Arch Resources Inc (ARCH) 2010 Q3 法說會逐字稿

Good day, everyone. Welcome to the Arch Coal Incorporated third quarter 2010 earnings release conference call. Today's call is being recorded. At this time, I'd like to turn the 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 on this morning's call. 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 that 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 we plan to discuss this morning at the end of our press release. A copy of which we have posted in the investor section of our website at ArchCoal.com. On the call this morning we have Steve Leer, Arch's Chairman and Chief Executive Officer, John Eaves, Arch's President and Chief Operating Officer, and John Drexler, our Senior Vice President and Chief Financial Officer. Steve, John, and John will begin the call with some brief formal remarks and thereafter will be glad to take your questions. Steve?

Thank you, Deck and good morning everyone. Arch earned $0.35 a share in the third quarter, excluding sales contract amortization, on the Jacobs Ranch acquisition, and financing fees on the redemption of $500 million of Arch western bonds. We also generated $201 million in EBITDA, our second highest quarterly level in the company history and we are targeting full year EBITDA that could exceed our best year ever. In addition, we set a high for free cash flow during the third quarter, putting us on pace to deliver record free cash flow this year. This strong financial performance was driven by an expansion in operating margins in each reporting region, different levers drove the performance in each region which John Eaves will discuss in more detail in his remarks. But the end result was a 60% increase in consolidated operating margin, per ton, versus a year ago. Consequently, we have raised the mid-point of our EPS and EBITDA guidance range for full year 2010.

Turning to coal industry dynamics, 2010 is proving to be a very better year for many in the industry than the very forgettable year of 2009. Electric generation trends have been good, up 4% year to date, based on a hot summer weather and moderate growth in the underlying economy. Cooling degree days ran 20% above last year's cooler and wetter weather through August, which led to a meaningful increases in residential and commercial power demand this summer. Industrial power sales have also remained in positive territory in 2010 and have begun picking up steam as the year has progressed. As you know, growth in the industrial power sales is a good -- is good for base low demand and is particularly good for coal demand. As a result, we estimate domestic coal consumption grew by 6.5% through the end of September, significantly exceeding the rate of growth for all power generation overall. Growth in global coal demand has been helping spur US coal markets as well this year. We are projecting US coal exports will reach 80 million tons in 2010, up 35% from last year's level and on par with the robust figures from 2008. The lion's share of this increase in coal exports, of course, is linked to the met markets. At Arch we expect to ship a three fold increase in coking and PC I volumes in 2010 and look to expand these volumes even further next year. We believe the dynamics in play are shaping up for a good 2011.

Moreover, domestic coal production is trending down year-to-date. Based on released MSHA data to date, US coal production nationwide is projected to be down more than 6 million tons through the end of September. Based on supply demand trends to date, it is not a surprise that US coal stock piles at power plants have declined materially since the beginning of the year. In particular, power generation in July and August was at record, or near record levels, in some parts of the country, despite the fact that the US economy hasn't exactly come roaring back yet. Against this back drop, coal consumption increased meaningfully and stock piles nationwide fell by 20% from last year's level. But they do remain about 10% higher than normal. We believe the nation's stock piles likely ended September at about 160 million tons.

In particular though, coal inventories at PRB served plants at September 30 were estimated to be at 54 days supply, below the five year average and the lowest days supply in the country. Demand for PRB coal has continue to pick up as inventories have been depleted and that is one of the reasons PRB index prices are up about 20% for 2011 physical delivery and up 25% for 2012 delivery since January 1. Despite the improvement in the coal market fundamentals, some headwinds remain. Namely low natural gas prices and the threat of increased regulation that could result in some coal plant retirement. The coal industry has faced similar challenges before and has succeeded by continuing to increase its relevance and dominance in low cost power generation over the past four decades.

Looking ahead, increasing concerns on the regulatory front could result in the retirement of the smallest and least utilized coal plants. However, we believe that there are substantial offsets to any potential decline in coal consumption related to coal plant closures, making us more optimistic on coal demand in the US as the years ahead. First, the build out of new coal plants in the United States should add significant incremental coal consumption through 2013, even if you net out the announced coal plant closures. Second, assuming base load demand continues to reassert itself as the US economy recovers, and the lost generating capacity from shuttering older, less efficient coal plants, will need to be replaced with something, and we think it will be replaced, in part, by increasing utilization rates at existing coal fire and power plants, because it is where the next lowest cost increment of unused capacity. Running existing coal plants harder could potentially increase coal demand meaningfully over the next five years. Moreover, we expect the globe to consume at least an additional 1 billion tons of coal per year by 2015, driven by strong net coal fundamentals and significant buildout of new coal-fired power plants around the world. Those trends could significantly boost US coal exports in the future from the east coast through the gulf and off of the west coast. Finally, if history is our guide, reserve depletion as well as increased regulatory scrutiny will result in reduced supply coming out of Central Appalachia during the same time frame. Such pressure on eastern production should contribute to a greater imbalance and supply demand equation and offer meaningful growth, for other US coal basin, particularly the Powder River Basin.

