Arch Resources Inc (ARCH) 2010 Q1 法說會逐字稿

Good day everyone and welcome to the Arch Coal, Incorporated first quarter 2010 earnings release conference call. Today's call is being recorded.

At this time, I would like to turn the conference 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 today. Before we begin, let me 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 are described in more detail in the annual and quarterly reports we filed 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 would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that replan to discuss this morning at the end of our press release, a copy of which we have posted in the Investor Relations section of our website at Arch Coal.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 VP and CFO. Steve, John, and John will begin the call with some brief formal remarks and thereafter, we'll be happy to take your questions. Steve?

Thank you, Deck, and good morning. First, I'd like to express our deepest sympathies to the families of the fallen miners in the accident two weeks ago in West Virginia. As fellow citizens and neighbors within the mining community, we would like to recognize and honor the contributions that those miners made serving our nation.

In the first quarter of 2010, Arch generated $131 million of EBITDA and reported adjusted earnings per share of $0.03, which excludes non-cash sales contract amortization. As expected, weak steam coal market conditions from 2009 carried over into the first quarter of 2010. However, we were able to generate $61 million in free cash flow during the quarter, on par with what the Company generated during the full year of 2009. The cold winter weather this past season, along with the hot met coal market, has improved our outlook for 2010 considerably since our last update. As a result, we are raising our full year earnings guidance on the expectation of increased met coal sales opportunities and improving PRB steam coal markets, particularly as we progress through the second half of the year.

Met coal markets have strengthened substantially on growth in the global steel demand, but also on the same supply constraints that led to the run up in 2008, namely infrastructure and weather-related challenges in Australia and continued supply pressures in central Appalachia. That's why we think US coal exports can reach 75 million tons in 2010, up more than 15 million tons from 2009, with seaborne met coal sales driving much of that increase. That's just 7 million tons shy of 2008 levels when steam and met coal markets were extraordinarily robust. Also embedded in our export forecast is some modest growth in US steam coal exports during 2010, with additional gains in 2011 as European demand recovers. In fact, we believe that demand will be strong for US met and steam coal in the Atlantic basin in coming years as European and Brazilian demand grows, as supply from south Africa is increasingly pulled into India and China, and as Columbian begins to find a new home in the expanding Asia Pacific market.

On the domestic steam front, we expect meaningful improvement in coal demand in 2010 compared with a year ago. Generation is up 2.6%, year-to-date, versus the record 4% decline suffered in 2009, and we are forecasting US coal consumption to grow by more than 6% this year. In particular, cold weather and a slight pick up in industrial activity helped reduce coal stock piles from the record 203 million tons last November. On a regional basis, PRB stocks are close to their normal level at an estimated 58 days of burn at the end of February and represent the lowest stock pile levels in the nation on a days of burn basis. By contrast, stock piles in Central App and Western Bit remain higher than national average, but lower than they were at the beginning of the year. We also expect a smaller build in stock piles this shoulder season compared to prior years, and with continued improvement in the underlying industrial economy, and more normal weather patterns prevailing this year, we should see stock piles drawn down further. As a result, we expect stock piles nationwide on average to exit the summer burn season at target levels.

Of course, one concern is natural gas. In 2009, we saw what we considered to be a significant displacement of coal by natural gas, totaling 25 million tons by our estimate. In 2009, natural gas prices for the year averaged $4.16 per million BTU, but at times were during 2009 gas was well below this average. In 2010, we don't expect incremental switching to natural gas to reach 2009 levels, although on the flip side, coal may not gain back all of the share it lost in last year. If natural gas prices remain at or below $4. It is also important to remember that PRB is cost advantage versus natural gas. Little if any PRB tons were displaced in 2009 and is highly unlikely that any will be displaced in 2010.

Turning to supply, EIA estimates that coal production has declined 5.2% year-to-date with nearly all regions down from the reduced levels of 2009. Central App is leading the decline off by 10% so far this year. Our production forecast for Central App is between 160 to 170 million tons in 2010, representing roughly a 70 million-ton step down from the 235 million tons produced in that region during 2008. After this our expectation that Northern App will be down versus 2008 levels and our belief that 15 million tons or so could migrate from steam markets into met markets from Northern and Central App, and you are talking about a 90 million tons of high BTU Appalachian coal disappearing from the steam coal marketplace over the span of just two years. As a result, the call on other coal regions, namely the PRB and to a lesser extent the Illinois basin, to replace all of that Eastern coal will be very significant, representing more than 120 million tons of PRB work to replace all of the lost Eastern BTUs. Additionally, new plants coming online in 2010, '11 and '12 should generate incremental coal demand of nearly 40 million annual tons. Suddenly, markets that seemingly were materially oversupplied at this time last year are trending toward being undersupplied by the end of 2010. In summary, Arch is strongly positioned to capitalize on such trends with our increased leverage and our meaningfully unpriced sales position in 2011 and 2012.

