accelerate stockpile drawdowns as well. While we're at it, we believe US coal exports will jump once again in 2010, further reducing available domestic coal to replenish utility stockpile.

Additionally, supply declines have occurred at a rapid pace in 2009. In particular, reported MSHA production figures so far from the third quarter which do continue to be updated, suggest that Central App production fell by more than 11 million tons when compared to the third quarter of 2008. This decline also represents five million tons more than the EIA had originally forecasted for the third quarter further demonstrating that high cost supply continues to be rationalized. Looking ahead, we believe additional supply cuts are likely in 2010, especially in Central Appalachia, given the contract rolloff, continued reserve depletion, the shutdown of high cost mines, and intensifying regulatory and permitting challenges. In fact, we estimate that roughly 30 million tons of Appalachian steam coal contracts with prices above $70 per ton will roll off at the end of 2009 alone. All of these factors suggest that it's possible for 40 million tons of stockpile to decline in a fairly brisk fashion during the course of 2010 which will set the stage for the next market cycle to become obvious to all market participants.

Moving on, I would like to spend a few moments discussing the acquisition of Jacobs Ranch at the beginning of the fourth quarter. John Eaves, in his prepared remarks, will provide an update on the synergies that we are currently in the process of unlocking as we integrate the two mines into one single operation. This acquisition follows in the footsteps of Arch's strategy of buying assets during market downturns to help position the Company to emerge as an even stronger player when markets recover. And we believe the world's economies are on course for that recovery to strengthen over the next 6 to 18 months. We also think this acquisition will be increasingly attractive in future years as domestic coal productions continue to ship westward.

Since 1990, southern PRB market expansion has been impressive, growing at an annual rate of 6%. During that time frame, PRB has overtaken Central App as the nation's largest and most prolific coal supply region. Quite simply, the PRB is the most cost-competitive coal supply source in the United States, with low geologic risk and significant economies at scale. These advantages allow the region to be highly competitive in its continued expansion on the national and international stage. Looking ahead, PRB's growth potential both in the US and outside the US is significant. As production in Central Appalachia continues to decline, the PRB will likely be called upon to step in and fill the supply gap as well as to meet demand growth from new coal plants starting up in 2009 through 2012 and from steadily increasing capacity utilization at existing plants.

Over the long term, we see potential to expand exports of PRB off the west coast directly into the Asia Pacific market as a game changer that will allow to us further unlock the value of our PRB assets. Given our view on the PRB, there's no surprise that then that we chose to grow the Company's PRB footprint when the opportunity arose to acquire one of Rio's best assets, Jacobs Ranch, the third largest coal mine in the US. As you know, Jacobs Ranch represents an excellent strategic fit with Black Thunder as the properties share a six mile border. We believe this acquisition not only creates a premiere mine complex in the PRB, but also the largest single coal mining complex in the world. Jacobs Ranch also brings a highly committed near term sales position to Arch's portfolio, and our new employees from that operation are trained and experienced and can share best practices to further complement our highly skilled workforce at Black Thunder. Furthermore, future reserve development opportunities for the combined mine will surely create additional incremental value at Arch over time. Couple these synergies with the hard assets and reserves, and it becomes clear why a third party consultant, Wood Mackenzie independently valued the transaction at $1.5 billion.

Since Arch became public in 1997, we have continued to successfully grow our coal volumes and reserves, with the focus on running large scale safe, efficient mining complexes. In addition, we have a superior asset base to profitably weather market downturns and to truly excel in market upturns. With our strategic position in the PRB, our number one position in western bid, our strong mets production and low-cost profile in Central App, we are poised to capitalize as markets recover.

On that note, I will turn the call over to our President and COO, John Eaves. John?

Thanks, Steve. As previously disclosed, Arch anticipates capturing annual synergies of $45 million to $55 million per year beginning in 2010 from the Jacobs Ranch transaction, which equates to $1.20 on acquired tons. At least 50% of these synergies come from operational benefits of integrating the two mines. Based on our success in integrating the North Rochelle into Black Thunder in 2004, we've identified similar efficiencies that will enable the combined mine to run at an optimal manner. I'd like to highlight some examples that give you a flavor for the type of concrete items we're implementing.

One of the key costs of mining the PRB is hauling coal to the truck dump and load out facilities for processing and loading into railcars. As mining on the former Jacobs property moved to the west, haul truck distances back to the load out on the Eastern edge of the property were increasing. With Arch's new state-of-the-art load out built in the direction of the mining just to the west, we are redirecting some of Jacobs trucks to the new loadout to shorten haul distances, resulting in significant cost savings. We've also deployed Black Thunder's GPS-enhanced MineStar system to the equipment fleet at Jacobs Ranch and already driving efficiencies at the integrated mine. The GPS system functions like an air traffic control system with a master computer determining where trucks should load, what type of material they should haul, and where they should dump. The MineStar system is directly tied to the scale of mining and is naturally more effective at larger and more complex mines.