In summary, we have positioned Arch to excel in this market cycle with our unpriced sales position and strong operating platform. We are targeting record free cash flow in 2010 and given our relatively modest capital needs, we expect to continue this growth in the cash flow metric going forward. I will now turn the call over to our President and COO, John Eaves for a discussion of Arch's sales and operating performance in the quarter. John?

Thanks Steve. Given the increase in power generation we have seen so far in 2010, particularly during the summer months, customers are have re-entered the mark to replenish stock piles that have been drawn down materially. In fact, the inventory buffer that had been built up during 2009 has effectively evaporated and has certainly changed the marketing dynamic as we look into 2011 and 2012. Even flat to modest growth in a domestic coal consumption next year, coupled with ongoing supply constraints in Central App, should result in continued corrections in coal stock piles at US power plants. Additionally, increased opportunities for US met and steam coal to move offshore, to meet growth and sea born coal demand, could accelerate stockpile reductions. In fact, forward PRB prices have improved materially since this time last year, and as indicated, we have chosen to begin layering in some volume for future delivery while still maintaining exposure to the forward markets.

In the PRB, we committed a blend of 8,800 and 8,400 BTU coal, totaling 20 million tons in 2011, and 15 million tons in 2012, at prices above the current annual indices for each coal type in the region. We also continue to be encouraged by the strength and depth of the market, and are in active negotiations to put additional volumes to bed at attractive prices, as we speak. While we believe there is significant upside in coal markets, the commitments that we signed here during the shoulder season are consist with our patient but prudent approach.

In Central App, we've committed 2.5 million tons of met coal in the 2011 time frame, at a mine net back prices in the triple digits. The mix of PCI and coking coal committed was roughly 50/50. We now have up to 5.5 million tons of met quality coal uncommitted for next year. At Western Bit, we placed more than 4 million tons for 2011 and 2012, as part of a price reopener, at a 20% premium to Arch's current realizations in the region. As a result, we now have between 30 million and 40 million tons uncommitted in 2011 and between 70 million and 80 million tons uncommitted in 2012. We also have roughly 15 million tons committed, but yet unpriced, in each of these outer years.

On the operations front, our mines had a strong operating performances in the third quarter. In the PRB, volumes moved up in the third quarter due to good performance from the rails, higher broker tons and improved efficiency gained through the integration of Jacobs Ranch and Black Thunder. The combined mine is running better than expected as we captured more synergies than originally forecasted. That being said, we will continue to follow a market driven strategy and ultimately it is the coal market that will dictate whether we bring back any idled equipment to reach Black Thunders stated capacity in quarters ahead. Realized prices in the PRB also increased while cash costs have now declined every quarter since the beginning of the 2008. Consequently, PRB operating margins rose by nearly 40%, quarter-over-quarter, reaching their highest level in four years. In Central App, third quarter steam volumes increased 30%, versus the second quarter, on better steam coal market fundamentals. Met coal sales represented 40% plus of our Central App regional volume in the third quarter versus nearly 50% in the second quarter. This decline resulted from rail and ship delays, as well as, a slight dip in the market during mid-summer. We now seem to be rebounding as Chinese met coal imports were up in September. Additionally, other major steel producers in Europe and Japan grew output month-over-month in September.

Looking ahead, we now expect met coal sales to total around 6 million tons in 2010, up from 2 million tons in 2009. We are also off to a strong start with the 2011 met contracting today and believe our met coal sales could reach up to 8 million tons in 2011, if market conditions warrant. Price realization in Central App were flat, quarter-over-quarter, as higher pricing on met coal sales were offset by larger mix of lower price steam sales. Operating costs rose by $0.90 per ton, quarter-over-quarter, driven by the region's production mix. Despite the increase, Arch's cash structure is one of the lowest in the region. In Western Bit, volumes were maintained despite a temporary outage at Dugout Canyon, which lasted for most of the third quarter. We were able to make up lost shipments from Dugout by increasing shipments from other mines in Utah. Dugout's long haul restarted on September 7 and achieved normalized run rates by the end of the month. While costs increased in Western Bit, due to the outage at Dugout, prices also rose to expand the third quarter operating margins by 16% versus the second quarter.