On that note, I will turn the call over to our President and COO, John Eaves, for a discussion of Arch's operating performance in the first quarter and updated outlook, including our plans for increased met coals in 2010 and '11.

Thanks.

As Steve mentioned we are seeing positive momentum in the met coal markets. As a result, Arch has increased its met coal targets for 2010 and now expects to sell between 6 to 7 million tons into the met and PCI markets this year. During the bull market of 2008, Arch sold roughly 4.5 million tons as met coal and 2010 is shaping to be even stronger. We plan to raise our met coal shipments over the remaining quarters of 2010 through placement of our open metallurgical coal volumes and by shifting coal that was previously planned as steam coal sales into more profitable met and PCI markets.

This shift has three positive benefits. First it increases our profitability in 2010. Second, it establishes Arch as a growing participant in an important market segment; and third helps reduce the stock pile overhang in Central App as steam coal demand remains relatively weak. Additionally we have plans to expand production of met coal at Cumberland River complex in Central App to increase our total met coal capabilities to approach 8 million tons on an annualized basis by spending just a small amount of capital. Our current plan is to spendless than $10 million to bring online additional met coal production which should benefit 2011 if the market remains strong. As for the recent met coal sales we sold 1.5 million tons for 2010 delivery in the first quarter at average net back mine prices in the triple digits. New sales have moved up as well, and we are now booking coal in a met market at average net back prices in the 140 to 150 per ton range. To date, we have more than 4.5 million tons of met and PCI coal committed.

Turning to steam coal markets, we are seeing initial positive signs from the PRB where prompt quarter pricing moved up more than 40% from last fall's bottom and more than 25% since the beginning of the year. Against this backdrop, Arch committed 5 million tons of PRB coal for 2010 delivery at price premiums to the prevailing forward curve. These commitments effectively sell out our open volumes in 2010, although we still remain some price exposure through the market index tons. We also have signed agreements for less than 5 million tons of coal in 2011 at price premiums to the prompt year forward curve, but have chosen to maintain a very sizable and committed position in those outer years. Arch now has a small amount of tons open in 2010, which represent primarily met tons and roughly 10 million tons committed but open the market based pricing this year.

In 2011, we have between 65 to 75 million tons uncommitted and between 100 to 110 million tons uncommitted in 2012. In addition, Arch has roughly 20 million tons committed, but not yet priced in each of these outer years. Looking ahead we will continue to remain patient and selective in commiting our open tons in future years. Given forecasted expansion in the nation's industrial sector and additional opportunities for increased exports for the nation's manufacturing and coal sectors, we expect steam coal markets to improve meaningfully as we approach 2011. Most importantly, we want to preserve the value of our low cost reserve base for future periods when market conditions are likely to be stronger, and we want to insure that we obtain an adequate return on our capital employees. We believe this strategy is in the best interest of our shareholders.

On the cost front, our mines achieved a solid operating performance in the first quarter. I am pleased to report that we further improved our cost structure in Central App and the PRB versus the fourth quarter. Moreover our Western Bit operations performed in line with our expectations given the long wall move during the quarter. In the PRB we further improved our cost beyond the step down we had in the fourth quarter which reflected the realization of the synergies from the Jacobs Ranch transaction. Looking ahead we expect to build upon this performance through the year.

In Central App, reported cash costs were $47 per ton in the first quarter as a larger percentage of the production came from our lowest cost mines in the region. This cost figure also is likely represents one of the lowest cost structure of any operator in Central App. Going forward, maintaining this strong cost performance will be our goal, but increased met opportunities may result in cost structures increasing marginally. In Western Bit, first quarter operating costs rose compared with the fourth quarter reflecting both lower volume levels in the region, giving weak steam coal demand and a long wall move during the quarter. Looking ahead we expect to maintain our operating costs in the $25 to $27 per ton range for the full year.

Let me end by congratulating our operations for achieving a strong start to safety and environmental compliance this year. We're on track to repeat or even beat our record breaking year in 2009. Now and always, we remain focused on continuous improvement in safety with a goal of operating the world's safest and most environmentally responsible coal mines. Eight of our subsidiary mines or facilities achieved a perfect record for both safety and environment compliance in the first quarter and we absolutely believe that Arch, as well as the coal industry as a whole, can ultimately achieve our collective goal of zero incidents in our nation's mines.

With that I will now turn the call over to John Drexler, Arch's CFO to provide an update on our consolidated financial results and guidance for 2010. John?

Thank you, John and good morning, everyone.