Furthermore, we are currently preparing mine plan and permit revisions to deploy one of Black Thunder's idle drag lines on the former Jacobs Ranch property to displace a portion of the mine's more heavily skewed truck shovel operation. The drag line redeployment will help move material at roughly one half the cost of a truck shovel spread without any changes in production. Additional operating synergies include consolidating and eliminating duplicate facilities, such as the admin office, the warehouse, and the coal laboratory at Jacobs to reduce overhead and other carrying costs. We are also consolidating our purchase agreements with key venders, which is yielding incremental supplier savings. Beyond these operational cost savings, we estimate that 40% of the synergies reflect overhead and admin cost savings, most of which have been implemented. These savings include the elimination of duplicate jobs, corporate management fees, and intercompany leasing arrangements. Over time, we should also be able to reduce reclamation costs with a coordinated pit closure plan.

The remaining synergies consist of coal blending opportunities to provide more diverse products to the customer and the power generation industry. Blending a portion of Jacobs' higher sulfur product with Black Thunder's ultra-low sulfur coal will yield additional OTC spec products that are preferred by utilities, resulting in greater recovery and revenue enhancement for the combined operation. Furthermore, over 110 million tons of low-cost coal lies underneath the rail spur that service Jacobs Ranch. The combined operation will be able to mines these reserves as production transitions west and the coal is hauled to other load outs on the property. Without the acquisition, it would have been difficult to coordinate a solution to mine these reserves. We also expect future net capital spendings from the combined mine to be far below what would have been required on a stand alone basis. Overall, we remain on target to complete the integrated of Jacobs Ranch into Black Thunder in the fourth quarter and are enthusiastic about the newly expanded Black Thunder mine.

Now turning to our sales and marketing efforts. We're seeing increased demand for met coal both domestically and abroad. We shipped nearly 50% more met and PCI coal in the third quarter versus the second quarter to both traditional and new customers in both eastern and western Europe as well as Brazil. We also expect an even stronger fourth quarter, which will enable to us ship the two million tons into the met and PCI markets this year. And for 2010, our goal is to more than double our met coal shipments compared with 2009. In addition, we're pursuing new steam coal sales off the east and west coast as some global economies are recovering at a faster rate than here at home. We shipped another steam vessel to China in September and continue to have discussions with customers in Asia who are interested in securing a diverse supply source to satisfy their growing coal needs.

As Steve discussed in his prepared remarks, one market that remains weak is the domestic steam market. As a result, we'll continue to follow a market-driven strategy patiently and selectively committing coal in this weak pricing environment. Based on 2009 production levels, Arch has between 15 million and 25 million tons uncommitted in 2010 and between 80 million and 90 million tons uncommitted in 2011. We'll also continue to evaluate what we believe are appropriate production levels in 2010 based on our expectations of market demand. On the cost front, we continue to benefit from successful cost control measures implemented across the organization. In the PRB, we reduced cash costs per ton by 5% in the third quarter versus the second despite lower production levels. In particular, we cut our mining costs by reducing contractor services, lowering our repairs and maintenance costs, and reducing our usage of raw materials such as diesel and explosives, all in an effort to adjust our mines to operate profitably at reduced volume levels.

In Central App, we maintained our cash cost at $49 in the third quarter as increased volume levels and a larger mix of production from lower cost operations offset increased sale-sensitive costs. In Western Bit, our all-in cost improved substantially versus the second quarter, reflecting the absence of longwall moves at our operations and better cost control at West Elk. Looking ahead we expect geologic conditions at West Elk to continue to improve, which should reduce the need to truck some coal for washing. We continue to expect our all-in costs in the region to be between $26 and $28 per ton for the full year 2009. Additionally, we are progressing on the construction of the West Elk preparation plant, which we expect to have up and running early third quarter 2010.

Let me close by congratulating our operations for another strong performance in safety and environmental compliance. We're on target to deliver another industry leading year in terms of safety performance during 2009. Furthermore, the first nine months of 2009 we're on pace to beat our best ever environmental compliance record set in 2008. At Arch, we strive to uphold our three key pillars, safety, environmental stewardship, and financial performance. And want to thank our dedicated employees for their contributions so far in 2009.

With that, I will now turn the call over to John Drexler, Arch's CFO to provide and update on our consolidated financial results. John?