In closing, I would like to recognize the more than 1,500 employees at Black Thunder for working over two-and-a-half years, for seven million employee hours, without a lost time safety incident. Additionally Coal-Mac was honored by the US Department of Interior for its commitment to protecting the environment. Arch's core values are based on excellence in safety, environmental stewardship, and financial performance, and we achieved all three of these in this past quarter. With that, I will now turn this 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. The third quarter was not only successful from an operations standpoint, it was also successful from a finance perspective, as we used our strong cash flows to reduce debt levels and increase liquidity. We also completed a refinancing that pushed out our debt maturity profile considerable. Beginning with the refinancing in August, we took advantage of strong credit markets and issued $500 million of new, ten year senior notes. Those notes have a yield of 7.25, which at the time of the debt offering ,was the lowest yield for a US coal company since 2005. Subsequently, we used the proceeds to redeem $500 million of our existing Arch Western notes that mature in 2013. The refinancing helped reduce our 2013 maturity tower by more than half. As a result, we now have less than 30% of our term debt coming due during the next five years.

As we have mentioned, the third quarter was another strong quarter of cash generation for us as cash flow from operations increased 19% quarter-over-quarter to total more than $197 million. Year-to-date cash from operations reached $457 million, which already exceeds our full year 2009 level. Additionally, capital spending in the third quarter was just $50 million, bringing the year-to-date total to $222 million. Consequently, we set a free cash record in the quarter just ended and remain on pace to deliver a record year in that cash flow metrics. During the third quarter we used our free cash flow to reduce our short-term borrowings by more than $100 million. Since closing on the Jacobs Ranch acquisition last October, we've reduced our outstanding debt by more than $200 million. At September 30, total debt represented $1.68 billion, with nearly $140 million of that related to short-term borrowings under our credit facilities. At quarter end, our debt-to-cap ratio was 43%, down three percentage points from the beginning of the year, and our liquidity was in excess of $950 million.

With that, let me now discuss our revised outlook for the remainder of 2010. We expect the following. Volumes from company controlled operations to be in the range of 155 to 158 million tons, EBITDA in the range of $750 to $790 million, adjusted earnings of $1.25 to $1.40 per share. The adjusted EPS range excludes an expected $34 million, or $0.13 per share of non-cash, intangible asset charges related to sales contract amortization, and $6.8 million or $0.03 per share of early debt extinguished mid-costs. (inaudible) excluding sales contract amortization, in the range of $372 million to $377 million and capital expenditures, including reserve additions of $315 million to $335 million.

As you can see from our guidance, we expect a strong fourth quarter from both an earnings and cash flow perspective. We will continue to focus on strengthening the balance sheet further and expect to end the year with an even lower debt to cap position. With that, we are ready to take questions. Operator, I will turn the call welcome back over to you.

Thank you very much. (Operator instructions). We'll take our first question from Jim Rollyson with Raymond James.

Good morning, Guys.

Good morning, Jim.

I guess maybe for John. Your Western Bit put up pretty good numbers considering Dugout was out for a good chunk of the quarter and I guess you had mentioned Utah picked up some of the slack on volumes. What do you think about that now that Dugout is back up and running from a volume and cost perspective?

You know Jim, we are in the budgeting planning process now. As we move forward, clearly in Western Bit, we are in much more challenging geology, as we move forward. When we went from the B seam to the E seam at West Elk, it's a higher cost reserve. Our goal would be to manage our costs as effectively as I can. As we look to the fourth quarter, I think you'll see a comparable cost number maybe planning a little better. As we finish up the planning process for 2011, I hope we can do a good job managing the costs. But I clearly don't see a real material step down in those costs in Western Bit moving forward.

That is great color for that and as a follow-up maybe Steve, contracting strategy for next year. You guys still have you know a fair amount of coal yet to price and I'm assuming that some of that's in PRB. How are you thinking about -- you guys usually come and step this up over a period of time. That's what you've done historically. But you are a little more open than some others, just kind of curious your thoughts as to your position and how that fits in where you guys see the current market outlook?

Sure, the market moved around a little bit during the third quarter and clearly we layered in some contracts, got some attractive pricing relative to where the second and first quarter and relatively strong pricing on those contracts. As we look forward to 2011, we are very comfortable where we are and in fact, if this call was a week or perhaps two weeks later, we are in active negotiations for another what John?