I would like to begin my remarks by addressing the quarter's cash flow and our quarter end balance sheet and liquidity position. From a cash flow perspective, the most noteworthy item was our capital spending which totaled just $32 million. As we indicated in or January call, we expected first quarter results to be the weakest of the year and managed our capital spending accordingly. As a result, we were able to generate free cash flow, in the quarter, and pay down our debt by $24 million. This further demonstrates that our disciplined capital expenditure focus, combined with our existing reserve and operations portfolio, will generate meaningful free cash flows as markets continue to strengthen. At the end of the quarter, our debt totaled just under $1.8 billion, and the debt to capital ratio was 46%. Quarter end liquidity totaled approximately $780 million.

Next, I'd like to briefly discuss the recently passed health care reform and the impact on Arch. The quarter's results do not include any adjustment to our active or retiree health care liabilities for the law. Based on our analysis of the law, which admittedly is still on-going, we do not anticipate that it will have a material impact o our financial statements in 2010. One other item to note, of the $5.9 million loss reported in the income statement associated with the change in fair value of coal derivatives and coal trading activities, more than $4 million was attributable to mark to market losses on risk management positions that did not qualify for hedge accounting. We entered into these to protect the down side on a relatively small portion of our unpriced position. As markets have improved, against those down side protected positions, we have recorded the mark to market losses in the trading line. The remainer of the loss related to the trading operations as the market moved against the positions we held in our book.

With that let me now discuss our outlook for the remainer of 2010. Given the strength of the met markets and the improvement in PRB markets, we are increasing our earnings guidance for the full year. We expect the following. Volumes from company controlled operations to be in the range of 147 to 155 million tons, EBITDA in the range of $700 million to $790 million, adjusted earnings of $1 to $1.40 per share. The adjusted earnings per share estimates exclude an expected $35 million or approximately $0.14 per share of non-cash intangible asset charges, related to sales contract amortization as previously discussed. DD&A, excluding sales contract amortization, in the range of $372 million to $378 million in capital expenditures including reserve additions of $315 million to $335 million. The CapEx estimate includes the payment for the lease of the Outer Creek tracks from the state of Montana of $86 million along with additional land purchase requirements and incremental capital to expand met coal sales opportunities.

As both the steam and metallurgical coal markets strengthen meaningfully, we continue to be well-positioned to generate value. We expect free cash flow over the remainder of the year will be significant and we expect that our on going commitment to capital discipline and the market driven strategy will continue to create additional value well into the future. While we will continue to evaluate all potential uses of free cash, our immediate focus will be to continue to strengthen the balance sheet. We will execute on our strategies while maintaining a vigorous focus on our commitment to safety and environmental stewardship.

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 is from Shneur Geshuni with UBS.

Good morning everyone.

Good morning, sir.

A couple of quick questions. You laid out an interesting forecast with respect to Appalachian production contracting and tons moving into the met market and so forth. I guess the question that needs to be asked is are you seeing any test burns for pattern basin to go forward or move east into the eastern market? And, secondly, do you have any interest in investing in the Illinois basin at this point given how you see the market play out the next couple of years?

This is Steve. The utilities in the east, I think, over half or roughly half of sales are now east of the Mississippi. So they're, there's been a lot of previous test burns. Right now, as we look forward, we are certainly seeing some conversations develop, not so much for test burns but increased percentages, and I think the utility base is getting very focused on what is happening in Central App, and the concern is rising but they do have the luxury still of relatively high stock piles.

So we can see it all developing, we think that the experience levels of our utility base, I'm sure there's a few test burns going on out there for some folks who have never done it. More importantly, we're starting to see people thinking about upping their percentages at the moment. I think it is playing out as we expected and our 160 to 170 million tons of forecast for Central App, we've had that number out there for a while and really as we look at what's going on in Central App, I think the pressure is more on the upside rather than the downside.

Turning to Illinois, Arch has operated in Illinois probably continuously or almost continuously for 40 years and we have about 375 million tons of low chlorine reserves in Illinois. We are currently permitting a major Illinois mine. We don't have any plans of bringing it into production immediately but as I look at the Illinois basin I really do think it is going to be a contributor to stepping into the shortfalls in Central App. Frankly, I think it's behind the PRB and I just look at it -- there are some developments going on, but the realistic view of it is to put in a 5 or 6 million-ton a year Illinois mine. If we started today on the permitting process, let alone that's assuming you have all of the reserves in place, it would take us four to five years and $250 million to $300 million to bring that mine on line in full production.

So it's not a real risky forecast when you sit there and say, all right maybe there's another 10 million tons of production that will come on line in Illinois basin, that is in play at the moment, but the next increment's probably 45 years away and costs a lot of money. So, we are preparing for it. I think several others are preparing for it. I have often said I see it in the next coal market cycle, not the one that we seem to be entering at the moment.

Okay. And I guess a follow up question. I was wondering, since there's two parts of the business, I was wondering if you could remind us of your mix between high ball D and PCI? And also if you can talk a little bit about price realization in Western. Are you expecting it to go up in the third and fourth quarter once the new facility comes online?