Thank you, John, and good morning, everyone. Before addressing our quarter and liquidity position and balance sheet, I would like to summarize the significant financing transactions that we completed in the third quarter. In late July, we issued senior notes at the Parent Company level with a face value of $600 million. The notes mature in 2016 and were priced at a discount with an effective yield of 9.25%. Net proceeds from the debt offering were $570 million. We also sold 19.5 million shares of common stock, including an overallotment at a price of $17.50 per share. Net proceeds from the equity offering were $327 million. We completed our financing efforts with an amendment and extension of our revolving credit facility. Before the amendment, the facility totaled $800 million and matured in June of 2011. After the amendment, the facility was expanded to $860 million through June of 2011 and $763 million of the facility was extended to March of 2013.

In combination, the transactions resulted in proceeds of nearly $900 million, putting Arch in position to complete the Jacobs Ranch acquisition, strengthen the balance sheet, and preserve liquidity both for current needs and for additional growth opportunities. While the financing activities were the largest items of note on the cash flow statement for the quarter, I believe one of the smaller items is just as noteworthy. Capital spending for the quarter was $34 million, Arch's lowest quarterly capital spend in more than five years. As discussed throughout this year, we will continue to limit capital expenditures while market conditions remain weak. For full year 2009, we continue to expect capital spending of $160 million to $170 million, excluding land and reserve additions.

Turning to the balance sheet, at quarter end, we had cash on hand of $840 million, total debt of nearly $1.9 billion, and a debt to total capital ratio of 47%. We utilized $764 million of cash on October 1st to complete the Jacobs Ranch acquisition. On a pro forma basis, reflecting the payment of the purchase price for Jacobs Ranch, liquidity was $702 million.

Before going through our outlook for 2009, let me briefly mention where we stand with regards to the acquisition accounting for the transaction. We are still very early in the valuation process and the allocation for the purchase price for the acquired assets and liabilities. However, one thing that has become clear thus far in the process is that some value will be assigned to acquired sales contracts. This is due to Jacobs' strong contracted position combined with the fact that PRB prices were near their low point for the year on the date we closed the transaction. Given the relatively short life of the contracts, we expect the amortization of the sales contract value to have an impact on our GAAP reported fourth quarter earnings per share.

With that let me now outline our revised 2009 guidance, which includes our current estimates of the impact of the Jacobs Ranch acquisition. We expect the following -- volumes from Company-controlled operations to be in the range of 121 million to 125 million tons; earnings of $0.28 to $0.43 per share. Our EPS estimates include an expected $15 million or $0.06 per share related to acquisition expenses incurred for Jacobs Ranch and an estimated $16 million or $0.07 per share of noncash intangible asset charges related to sales contract amortization expected to be recorded in the fourth quarter as previously discussed. Adjusted EBITDA in the range of $449 million to $490 million, the EBITDA estimates exclude the impact of the acquisition-related expenses. Cap Ex of $160 million to $170 million as discussed previously and DD&A in the range of $314 million to $322 million. With that, we are ready to take questions. Operator, I will turn the call back over to you.

Thank you. (Operator Instructions). Our first question comes from Pearce Hammond with Simmons & Company.

Good morning. Congratulations on a great quarter. Based on your guidance for 2010, it looks like you have committed, based on your 2009 production levels, about 80% to almost 90% of your tonnage. How should we think about the committed prices for your coal in 2010 by region? Is there significant change from 2009 realizations?

There hadn't been fundamental changes. We didn't really commit much this last quarter a little bit. Our view as we look at 2010 is a lot of our contracts just carried over from either previous quarters this year on into 2010 and from previous years. So I don't think there's a lot of change nor do we have a lot of rolloff. I'm looking at John, but I don't think we have a lot of rolloff at the end of the quarter.

This is John. We don't. We're kind of in the budgeting process right now and planning to see where we see market demand developing. Right now, based on the 2009 production levels at 15 million to 25 million is probably as good a number as we can give. Pricing wise, certainly it's no secret that the domestic steam market is pretty soft. We would expect to see that going into next year. We are somewhat encouraged by what we're seeing on the met side both domestically and internationally. So obviously, we're going to try to target that market as we move into 2010.

Great. Then a follow-up. If you can update on your hedge position for 2010 for diesel, steel, explosives; and, should we see some positive variance on cost when we compare 2010 to 2009?

This is John Drexler. On the diesel front, we're 76%, 75%, three-quarters hedged for the fourth quarter at a fairly significant price as we discussed previously. Those hedges were laid in when market prices were higher. So it's $3.50, $3.75 a gallon in that period. As we look to 2010 as you alluded to, we expect to see benefit. We're roughly 50% hedged, including the impact of the Jacobs Ranch consumption for diesel at a price around $2.15, $2.20 a gallon. So we should see a step down in that front. From an explosives position, we are not in an active hedging position, but we see where natural gas pricing is a large component on the explosive side. So we feel good and as we move forward into 2010 there. So that's kind of an overview of our consumables.