Five to ten.

Five to ten million tons of contracted sales for 2011. I think we could have reported on those numbers, had we been a couple weeks later here. We fully expect to conclude those negotiations that are kind of in the final throngs of it, next seven to ten days as we look at it. We're pretty comfortable with it. We like the numbers. I don't think the investor marketplace will be disappointed with the pricing at all. We are seeing you know a reasonably robust market out there. Obviously winter weather could have an impact, either way. Today's GDP report a little bit stronger at least on the preliminary numbers than expected. Europe, England came in with a better number than people we were expecting. So nothing to crow about from the economy, but frankly, we like our position. We preserved again the upside, at the same time, we think we have very strong positioning on, if it takes a little longer to develop, we are comfortable. We will be market driven. Let me just reiterate that point.

Great. Thanks for the color.

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

Morning, Guys.

Morning, Brian.

Steve, maybe we could just continue on that theme just for a second, in the PRB. It seems like you guys had a real good quarter and relative to productivity and rail performance, and the like, that seems to be a trend. It seems to be any big major producer in the PRB, had a pretty good quarter. I guess, as you continue to try to contract 2011 open positions, has the thought processes between you guys and the utilities changed at all during the quarter as those production levels have bumped up? It just seems like there is a point where those inventory levels contractor positions for next year might start to be a problem? Has it changed at all or have you continued to see robust throughout the quarter and even in the contracts that you'd say you were working on right now?

Brian, this is John. We are very encouraged about what we are seeing. If you look at PRB inventories, we think they are at targeted levels, maybe even a little bit light to targeted levels. We really haven't seen any slack in demand. As Steve indicated, we are in the late, late stages of completing another five to ten million tons over the next week or two. So, really haven't given any concern at all about what we see outgoing into 2011. Steve mentioned we are going to be market driven. We'll continue to evaluate that. I don't see anything that gives me any real concern at this juncture.

Then switching gears. Walking over to Central App, I think when you guys were running through the numbers, you mentioned the met's percentage in Q3 being lower. Maybe we could go over -- did that dictate the entire, I guess, what would be considered a shortfall to what we were expecting from a realization standpoint in that basin, given that met had been strengthening? And then how do we look at fourth quarter? Then also, you mentioned the goal or not the goal, the possibility of doing eight million tons in '11, up from six this year. Is that two million ton increment entirely the PCI product and maybe a little color there?

Yes, several questions there. First, in the third quarter we had a little bit higher volumes on the steam side. I think quarter-to-quarter steam volumes were up 400,000 tons, the met was down slightly. We had rail issues. We had a couple ships move on us. I think for the most part it was the increased steam volumes. We saw some of the customers come to market start looking at their inventory levels. We had the hot summer and there was some buying activity during the third quarter. We would expect met volumes to be higher during the fourth quarter. We would expect pricing to improve some as well. In saying that, we indicated we'd be at the bottom of our range at about six million tons or so for this year. We do have a couple boats towards a latter part of December, and that is always kind of a moving target. Right now we feel pretty good about where we are. As we move into next year, in the additional volume, we said on the previous calls that we are spending a little bit of capital Cumberland River to increase our met capabilities. I feel confident in an eight million ton range. I think the marketing guys feel good about what they see out there as well. So, I would tell you a lot of that would be on the met side versus the PCI side for next year. That can always move around a little bit. But, I think for the most part what would be met.

John I appreciate the color.

Thank you.

We'll take our next question from Michael Dudas with Jeffries.

Good morning, everyone.

Good morning, Michael.

Steve, you mentioned about your negotiations with your customer over the next company of weeks and what you put to bed recently. What is the discussion on the terms of these contracts in the sense of length? Three years, five years, one-and-a-half years? Are you willing to go long at these prices? Give me a little sense of, everybody's so nervous about the near-term economy, and what stock piles are today to next year. What is the dynamic on placing the coal longer term relative to all the uncertainties in the market?

Customers with plural. It varies from one to three years, typically, with each customer. From our perspective, as you get out most of the time, we can come to some number agreement if we're looking at 2011, and then '12, we might have a little divergent view where the markets might be and then '13 and even more. Sometimes we start with a three year deal and end up with an 18-month deal. So it is a dynamic. But our view of the world is, that as we look back a year ago, PRB, was down $9.00, $10.00. This summer it hit above $15.00. Moving forward, the forward indices backed off here in the shoulder months, but still pretty robust when you look at it. We are feeling good and most of the customers kind of recognize that and we are getting more and more concerns being raised on the reliability and the availability of Central App seeing coal as they see some Central App get drawn into the metallurgical market and, then just all the pressure going on there. So, really it is -- there's not, I guess, a standard number out there, other than it's probably one-to-two years would be more the average than three. But that's as much our positioning as perhaps the customers.