Yes. This is John Eaves. I would say on the PCI met, we have about 1.5 to 2 million tons of PCI in our overall mix. As I indicated in my opening comments, we're forecasting about 6 to 7 million tons total in that PCI, so hopefully that's a good number. We hoped to do better than that, but clearly we see that market strengthening right now and want to participate.

In terms of Western Bit, there was a small step down in the pricing from fourth quarter to first quarter. I think that was sales mix. We had a reduction in volume about 700,000 tons. Quite frankly, we had some open market tons that didn't get sold and we see that market right now a little soft in the short term. We think it will strengthen as Central App supply continues to decline. We think they will look to PRB as well as Western Bituminous and we'll see that price strengthen. We have seen that in the last three market cycles. I think it depends on how quickly the market materializes for the balance of the year, whether we sell those uncommitted volumes that we have for the balance of the year.

Great. Thank you very much.

Thank you.

We will take our next question from Jim Rollyson with Raymond James.

Morning everyone.

Hey, Jim.

Steve or John, either one, following up on the met question, John, you talked about the Cumberland River opportunity getting you up to 8 million tons, and it seems like everybody is kind of rushing to boost met production or cross-over tons given the market we are looking at right now.

Curious on your thoughts on how the market plays out, number one, do we have an over-reaction in supply or is the market just short enough, tight enough that is not really going to happen? And number two, things were to soften from the demand side or whatever reason, do you think everybody is diligent enough to real that back in if prices start to turn the other way?

Certainly on the met side we are seeing a strengthening in the market. We sold 1.5 million tons during the first quarter, a triple digits and we continue to see that pricing in demand move up, and prices in the 140 to 150 range. We are not seeing anything that would indicate a softening in that market.

In the event that it did, we think we have got a cost structure in Central App that allows us to be competitive in the steam market as well as the met market. And being market driven, if we saw that market start to soften a little bit, we would pull back, but currently we are not seeing anything that would indicate that.

I haven't either. Just curious how the market plays out if it did happen.

As a follow up on the PRB side, maybe you can talk about where you sit today in terms of percentage of capacity, in terms of production, how you see that playing out going forward given the strengthening pricing outlook?

Clearly, we have some additional capacity out there. We've had some idle equipment for a while. We continue to be patient in our sales. We sold 5 million tons for 2010 which basically takes out of the open market although we have 10 million tons priced on the index. We are really not willing to crank up that capacity until we see a sustained demand and improving market.

The pricing we did was fine, but we think there's a lot more room on the pricing side as we move forward, and we want to be patient and take advantage of that. That's why if you look at our 2011, 2012 uncommitted position, we have such a large position, because we do see that market improving. 40% improvement since fourth quarter, and plus 25% this year. So directionally it is going in the right spot. But we think there's a lot more room for improvement.

Fair enough. Thank you.

Thank you.

We will take the next question from Michael Dudas with Jefferies.

Good morning, gentlemen.

Hi, Michael.

For either Steve or John, you illustrated some pretty favorable arguments toward the tightness in Central App going forward, maybe you can refresh us on where you stand with regard to the situation and how your views have changed the last three months or so given what the EPA has put forth from the permitting and quality water standards and maybe potential on decision shortly, are things going to get, in your view, much even further difficult for Appalachian production to allow further Western coals to fill the gaps?

That question and even ties back to Jim's questions a little bit is clearly, I think the regulatory environment in Central App is getting more difficult and more challenging for all operators. At the end of the day, those sorts of things do impact productivity and production numbers. As we look at the permitting situation, the conductivity rules or the proposed rules, although you are living by them now, they're extraordinarily challenging and really don't think many if any new surface mines will be able to meet that number. Perhaps there will be some adjustments as we find a way through that forest, but right now I would say that we have always been -- had the view that permitting was going to be very difficult and that a few permits would be through the system.

We still believe a few surface permits will be through the system, but that number is fewer than in the past. I think with the terrible tragedy in West Virginia, we have to assume that the regulatory environment from safety perspective is going to be very rigorous on inspections, and while mines might pass an inspection with flying colors, nonetheless it does impact productivity. The easiest example I can offer is if an inspector wants to look at a continuous miner and for whatever period of time he is looking at it, you pull it out of production and he inspects it. That might take an hour, it might take a shift. But -- in any single mine that may not show up in the numbers, but -- so nation -- for the industry it has an impact. So we see, the production numbers and the challenges for production numbers for all of us, and it is built into our view and guidance, that there will be very difficult, it will be very difficult for the industry to raise their numbers moving forward.

As far as the EPA ash -- that's really a storage and utility question. It could raise, and probably will raise storage cost. It's hard to say exactly what the EPA is going to do and our rumors are the same as what you have read and seen; there may be a multitude of approaches, but a more challenging view of wet storage than dry storage seems to be where consensus people are thinking, but we have to wait on that. Whatever it is I am sure there will be a lengthy implementation period if they're converting wet storage to dry or something like that.