We'll go next to Michael Dudas of Jefferies & Company

Gentlemen, good morning.

Good morning, Michael.

First question, Steve. I understand you went to Coaltrans Europe; spoke this past week?

I did.

Could you maybe share a little bit of some of the sentiment that you faced there, and questions and concerns; and primarily, maybe a little bit more on what Europe's thinking about their future in coal given the dynamics we're seeing in the Pacific basin?

Sure. I think you have to look at it in two manners there. The general theme on the metallurgical side both in Europe and globally was positive -- robust would be too strong a word, but certainly people were feeling that the Pacific Rim was really driving the market and they were starting to see positive signs in Brazil and the eastern and western European steel mills were in the markets as well. Generally a push upward on price sentiments, depending on whether you're talking to buyers or autonomous, they have different views on where that might settle. I don't think anybody knows, but generally positive across the board. In fact, very positive across the board.

On the steam side, Europe has much of the same position that the US has; fairly high stockpiles at a lot of the ports and utilities, probably worse perhaps in Britain than it was in the continent. But nonetheless, there was an underlying tone of real concern of the amount of South African coal that was being redeployed if you want to think about it that way, into India as India just aggressively grows and continues to expand its imports, and that when Europe returned to the marketplace, that South African supply would be limited or perhaps not available. Really depending on freight rates and dollar exchanges, they really saw there would be an opportunity for the US into Europe, but it's premised on their economies continuing to climb out of the hole that they have been in as well.

I appreciate that color, Steve. My follow-up is-- certainly there's been a lot of buzz over the past three to six months ever since last year when you and Peabody and others have been shipping marginal tons of PRB coal westward. Could you maybe -- or someone -- characterize what inning we're in, and the opportunity to potentially getting terminals and rail capacity and a real sense of the Pacific basin looking to the PRB for reasonable tonnage? Is this a three-year, five-year, ten-year situation? Just a little color on that and how far you guys have come along relative to your discussions with maybe other parties and pushing this forward?

I think we're in the top of the fist and the other team has a good pitcher, but we're getting good hits. It's an exciting opportunity of course, the Pacific Rim led by China and India are fundamentally changing the commodity landscape, I think both with their internal leads and external investments. When you do the math, if India really hits its objective, which seems to be a high number but even half of their objectives, of 200 million additional tons of import, metric tonnes of import by 2014 or 2015, you look at what's happening in China. It's going to be a challenge to the traditional suppliers of really Australia and Indonesia. Then you have Indonesia talking about their internal needs and the various constraints that you can see as Australia continues to grow and expand. So we see it as a real long-term opportunity. We think it will develop realistically. I think you have to assume there's a step up of moving out through the Canadian ports, maybe to a 6 million or 10 million ton range. But the real step up would be, then, a development of a west coast port. And that's got to be five years out, just when you think through the permitting and other issues. But clearly, the level of interest the discussions are starting to accelerate. So that's why we say we're in the top of the first.

Thank you, Steve.

Sure.

We'll go next to Jim Rollyson of Raymond James.

Good morning, everyone.

Good morning.

John, you talked about in nice detail, the issues driving your cost savings over the next year roughly with the integration of Jacobs Ranch. When you put that all in, since we weren't privy to what Jacobs Ranch costs look like, can you talk about how you see overall PRB costs trending fourth quarter maybe to start when you first integrate this in and then over the time of you capturing the cost savings, just kind of how that might trend?

Yes, Jim. I think initially, obviously, we implemented during the fourth quarter admin savings, closing of offices, consolidation of shops. As we move through 2010, we're expecting a lot more savings as well, i.e., taking drag lines and replacing truck shovel spreads with them. So we're very optimistic. We think sharing that six-mile property line. We're making one big coal mine that we think is going to be very efficient. So, truck hauls, equipment, capital savings. So if you're modeling our cost, I would expect hopefully to be flat to improving as we move on. Obviously, everybody in the PRB's moving to higher ratios so we've got that challenge. But clearly, that $45 million to $55 million of synergies we think is very obtainable.

Do you think for next year with the fuel savings and all you can get down sub 11, or do you think you are probably still somewhere in the 11s?

Jim, I would be hesitant to say. I think we're in the budgeting process right now. We're kind of working through those numbers and see how everything plays out. Obviously, we've got to look at market demand as well.

Sure.

As we've said, we're market driven. If the market's not there, we're not going to produce and sell the tons. So that's something we're currently evaluating and will make a determination and report on in our fourth quarter call which is typically late January.

Understood. Follow up here on the met/PCI side, you're looking to double volumes next year given the market you guys see. Could you maybe spend a minute talking about relative prices for your grades of met and the PCI, maybe compared to what we're all used to staring at in terms of the benchmark on the high end? Just big spreads, kind of rough gauge of where that might look.