Your recent contracts are they index oriented or more negotiated price or a blend of all of the above?

There would be a combination. Mike, we're always looking at those. I would say the larger percentage of those would be a known pricing.

Sometimes we saw that third year by doing exactly that, Michael. We might go two years with a known price and then one year at an index or a percentage of an index.

And just my second question to follow-up. Steve, an update looking into 2011. How much movement will we, do you think we'll see in the availability of putting together a west coast port terminal?

You know, I think there will be a fair amount of information during the course of 2011 that will come out. Obviously, they are future permitting and go other things. But clearly, we are very actively engaged in negotiation, multiple negotiations, and reading some of the industry press reports, or industry reporting documents, or you would hear you would conclude that others are as well. So, I think we'll see something there on the flip side. I think the Gulf is starting to open up. I thought it was a great thing that we have seen [Drax's] buy a test shipment, when the lot of coal is 50,000 tons. But when you look at Drax's, I mean Drax's has been back down to Black Thunder's representatives and I think that we have six units consume ten million to 12 million tons per year. We bid on that particular test boat, as did others, and you know, presumably someone bid lower than us and got it. But, the most important point is that Drax's considering testing Powder River Basin 8,800 BTU coal and if it goes well ,I think they would actively be in the market next year, in 2011, looking for maybe it is one unit, maybe it is three units that they have talked about, conceivably two to six million tons of coal. So again, they have indicated to us they would probably seek multiple suppliers on that. So we are feeling pretty good about that whole concept through the Gulf and I think it'll open up additional opportunities into Europe and the west coast port situation I think, will develop over the coming six to nine months. And again, I think it will be a very good positive from a producer's of view to have that market outlet starting to develop.

Sounds encouraging. Thanks Steve.

Thanks.

We'll stake take our next question Shneur Gershuni with UBS Securities.

Good morning, Guys.

Good morning.

Just a couple of quick questions, some follow-ups on some of the previous questions. The PCI market and the high vol B market, I recognize that you're not sitting on high vol A, but there has been some strength in the A market, some into the B market, and you mentioned some strength as well. Do you believe it's currently strong enough right now for you guys to really consider actually producing eight million tons next year or is it still not enough to get you there and it just remains an objective?

Well, as we see the market right now,we're encouraged by what we are seeing in a domestic market. The 2.5 million tons that we have placed for 2011, the majority of that 80% plus is domestic. So, we are having meaningful conversations with our international customers as well. Some of the customers have even requested pricing and this is pretty early for that to take place. So, I would tell you right now, we see the opportunity to put that kind of volume in the marketplace. You are reading the same stories we are, in the rags, about the high vol A, and the high prices and we see that as a positive. One thing we know is there is less and less high vol A and we are seeing more and more opportunities for a high vol B to be included in the blends. With the volume move up we are seeing pricing appreciation as well. I would tell you at this point we feel pretty good about 2011 and that number we've put out there for met PCI.

I would just add.

Great.

We're looking at it now, what we have to sell is 5.5 million tons, not eight. Because 2.5 million have already been sold. Just to put percentage around it, if you look back at the six million tons, or so, here in 2010, about 70% of that was international sales. So, John and his team have concluded, maybe not all of the domestic sales, but a significant piece of PCI, and domestic sales in the 2.5 million tons and we are just you know, in contract negotiations for the international stuff. So if that percentage would hold true, it really does kind of indicate that you can reach those numbers that we was indicated.

Great. Shifting over to the PRB for a second, kind of a two part question. Shipments are up out of the PRB, you've had a pretty good productive quarter and so forth. I was wondering if you can talk about whether you believe the shipments, both from yourself and some other producers, are off due to efficiencies, especially you have the merger with Jacobs Ranch and so forth, or whether you believe that there's actually been new equipment or idled equipment put back to work and then the second part of the PRB question, is with respect to pricing, you talk about above an index during the quarter, the quarter was ranged quite a bit, sometimes over $15 and so forth. Is it fair to say that an 8,800 style coal booked for next year when in excess of $15.00 at this point?