I, personally, do not think they will go to hazard of waste designation, but that's a personal opinion, but not any knowledge from that.

Thanks, my follow up is maybe a little bigger picture question for you Steve or John. As you continue to rebuild free cash flow and the balance sheet after your acquisition last year, and looking into the market we've seen quite a bit of activity in the natural gas side, a lot of coal companies very interested in the emerging shale plays, what does arch think about natural gas relative to investment going forward? Is it something the board has considered at a very high level basis, and would you anticipate the next major investment in the next twenty-four months would be in to coal mine or gas fields?

We've debated this for fifteen years, at least. The focus of Arch is, we think we good coal miners and we understand the coal business and coal mining. At the board level, we've had the conversation that if investors want to diversify away from coal they will do so in a natural gas play or whatever other play they're looking for. They don't expect us to do it. So I would really say we will focus on coal.

I think if you look at some folks they have looked at gas and if you have a very gassy mine and you are degassing it anyway, which is something we've strenuously tried not to do from a safety perspective, although we do have a few gassy mines, for the most part our reserves are focused on acquiring mines with less gas tendency than those. But, if somebody has done that to degas the mine, if they can recover that gas profitability or economically, I think that makes sense. You can see Arch or any producer out there do that. But, we will leave it to you guys to diversify your portfolio. We are most likely a coal play.

Appreciate your thoughts. Thanks, Steve.

We will go next to Brian Singer with Goldman Sachs.

Thank you. Good morning.

Morning, Brian.

A couple of follow ups. First on the met side, you had indicated that you had sold some of your met for $140 to $150 a ton at the mine, and I wondered if you could add some more color to the specific quality that that implies or maybe that's the average quality of your overall portfolio?

Our quality is typically that high vol, low A, high B range high ball coal. So, that would be the pricing for that coal; $140, $150, we continue to see that demand, that price improve. It is likely over the next couple of weeks that we committed about 4.5 million tons that that number would move up quite a bit.

Thanks. My follow up, you idled drag lines last year in response to market conditions. Can you refresh us on your estimated total PRB production capacity, and how much capital would be required if demand warrants say that all that capacity be brought on line?

We think we can run the operation in that 140, 150 production range if all the equipment was being utilized.

How much capital would be required to bring that back?

Really, not a lot of capital at all. We'd have some repair and maintenance expenses as we brought the equipment back on, but we hope the volume for the most part would offset those increased expenses.

Great. Thank you.

We will go next to Brian Gamble with Simmons & Company.

Good morning, guys. Follow up on the met real quick. The open position at the mid-point of your current guidance implies roughly 2 million tons. Can you break that down by quality?

2 million tons is the right number and it's typically all going to be that high vol met product.

So there's no BTI in that at all?

Most of that will be met, the way we see it right now. Obviously as demand continues to increase, you could see some opportunities present themselves but right now we see a majority of that being high vol met.

Okay, great. As far as the expenditures and bumping it up at Cumberland River to get you to 8 million tons, is that something that could be done in 2010 or is that you strictly saying you could get that 8 million in '11?

Annualized, we hope to get there toward the back half of this year, and that's mine development at that particular division, but clearly by the time we got to 2011on an annualized basis, we should be in the 8 million-ton range.

One quick follow up on the PRB. You mentioned last quarter talking about the possibility of roughly 5% cost improvement this year, is that still about what we are seeing? I know we saw Q1 prices behave themselves quite well, is 5% year-on-year decline in PRB pricing a fair assumption?

I think right now it is. We hope to see improvement there. We have 10 million tons that are going to be indexed and we should see the benefit of that as we move throughout the year.

Appreciate it, guys.

To add to that question, not all of our contracts, but on the index tonnages, a majority of them probably, lag about a quarter, so as the market changes, the index tonnages will lag whatever that change is by about three months.

Thanks, Steve. Appreciate it.

We will go next to David Khani with FBR Capital Markets.

A lot of the good questions have been asked. I'm going to ask you more of a speculative question given that we are all trying to fig this out. Where do you think the areas in which they're going to target for some of the safety regulations coming out of this whole unfortunate mine disaster?

That's a very difficult question and it comes down to, David, that as the investigation progresses, and if they find something that can be changed or should be changed or some specific causes, obviously, I would anticipate that will be the focus of the regulatory environment. Of course, with Congress you never know, you can certainly get off on tangents, but it is going to be additional monitoring for sure. Whatever can be done to accelerate the final implementation of the Miner Act I will probably be pressed.