Really, the benchmarks are moving around right now, so I'm a little hesitant because of all our discussions with customers about talking about pricing. What I can tell you coming from second quarter to third quarter, we saw a pretty good step up in met prices. We would expect that in the fourth quarter and as we move to next year. On the PCI coal, it varies. We see market demand out there of about 5 million tons right now. There's usually a $5, $10 spread between those products. Generally, that can change. But we'll ship the 2 million tons, we think, for 2009. The goal is to get to at least four next year. Based on the demand and the pricing we're seeing initially, it tells you that -- to take those opportunities versus steam opportunities.

Thanks. Very helpful.

You're welcome.

We'll go next to Kuni Chen with Banc of America Merrill Lynch.

HI. Good morning, everybody.

Good morning.

Just a follow up on the met coal. As you guys get to 4 million tons next year, is there any significant CapEx that's needed to ramp up that level? If you could just give us some more clarity on that.

There really isn't. It's very minimal. As I said, we're kind of in the budgeting process right now, but I don't think it's a material number. I think we also have the opportunity. We've indicated that we plan to go to 4 million tons next year, and hopefully that's a conservative estimate, but we had the capabilities to go well beyond the 4 million tons as a Company with very little capital, so if the market demand is there, we'll be pushing to get that volume higher in 2010 and 2011.

Thanks. Then more of an industry question. You mentioned that stockpiles could get up toward 200 million tons and perhaps 40 million tons need to be worked down to get back to a more steady state level. As far as the weather goes, if we do have a cold winter versus a normal winter, how much do you think that can contribute to working down that 40 million tons?

A colder than normal winter could work it all off. It depends on obviously how cold. It's a similar question I got at the board meeting last week from our board. I think the way to think about it, or the way I characterize it, is how could 40 million tons work off in a reasoned thought process? And you sit there and say, well, the EIA is estimating just the economy itself could result in another 30 million tons of coal burn or improvement from 2009. As I have listened to various utilities, and it's certainly unscientific for third quarter earnings report, there's a common theme that seems to be developing, that they see a pickup off of awful numbers for their industrial load demand, of 10%, 9%, 11%. I think Duke mentioned this morning 11%. That's a positive. That's almost always driven by low-cost electric, principally coal. So you get a gain there of 10 million, 15 million, 20 million tons perhaps of additional burn and then just normal economic growth if we stay positive, which current forecasts have us, as opposed to the first half of this 2009. So maybe you get half of it through that.

The coal to gas switching, with gas north of $5, really very little switching occurs for economic dispatch purposes, depending on the estimates. But there may have been 30 million tons of additional switching this year. Basically, that all comes back to coal. Then you take the new tran really well. It's not a really big number, but the refueling cycle's a little heavier; a lot heavier in 2010. That could be another couple million tons. Then you have some additional plants coming online in 2010, which could be 5 million to 10 million tons. You go through all the math, and you sit there and say, you don't need any miracles out there, but I think the key components are you need a normal winter, not a mild winter. And you need the economy to be in plus numbers not negative numbers. And if that occurs, we're likely to see the reduction in the stockpile occur at a reasonably brisk pace.

Great. Thanks for the color.

Thank you.

We'll go next to Shneur Gershuni of UBS.

HI. Good morning, guys.

Good morning.

Most of my questions have been asked and answered, but I do have a couple of follow ups, two in particular. With respect to the cargoes that went to China and so forth, I was wondering if you could us give us some color on the feedback as to the uses of coal. I know historically, people have talked about how it's similar to the Indonesia coal, was the feedback positive? And secondly, as part of that, where you estimate the rail costs would be to get it up to Canada to get it out the door essentially.

I'll tell you, we've got good feedback on the first boat. Obviously I think it is working pretty well. As you said, we think it will compete very favorably on a cost and a quality basis with Indonesian coal. Just loading the second boat, obviously we don't have a lot of feedback on that, but we think the coal will work very well. In terms of rail costs to the fort, I can't get into the particulars, but I will tell you that the railroads are motivated to move this product to China as well as India. We're having meaningful conversations not only with customers but with railroads. So we're cautiously optimistic that that's going to be a real strong market force for the next three to five years.

Okay. If I can ask a follow up question with respect to the guidance that was presented today. Just trying to work our way through it. When I look at the EBITDA numbers and look at the depreciation guidance and so forth, can you give us some color on where you expect the tax benefit, I guess, to be in the fourth quarter as well as any other items like other income or trading, how that corresponds into your guidance and so forth, when we contrast EBITDA estimate versus your EPS estimate?