Well we have had a range of settlements, obviously, but I will tell you, one of our most recent deals was north of $15.00. So we continue to see attractive pricing in that market. To your earlier question, on the volumes out of the PRB, I mean, we continue to be pleased with the efficiencies we are seeing in Black Thunder. I mean, we initially identified synergies, we upped that synergy number to $50 million to $60 million, and we continue to wring that excess out of the system and it's been a pleasant surprise and the guys at Black Thunder are doing a phenomenal job. I can't speak to the other locations, but I with tell you, we are pleased with what we are wringing out of the system now. Is there much more beyond this? I wouldn't want to indicate that there is. But, we have had six plus quarters with declining costs and the guys are just doing a good job. So that, combined with the improved demand, the attractive pricing we are seeing in the PRB, we made the right business decision by putting that into market and I think it paid off.

So essentially you don't believe there is any new equipment that's actually been put to work?

No, we didn't. It was just efficiencies at Black Thunder. I'm not going to speak to anybody else, but I can tell you from what we had parked at the first effort quarter to the end of the quarter, was the same equipment.

Great.

And I think, John came in and we sat down and talk about it. Because, obviously, about halfway through the quarter, we were looking at our performance numbers and they were really strong and the team, the men and women of Black Thunder and Coal Creek, have just done a great job. But we said, all right, we are obviously going to produce some extra tons with this kind of availability, this kind of efficiency, do we do that or do we do something differently? The last thing we wanted to do was, I guess, give a signal that because you are doing a great job, we are going to park equipment and perhaps not have a job for somebody or temporarily lay somebody off. We basically said you guys keep going, we don't have to bring anything else online and the marketplace at the time and continues to be able to absorb that. So, it was a very high class discussion. I wish we could have that discussion at every one of our operations.

We'll take our next question from David Khani with FBR Capital Markets.

Hi, Gentleman. A lot of questions have been asked. One of the questions, you obviously are going to be building up a nice amount of free cash flow. Maybe you can outline a use of proceeds, talk about some of the LVA's coming up and, also, as your stock sitting here at $24.00 and change, maybe where does stock buy back come into the picture?

David, this is John Drexler. We obviously, as we have indicated and as we look into the future, it will have strong free cash flow generation and that is a good position, obviously, to be in. As we have indicated, I think the first priority, short-term, is to continue to work on the balance sheet. So subsequent to that, we'll look at where we think we can create value for the company and every year, and every meeting, the Board meeting, we continue to evaluate where those opportunities are and those typically include discussions related to dividends, related to share repurchases, and, obviously, we are out there looking for opportunities as well. But, we are in a position where we don't feel compelled that we have to do anything at this point. So we like that position.

Speaking as a totally biased CEO, obviously the stock's undervalued.

Well, sometimes the best way to show us is to buy it back.

Yes, I understand that. As John says, we have discussions at the Board meeting, every meeting.

Okay. Given that you guys are in a lot of the basins and then you have been focused a lot on sort of the EPA, what do you think is the productivity impacts on your business for underground mining, for mine safety? And then also, even though you have a little bit of Central App, from a permitting standpoint when does the permitting issue start to really, again, hit the supply?

David, this is John and I'll let Steve follow on if he wants. In terms of the regulatory oversight, and the impact our business, I'm not sure I can hang a productivity impairment number on it. You know, I'll tell you, we've got the same challenges everybody else, we are not going to use it as an excuse. Look at our safety and environmental performance, we are very proud of that. We run very efficient mind and we think that pays dividends. We had a little bit of step up in costs in Central App this past quarter. I would tell you more of that was a production mix than maybe the regulatory impairment. It is a fact of life we are going to have it. We are going to deal with it as a company and we'll see where you know the chips fall. But I mean, as you know, we have been able to manage our costs pretty effectively over the last several quarters. Really in all our regions. If you look at Western Bit where we have regulatory oversight we had a mine down for our biggest part of the quarter and we still manage our costs pretty effectively. So, I think the guys are doing a good job. I think we'll continue to manage our costs pretty tightly with all the additional regulatory oversight.