I think inspection regime -- the big mines virtually are inspected everyday, and we would like all safety rules to be a black and white issue, but the reality of it is a lot of it them have interpretive numbers in them. I mean there's gray areas, and what is the correct interpretation of too much dust or too much something on the floor. And as you look at that, I think the pressure to be very aggressive in that arena, the interpretation will certainly be there. We are anticipating that. So that's where I come down to -- in this existing mine, you will see a lowering of productivity as we move forward, just from those kind of activities.

And if I remember correctly, we saw somewhere around 5% or so kind of productivity declines from the Miner Act and all of things that came out of Sago, and Aracoma, and Crandall Canyon, do you think that magnitude of 5% is a decent ball park to think about?

I don't really know what the number is and it's just speculation, but it is certainly some number above 0, and I think for a plug 5% is as good as any other number out there. But, it really depends on what comes out of the investigation, and then the time frame that new regulations get implemented in but, the pressure is going to be there.

So I think everybody should think about at least some number, and it is, coming back to again one of the the previous questions on met coal, when you think about it, met coal virtually is all deep mines or is all deep mines, and a lot of times difficult end seam mines, so the numbers there might be even higher just because of the way it impacts your productivity in those very low seam mines.

All right. And so, they won't let you get a permit on the surface and they're forcing you underground. Yet you will have all of these issues coming at you underground.

I think that's says buy PRB coal, doesn't it?

I figured there was tag line for you here.

Could you also, flipping around, there's obviously a lot of debate about the, a little bit of excess Illinois basin versus some excess PRB, where it finds a home and why do you think that pure B is preferential to the Illinois basin inside of Central App? What gives you that sort of comfort?

You can start with -- obviously the scrubber build out has continued, but not all the scrubbers are built. So you have the sulfur question and in some cases, certainly not as large as it used to be. Chlorine is an enormous issue in high chlorine content of some of the Illinois basin coals, but it really comes down to simple math.

It is -- if you think what, if you look at Illinois basin, it is at a production level about what it was in 2005. And there's certainly some new mines that are coming online in Illinois basin and let's say it is, say it is 15 million tons coming on over the next year. I think it might be less than that. But, let's give them 15 million tons, and then you sit there, and again, I mean we know from practical experience, that the permitting in Illinois basin has slowed down. It hasn't stopped like it has in Central App, but it has become a slower process or lengthier process, and you look at the capital requirements, and if you take $250 million for 5 million tons of production, and it takes you four to five years to bring it online to add another 10 million tons, we are talking about $1 billion to add 20 million tons.

We are asking $2 billion. It is not that the capital markets aren't there for people, but I think that those kind of expenditures aren't happening at the moment, after we get past this initial surge. So, I don't think it is a high risk projection to sit there and say we are five years away from Illinois going beyond this next 10 or 15 million tons of production coming online. So, yes, and then you throw in chlorine and then you throw in the other concern, and this is as a producer, we have a joint venture in Illinois, and mine there for a long time.

We look at the competitive strength of Illinois versus the PRB in third markets and versus Pittsburgh Eight in certain markets, and it is literally in the middle and can be squeezed in certain circumstances. Before we risk $250 or $300 million of our shareholder money, we would like to have some more assurety of the development market and we see that five years away.

We will next our next question are from Mark Liinamaa with Morgan Stanley.

With regards to the 65 to 75 million tons you have left open to sell in 2011, can you talk a little bit about your pricing strategy given it is fair so say that your took more than your fair share of the pain in the down turn, how you balance potentially the ability to gain share in the east versus wanting to get some of that put to bed? Thanks.

I will jump in, and let John jump in afterwards if he wants, but we see this as we've seen the Potter River basin market is our major production area but we have unpriced tons or uncommitted tons in all of our regions. We have spent a lot of time analyzing the past three market cycles over the last ten years, and, as we see it, there's a point in the cycle where layering in tons for future delivery makes a lot of sense. We are not at that point right now.

We think we are in the beginning stages of the market cycle, but as we see a little more strength in the market, you will start seeing us layering in. We don't feel we have to layer in anything. In any short period of time, but over time, we will start commiting certainly 2011 and '12 and '13. There is a lot of interest in '11, '12 and '13, and it is growing. The high stock piles of all of our customers almost entered the year with have come down substantially, have come down more for traditional PRB customers than Eastern customers, the issues in Central App are taking hold and starting to get into the planning cycles of our utility customers, and perhaps most importantly, almost to a customer, they're seeing a little better economic forecast as they're entering say the second quarter than they were in the first quarter.

So, you add that all together and say the market strengthening, we are going to be patient before we enter the market, but at some point in time this year you'll start seeing us layer in some market sales. And it's just like the -- we hadn't really talked about it before, but as John Drexler talked about, the trading group had built some floors into some of that exposure really late last year, last year for 2010 and '11 and beyond. Those were non-hedge accounting, so we had to mark them to market, and as the market has strengthened, those have become worthless, but I can asure you we had rather see them become worthless exam can market going up than vice versa.