Shneur, this is John Drexler. As we look at the tax provision, we have to look at it for the full year. We now expect relatively modest tax benefit for the year of between $8 million and $20 million primarily due to the impact of percentage of depletion on our pretax income. You can work that back through with where we're at and year to date and kind of the range of expectation for the fourth quarter. As we look for -- what was the other component of your question?

I guess the trading or other income.

Trading or other income. As you look at the other operating income, we did have an increase here in the third quarter. If you look at what we trended in the first two quarters of this year, we were running other income of around $6 million or $7 million a quarter. As Steve discussed in his prepared remarks, we did have one transaction where we monetized a brokerage position that we had out there that we had expected to go physical that resulted in another component of the step up in that other income. So, if you look back to the first couple of quarters, that's kind of the rate that we've been running at with kind of the one transaction here. Within the trading organization, as we've talked about previously, the trading organization is there not to take a significant amount of risk but they to make money to provide value, with the real component of trading giving us more asset optimization, insight into the markets themselves and really helping us across the entire sales platform as we look forward. So hopefully that's some color there for you.

To add to that, our Knight Hawk investment in Illinois continues to perform well and improve so, that'll be a continuing contribution we hope as we move forward.

Great. Thank you very much.

Thank you.

We'll go to Paul Forward, Stifel Nicolaus.

Good morning. On your potential growth from 2 million tons of met coal this year to 4 plus million tons in 2010, we've seen some of your competitors, who have big positions in Central Appalachia also talk about having the capacity in place to expand production or shipments of metallurgical coal. Just wondering if I could get your take on what sort of constraints are potentially out there? Not market constraints but really physical constraints through the supply chain to be able to really bring that coal to the market assuming that the main driver is exports.

Really, Paul, there's not a lot. Certainly on the railroad side, they've demonstrated that they can move the volumes to the ports. In 2008, we exported about 80 million tons. This year, we're forecasting about 55 million tons of exports. So we think there's tremendous opportunity without any capital investment to increase that volume. We think going into 2010, it'll most likely be met. So we're forecasting roughly a 10 million ton increase in our experts for 2010. So I would tell you not a lot. Certainly on the operating side, as I indicated earlier, there's not much capital if any at all associated with us going into met market versus the steam market.

Following up on the first question from Pearce on pricing for next year. In the PRB, you had $12.26 this quarter. And you talked about flattish with your current locked in book of business for next year flattish type pricing. Just wanted a little clarity if I could. Is that applying to the legacy Arch PRB operations should have comparable pricing, or is it helped by the higher prices at Jacobs Ranch that might be overcoming a decline in pricing from your Black Thunder and Coal Creek for 2010?

The fourth quarter 2009, we had the Jacobs Ranch in there obviously. Moving forward, we're basing that 15 million to 25 million tons on about a 40 million ton rate at Jacobs Ranch.

I think on your pricing question, Jacobs did have some solid pricing compared to current markets. So that's a positive as we look forward but fundamentally not a lot of change on either one. Our view is 2010 will likely not be real robust certainly in the first half, and really, as we try to move coal in 2010, we're certainly not active in trying to commit it beyond 2010 if we have to sell it at all.

Hey, Paul, we moved a little bit of volume in third quarter but it was pretty insignificant. So we're trying to be patient. Don't see a lot of opportunities out there right now in the near term. As we go through the budgeting process, we'll determine where we are for 2010.

Okay. Appreciate it. Thanks.

Brett Levy, Jefferies & Company.

Hey, guys. As you look at 2010, can you talk about, with Jacobs in there, what's maintenance CapEx? As you look at some of the other projects that you may opportunistically pursue, can you talk in rough sense what each of those projects would cost incremental to maintenance pro forma for Jacobs?

I think it's a little bit early to talk about where our capital numbers are. We are still in the planning stage. I think suffice it to say, we certainly plan on having an overall capital savings by combining these two coal mines. We'll be able to report on that more in that January call.

But not even a maintenance number for 2010?

There's not a lot of change but it's a distorted number simply because if you think about Black Thunder, we have some equipment parked right now. If you look forward to maintaining the current level of production and equipment it's lower than the mines of full blast. As we move one of the drag lines over to the former Jacobs Ranch property, then park their shovel truck spread, you can sit there and make the argument that, and very legitimately, that if business would pick up in the second half of 2010, and we wanted to expand, if you will, or the market demanded expansion, then we would just simply restart that parked equipment. So by moving the drag line you end up lowering cost and parking equipment, so the maintenance gap is virtually nothing additional for Jacobs for a period of time, but it's somewhat distorted because of the current market levels or production levels. Did that make sense?

Yes, I was actually looking for a maintenance number kind of as you see it.

It wouldn't change from 2009, and I can't remember the number off the top of my head as we sit here today unless something comes out of the budget that I'm not anticipating.