John's being a little bit modest here. Right now we are on pace to be industry leading record safety performance, industry leading record environmental compliance, and as I look at it, I think there's going to be, certainly, regulatory cost pressures that we will have to manage, over time they will push cost's up. Where Arch is sitting the way the culture of the company ,the history of what we have been able to achieve, that over time that allows us, really the goal is to allow widen the gap between some of the competition and where our minds are at. We may go up, but we'll go up at a slower rate than a lot of other folks. It is difficult out there. It's hard and I think to the second part of your question on permitting, you're starting to see the impacts. I mean, if you look at production numbers and we're down in Central App again, I think it was down somewhere around 12 million tons year-to-date. That's just going to continue. It is hard to separate out of what's permit, what is reserve degradation, what's the regulatory issue. But nonetheless, it's been a long time since any meaningful number of permits have been issued and it doesn't appear that, that's going to improve any. So, we think we spend a lot of time on this. We think that in 2011 you are going to see more of the permitting impact in 2012, maybe the ultimate cliff in some of the existing operations out there in the world of Central App. So remains to be seen, but the summary is, cost pressures are very real in Central App and our objective is to continue doing what we are doing and really having that focus allow us to widen our advantage from a per ton production gap.

Okay. Thank you.

We'll take our next question from Brian Singer with Goldman Sachs.

Thanks, good morning.

Good morning Brian.

On the M&A, front a lot of talk about various assets for sale in Australia, Colombia, Central Appalachia. Can you just talk to how you evaluate your own interest in expanding domestically or internationally or vice versa? Whether you use the strength that we're seeing in met coal markets in demand to consider potential divestitures.

If you go back through the history of Arch, we've always taken a portfolio approach to M&A. I won't say we've hit the tops and the bottoms every time, but in very strong markets, we have shed assets or sold them and in some weak markets we've bought them and sometimes we haven't gotten the timing right on that. But we still see that view. Our simple goal is to increase value for our shareholders and maximize long-term value for our shareholders. Sometimes somebody sees a piece of property that's worth a lot more than we think it's worth and we may negotiate to sell it and, vice versa, sometimes we buy it to fill a hole in our strategy or market offerings, or to expand into regions we have been previously been. You are right, there is a lot in the marketplace right now. The international stuff particularly met, is extraordinarily expensive. We don't comment on any specific acquisition potentials, but we always look. But I wouldn't expect us to be writing those kind of checks for major companies or anything, just because current pricing. I told, I think in a one of the industry conferences here in the last few months, I said our real goal, as we see the cash generation, the pre-coke cash flow generation capabilities of the company, that as we look forward in this cycle, we really see an opportunity to improve the capital structure and balance sheet, the underlying value of the company, and we would also like to be in a position so that during the inevitable down turn that will occur, sometimes during at the end of this up cycle, that we are this a position to be very aggressive at looking at paying for potential acquisitions. Right now, we don't need anything to fulfill our strategy. We think the Company has proven that it kind of built a floor in its overall values and cash flows, and if the market would weaken, for whatever reason, we can certainly match that and follow the market as we have been market driven. At the same time or unsold position allows us to maximize values for the shareholders, without having to add major new capital spending or major new acquisitions. So we like the position in this particular cycle. At the same time, we will always look at things and see if anything optimistic or something we didn't think about pops up. But we always focus on discounted cash flow, and what's a long-term value to the company and for our investors, adjusted for risk. We'll look internationally, we'll look domestically. But right now, don't have anything that we think we have to do and there is certainly no pressure to do anything. So we are pretty comfortable with that. Going back, Mr. Khani asked about LBA, or someone did, and I think we forgot to answer that. It looks like any LBA that might come up, and we are limited on what we can say, the next steps that might come up would be in the 2012, or even 2013 time frame, that might be of interest to us.

Great thanks as a follow-up, just given where natural gas prices and futures are, can you talk to how your utility customers for Bituminous coal or maybe even also for PRB coal that are located a good distance away from the PRB are positioned and do you see any scenario, say if we get a warm winter and gas prices decline further, are you seeing any competition between the gas and PRB coal for far away consumers?

Again if you look back at the last year-and-a-half, two years, 2009 clearly, I think, natural gas displaced Central App coal. People can debate what that final number of tons was that were displaced. But somewhere between 25 million, and the high number's kind of 50 million tons. In 2010, the markets, the coal markets, clearly gained some of that back with the decline here in the shoulder months, maybe the gas is falling back a little bit. It doesn't look like it will reach anywhere close to the 2009 numbers. In 2009, we really can't confirm or see that any PRB coal was ever displaced by that the real gas and natural gas got down below $3.00 in some instances for short periods of time. Right now, I guess this morning's number, if I read it right as I was getting dressed, it had looked like natural gas was kind of in the I think it was $3.90 range which seemed high to me if CNBC was reporting the right number. We are not seeing it for PRB. They are certainly, we've taken a look at it. Has to be south of $3.00 for it to really have a meaningful impact, or competitive competition, against PRB coal at kind of the pricing we've seen. 15 type index market. Obviously, the rails have an important input to that. One of the things that I think all of us sometimes forget to think about is the Powder River Basin, really the coal business is a significant portion of the rails profitability in business and they have the same interest as the coal producers. They are not going to secede or give that market up easily. They have room to adjust as well if something would really happen. Now the gas guys, they remind me of the coal business in the 1990s where we produced coal because we could and it wasn't very smart and about a third of the industry went bankrupt during that decade. I'm presuming they will learn over time it's not a good thing. Gas was $3.96 they told me. I'm not concerned at that kind of level for PRB.