Would it be fair to say at 2011 the curve is at 1,435 and you would still be thinking, based on your view of the world, there's some upside relative to the curve?

I do. I think a lot of it is driven off of we have been talking earlier in some of the questions just what's going on in Central App.

We still have reasonably high stock piles in traditional Central App customer base, and as reenter the markets and seriously enter the markets for '11, '12 and '13 tonnage that's when you see the market dynamics really play out and we will assess the market at that time. But my anticipation is that traditionally, when Central App enters the market in a meaningful way from due to a shortage, it has impacts on all of f the other basins, and I actually expect that to happen again, but we will wait and see.

Thank, guys. Good luck.

We will go next to Paul Forward with Stifel Nicolaus.

Good morning.

Hey, Paul.

Hey. If I could follow up on that last question on pricing strategy -- You have got about 1.5 million to 2.5 million tons of unpriced met coal for this year. What is the appetite of your customers and of arch to possibly try to lock in some of the current pricing or come with a two year deal, let's say, so that you can have a little bit more certainty when it comes down to things like making the investment on Cumberland River that's supported by a contract? Do you see customers willing to go beyond just simply near term deals for small amounts of tonnage?

Paul, this is John. Clearly, in the past we have done a number of transactions that were multi-year, that's not the norm certainly on the international business. We continue to have those conversations, but I would tell you the majority of our discussions are for the next year.

So for domestic businesses, it is typically on a calendar year basis, the international stuff is typically April 1 to March 30 of the next year. Yes, we have those conversations, but right now I will tell you most everything we are looking at today is in that one year time frame.

Okay. And then, just follow up here, on the Western Bituminous region, not sure if you gave this earlier, but is there an approximate number you can give on the contract roll overs at the end of 2010, as far as the number of tons we are talking about of let's say pre-2008, lower priced contracts that will be rolling off at the end of 2010 that we can anticipate then higher price in 2011?

I don't know that we have giver an exact number in the past. What I would tell you is that it's significant. We have some contract re-negotiations going on, some open market tons that all come into that, but it is a pretty sizable number that you should see the benefit of starting January 2011.

Okay. Thanks a lot.

We will go next to Kuni Chen with BofA Merrill Lynch .

Good morning everybody.

Good morning.

Just another quick follow up on the met coal, for the 1.5 million tons committed in the quarter, can you comment on whether that was more toward domestic or international customers?

I would say it was a combination. If you look at the mix, call the midpoint 6.5 million, right now I would say one third of that would be domestic and two-thirds would be international. That's probably the mix. We booked some of that earlier in the quarter; we continue to see prices move up, but clearly, triple digit average for that 1.5 million tons during the first quarter.

Okay. And just, just domestically in term of your conversations with some of the domestic steel folks, has there been any change in the market the last couple of weeks, clearly, in light of some of the events that have taken place here, just want to get a sense as to what you see going on there?

Clearly we're seeing an improved demand and interest domestically as well as internationally from all our customers. Over the past few weeks, we continue to see that improve, and as I said, over the next several weeks, we would expect our commitment currently at 4.5 million tons to go up pretty reasonably.

Okay. Then just one last follow up, as far as PRB and your cost profile there, it came down sequentially. Do you think you can hold it at these levels for the year, or is there any seasonal ups and downs to the cost trends that we should be thinking about, again just for PRB?

If you look since October, we've seen a significant improvement in our cost structure in the PRB, and we would expect that to continue to improve. Now, how much I am hesitant to say right now, but clearly where we are to improvement for the balance of the year is our expectation.

All right. Great. I will turn it over.

We will go next to Curt Woodworth with Macquarie.

Hi. Good morning. So in terms of the met market continuing to strengthen recently, where do you see the pricing right now?

Well, as we indicated in our opening comments, I mean, we recently have been selling coal in the $140, $150 price range. And we continue to see an improvement in demand and would expect as long as we see that it might be a possibility for improvement pricing as well.

Okay. So, conservatively, the 2 million that you have left to price, the $140 to $150 numbers, probably pretty reasonable?

I think that's a reasonable expectation right now.

And then, the 1.5 million that you have placed in the triple digits, and I assume that's some of domestic stuff maybe is priced around $100 or below that, so do you think for the year your met realizations should be probably around the $130 range? Is that -- would that be too high?

We really haven't given out a blended number. We're hesitant to do that. What I would tell you is that we are pleased with what we are seeing currently and for the balance of the year and that's why when we look at our markets we are spending our time and effort on expending that met production capabilities.

Okay. And how much, if the PCI market really strengthens, how much PCI could you potentially swing to the market this year?

It depends a lot of production comes from our Low Mountain operation and our ability to move things around there would determine that number, but it is something that we are always looking at. As I indicated earlier, that 1 million to that 1.5 million to 2 million tons we had uncommitted is mostly met right now, so that is the opportunities we are seeing, and if we see some opportunities on PCI, we will make adjustments accordingly.