Brett, this is John Drexler. Historically, we've said in many different forums that maintenance CapEx for our Company typically, over the last several years, typically, has run around $200 million to $250 million. As you look at this year, we're coming in very much at the low end or below that bottom end of that range. And given these market conditions, as we look to next year, we'll have a very critical eye, but I would be willing to say it's safe to assume that at a minimum we'll be at the low end of that range. Remember, we have talked about, we are building a prep plant at our West Elk operation. That'll be next year as well. Suffice it to say, we expect on a maintenance capital basis from where we stand now, given these market conditions, that we're going to be on the low end of our traditional range.

Thanks very much, guys.

We'll go to [Andre Benjamin] of Goldman Sachs.

Good morning, guys.

Good morning, Andre.

I just had a quick question. If I could get a bit more color on the western Bit region where you guys actually surprised us by selling more than 1 million tons more than you did last quarter. However that 4.6 million tons is below the 5 million to 5.5 million run rate you've done last year. Just wondering if you could give a little color about how we should be thinking about fourth quarter and then going into 2010 as you work through some of the mining conditions out there.

Going from second quarter to third quarter, obviously we had three longwall moves in the second quarter, all those in Utah. We didn't have any in the third quarter, so that was part of that million tons. At the same time, we had throttled back West Elk due to the quality issues out there from an annual run rate of about 6.5 million tons to about 3.5 million to 4 million tons. So we're in the planning stages right now. As we move into next year, we are building the preparation plant at West Elk, which will not be operational until some time earlier in the third quarter of 2010. I think probably that 4.6 million is probably a decent number moving into the year, and then we'll have to see what the back half of the year looks like in terms of market demand.

I guess to expect -- given that you kept total costs pretty flat quarter over quarter, despite producing the 900,000 more tons, we should expect a similar condition next quarter, as well?

I think if you are modeling fourth quarter, I think the costs you see, obviously, if we're going to stay in western Bit in that $26 to $28 range, we have to have a pretty good fourth quarter. We're expecting to have that. I think modeling PRB and modeling Central App, if you use kind of the numbers you're seeing in the third quarter, that'll get you pretty close.

I guess one last question. Realizations took a little bit of a step down. We were under the impression you were kind of in the worst part of the patch last quarter. So if anything, I would have thought that if you kept selling the same quality coal at the worst, the realization should have been flat. Is there any color on why that went down? You think it's a market condition?

Yes, I think it's primarily customer mix.

Thank you for the color.

Thank you.

We'll go to Jeremy Sussman of Brean Murray, Carret and Company.

Hi, good morning.

Good morning, Jeremy.

Good morning. Clearly you are still busy integrating Jacobs Ranch, but it sounds like everything's going real smoothly there, so I'm going to ask you about your growth strategy going forward after that.

Right now, we're looking at the marketplace recovery. I think we talked a little bit about it. If you really think through the potential for the Powder River Basin expansions into the Pacific Rim, we see that as a real opportunity in intermediate term. We continue to see success in our Illinois basin operation. We have a little under 400 million tons of reserves there, I should say or investment in Illinois, in The Knight Hawk operation. That's down the road in my mind and I'm probably a little bit more pessimistic than others in the expansion there, but I'm confident that Illinois will become a major supplier stepping in along with the PRB and to the shortfalls that are developing, if you will, in Central App's production ability. So we see that. We continue on. We are always looking overseas. We just never find anything that we're willing to write the check for. And so that would probably keep us busy for the next couple years, I guess. And we do continue to believe that there will be further rationalization in the industry as we move through the next two to three years. And as Arch has demonstrated many, many, many times in the past, we look at virtually everything, but we're very diligent, if you will, on what we choose to buy and how it fits into our operation. But we'll continue down that opportunistic path, too, because we see potential in every one of our major basins that we operate in.

Great. Just as a follow-up, you mentioned in your prepared remarks that you could see inventory levels reaching 200 million tons by year end. Could you just give us a sense if that is pretty evenly spread in terms of an inventory day basis throughout the various regions or kind of what's your thoughts about that?

Sure. It's interesting. There's been some articles on it that, frankly, I don't think have been quite accurate. If you look at the Powder River Basin, we entered 2009 with pretty high inventories, and as the year developed, basically, Powder River Basin matched demand and the inventories didn't grow. They certainly didn't come down, but they more or less stayed the same. Where we saw the growth was in really the Eastern inventories. And I think that continues to be one of the areas that we've seen going through maybe the third quarter here. As we have entered the fourth quarter and looking at some of the early weather, we may have hit the high water mark on total inventories during this month and with the decline in production notably in Central App, but elsewhere, and if weather just kind of holds the same, we probably see inventories start to decline as we move through the end of the year.

But who knows what the weather's going to be. Speaking of that, though, if you look at the Powder River Basin as an example if we hadn't had one of the mildest summers on record, across pretty much the entire US, we would have seen inventories actually come down given the production rates and demand that were there because really PRB didn't get displaced very often by natural gas. We certainly saw some of that in Central App. So we are sitting there saying, the worst case is maybe we entered the end of the year with 200 million tons. Probably we think internally it'll be a little less than that. We probably hit that number or very close to it here at the beginning of October, but if you're sitting in St. Louis, we just had one of the coolest, rainiest Octobers ever, so demand's up a bit. We're seeing it in some of our other utilities as they announce third quarter. Obviously, anybody who's following the snow storms in Denver, Colorado, Wyoming, are seeing what looks like it might be an early start to winter, which would be a good thing.

Great. Thanks.

Thank you.

We'll go to Michael Goldenberg of Luminus Management.

Hi. My questions have been asked, thank you.

Alright, Michael. Thank you.

John Bridges, JPMorgan.

Good morning, Steve.

Hi, John.

(inaudible) Denver was enjoying the early start to winter yesterday.

We had people trying to get in and out and they really enjoyed it.

Any comment on how much met was in the mix in the third quarter? We're just trying to make our models work.

We had 500,000, John, in the third quarter of met. So I think through October, we shipped about 1.5 million tons of met, and we're going to hit that 2 million ton level, which is really the upper end of the range that we gave during second quarter call.

And is there a mix that -- you're including PCI in there as well, presumably?

That's correct.

So, are we talking 50/50?

No, it's about 25% PCI, the balance being met.

Just wondered how much other income you were factoring into your estimate for 2009?

It would be more of the traditional level of the first half, first quarter. Other income's lumpy. When we sell assets or sometimes you gain, sometimes you lose. I mean, it's part of the ongoing business but it's certainly lumpy as we look forward. It's almost impossible to project, though we usually use just kind of -- I'll call it a running average.

Okay. Congratulations on the results. It does sound as if you've turned the corner. Well done.

Thank you.

We'll go to David Lipschitz of CLSA.

Good morning, good afternoon, whatever time it is right now.

Hi, David. How are you?

Good, how are you? In terms of -- you have the open commitment still available for next year. If prices stayed where they are right now, would you keep those tons in the ground, or are they still in the plants?

It'd be a mix, David. When you look at the operation of the coal mine, particularly the big Powder River Basin type mines, but really all the mines, there are certain production levels that are natural economic breaks. We would adjust to the marketplace, but there would be some tons that would be sold. I had an interesting discussion overseas, since someone brought it up, where it was a merchant plant. They told me they were totally uncommitted for 2010 or unhedged because they had had such terrible business in 2009, they just didn't know where they were going to go. So, again, it comes back to that weather and the economy question. So I liken it to say that if we have a normal winter, let alone a colder than normal winter, I think the industry gets a double benefit in the sense that natural gas pricing would likely stay fairly positive compared to where it's been. Obviously burn would be up as a result of that and then throw the economy on top of it. Now, if we have a mild winter, you get a double negative. That's kind of where we're sitting. It would end up being a mix of some sort.

As of right now, based on 2009, where you are now, that means you wouldn't have any more production cuts for next year?

Again, we're not going to commit one way or the other. I think what we have demonstrated time and time again since, over the last decade, is Arch will match market demand and if market demand moves up, we'll match it. If it goes down, we'll look at our mines and say what's noneconomic.

Just a final follow-up. In shares outstanding, what is the total shares outstanding right now?

Right now, we're at 163 million shares outstanding, give or take.

Thank you.

Thank you.

At this time, I'll turn the conference over to Mr. Steve Leer for closing remarks.

Let me close today by really reemphasizing that our mines are running well. The Jacobs Ranch integration is going very, very well, and we're seeing positive signs on the economic recovery. As we've listened to other calls from our customers and others, you're seeing a common theme that their industrial base while certainly not back to normal have come off the bottom, which we think will bode very well to the coal industry. We would argue that coal has really taken a brunt of -- or coal generation in the US has taken a brunt of the economic downturn with electric generation down about 4%. I think that may be the highest since they've been keeping records, or certainly the last 50 years. But coal generation is down 10% or so, and as we see the economic turn around if that continues, we really see positive implications that coal will probably get more than its fair share on the upturn, just as it took more than its fair share on the downturn.

So thank you for your interest today. I think we have Arch very well positioned for the next market cycle as it plays out over the next 6 to 12 months on the upside of it, and then hopefully goes well beyond that. So we're very pleased and we look forward to talking to you again, I guess it would be in probably late January or early February when we close out the year and talk about 2010. So thank you.

That concludes today's conference. Thank you for your participation.