Okay. Great. Thank you.

We will take our next question from Jeremy Sussman with Brean Murray.

Good morning.

Morning.

In terms of -- you're obviously bringing on production or looking to bring on some production on the met side, but in terms of -- I think you mention this in your release, previously planned steam coal sales shifting into the met market, how much flexibility do you have on that end?

We do have flexibility, we try to retain that flexibility going forward because of this situation. So, I am hesitant to give out a number, but clearly, that 6 to 7 million range that we've given, we're very confident that we can be in that range for the year.

Okay. Great. And then just one quick follow up. In terms of port capacity, we have seen producers increase their outlook for met coal, where do we stand on port capacity, right now?

We are still comfortable; if you look at the recent high water mark back in 2008, we are still projecting to be about 7 million tons below that. Again, it always depends on rail performance and the mines themselves, but at the moment, we don't see pressing port capacity as being elimination. If there is another serge in demand on the international front or the steam coal market really would start clicking in say 2011, if Europe starts to recover in a meaningful way, I think we may have a more lengthy discussion on that point, but it is really a 20111 or '12 question.

Good to hear. Thanks for the color, guys.

Great.

We will go next to Brett Levy with Jefferies & Company.

You can you guys talk a little bit about the Jacobs ranch synergies? Is there a revised timetable? How much did you get right off the bat? Can you just give an overall number and a phase in schedule?

Certainly, we were pleased by the results we saw fourth quarter; you saw the step down in our costs, and we continue to be very pleased with the integration of that transaction, so the $50 million that we'd given to the street is still a very good number. Clearly, I hope, personally, we can exceed that, but the $15 million is something we think we can get during 2010.

And what's the phase in? Is it all going to be there by second quarter or third quarter, or, -- ?

It is on going, but, clearly, second and third quarter we shall be able to achieve those numbers.

Thanks very much.

Next to Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

The first question I just have was to clarify on Western Bit costs. You said you expect them to be $25 to $27 a ton there for the rest of the year, but does that include GG&A because that's a lot higher than it was? I can't remember if tha number includes GG&A.

It does. That's a cost and sales number.

Excluding that, it should be in the low 20s?

That's correct.

Okay. And then just on the utilities, and the contracts (inaudible). Obviously, you are holding off to wait for PRB prices to gain more traction through the end of the year, but are you guys hearing or maybe even experiencing in some preliminary negotiation utilities approaching coal contracts differently because of where gas prices are? Are they willing to only sign fewer tons under coal contract or looking to sign shorter term contracts because they want to retain that flexibility to use gas when they can?

We haven't seen that. Clearly, we don't think there has been any displacement of PRB coal by natural gas; we think that more of the impact's on Central Apps. So we really haven't seen any major modifications in contracting for PRB coal.

That was my question, thanks.

We will take our final question from David Lipschitz with CLSA.

Thanks. Good afternoon and good morning, I guess.

Hi, David, how are you?

Good, how are you?

Good.

Just quickly on the cross over tons you were going to sell to the met market, were those contracts that were signed pre-2008, (inaudible) contracts or more recently or 2008 type of contracts?

They're all over the place. I guess we haven't really thought about that. For the most part, from 2008, the team is focused on always having the flexibility of buying replacement tons, moving tons around different shipping points within our production system. So, it is a broad mix of tonnage. We don't have many of, say the 2007 and 2008, big market Central App left. So, we are not replacing real high priced Central App tons with pretty attractive price met coal ton.

Then quickly, in terms of what you saw in the $140, $150, you are talking about less than a couple of hundred thousand tons so far?

I would be hesitant to say the exact number, but it is meaningful volumes; and we would expect that to improve over the next couple of weeks, David, and clearly, we are enthusiastic about what we are seeing on the met side.

Okay. Thanks.

Thank you.

This does conclude our question-and-answer session. Now, I would like to turn the conference back to Steve Leer with any additional or closing remarks.

Again, let me close by thanking everyone for their time and interest in Arch Coal. Just to hit two or three of the high points, I think as we look forward, obviously, the met market is very robust and it has gotten more robust over the last few weeks. We are adding, we think, about a million tons of annual production; certainly, it would be on stream in 2011 at a relatively low cost of $10 million or so, so we think it will be a very attractive opportunity for all of our shareholders.

On top of that we have seen PRB prices improve 40% from last quarter ago to 25% in the beginning of the year. We think the market dynamics that are occurring in Central App are affecting the other basins, and we are extraordinarily well positioned. So, obviously, our guidance reflect this and we look very positively on all of this and look forward to talking to you at next quarter and reporting to you on the developments of the quarter and just how we are performing against what we have put out as our guidance.

So with that I thank you, and we will leave it at that.

This does conclude today's conference. We thank you for your participation.