Due to the number of questioners we have in the queue, please now allow yourself just one question. We'll take our next question from Mark Liinamaa with Morgan Stanley.

So, we are down to just one question and not three and five follow ups? I'll just have one. You can talk about the synergies at Black Thunder. Does that moon that name plate capacity is going to be higher than you expect to before or would it just benefit cost when you get up to full run rate? Thanks.

Great question. As I said, we are being pleasantly surprised as we see it. But right, now as we look at it, I think Black Thunder kind of name plates at 140. We really have been thought of it about that in that regard. But arguably, it could be. But, the other side of it, Black Thunder, like every other mine in the basins, slowly but surely progressing to a higher ratio than at some point in time, equipment has to be added, just to address the racial question. So, I think our message again, is we continue to be market driven and we will respond to the market needs going forward and we have to be really clear on what those needs are before would do anything that would fundamentally change the nature of what we produce.

Great. Thanks guys.

We'll go next to Paul Forward with Stifel Nicolaus.

Good morning.

Good morning Paul.

Just can you confirm something for me? I was just looking at the MSHA website for Mountain Laurel. It said they did 1.48 million tons, which would be far and away its best quarter ever. Can you just confirm that is the right number? And if so, do we need to rethink about -- was the name plate at Mountain Laurel actually higher than maybe we thought it would have been before at a four, four-and-a-half million ton per year mine? Maybe lastly as a follow-up, how much of that is going to the met market?

Paul, I think that number's closer to 1.1 million, 1.2 million ton. Clearly, we have been pleased with the performance we have seen at Mountain Laurel. You know the cost structure, the volumes. We said we are in that 5 million ton range out of that facility with the majority of that going to the met market and the PCI market.

We'll check on the MSHA data.

We'll confirm that MSHA number. But that, not the first time they have made a mistake. I mean Arch is in a great spot with Mountain Laurel. I mean, most companies highest cost productions are their met coal production and for us it is actually our lowest cost productions. Mountain Laurel is just a great coal mine. I wish it was producing at 1.7.

Okay, well thanks.

We'll take our next question from Garrett Nelson with BB&T Capital Markets.

Good morning everyone.

Morning.

Your new full year sales guidance implies Q4 sales of 37.2 million tons at the mid-point or about a 6.5 million ton drop versus Q3. Are you just being conservative with this guidance or are you expecting sequential drop with volumes more in line with the first half run rate? We are just trying to get a better sense of the Q4 earnings drivers we should be thinking about by region. Thanks.

We are check go on that right now.

I think the sales indicated in the quarterly regional figures that we have, includes brokerage activities. The sales that is in our guidance is from company produced operations. So, I think the mixing of those numbers is causing the appearance that there is a significant step down in the sales, which is not the case.

Okay, but sales year-to-date are 119.3, is that correct? From company produced operations?

We are doing the math.

We are looking now.

Okay.

I think the real message is, we don't anticipate a great deal of change from third to fourth quarter in our overall numbers, as we have sailed into this coming quarter. Obviously, we are about halfway through. The 119.3 that you referenced includes brokerage activity as well.

I got it. All right, thanks for the clarification.

Sorry about that.

We'll take our next question from Brandon Blossman with Tudor, Pickering and Culp.

Morning guys. All right. My one question, and you kind of touched on this, but just to be explicit, sounds like your comments indicate a disconnect between the forward PRB curve and what you are seeing currently in the contracting market. Is that true and if so, any hypothesis around that?

Well I mean we are encouraged by what we are seeing in the pricing market and I would say it is somewhat above the index market currently. As I said, we've got another five million to ten million tons in the late stages of getting finalized, like what we are seeing pricing wise. Is there a disconnect? We always try to get somewhat of a premium if we can to the index market. We don't always on do that. But that is certainly something we strive for in every coal supplier.

Great. Thanks.

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

My question relates to the end price position for 2011. Even after we take out the 10 million, that's about to be locked up, 6 million of met, there's still 30 million to 40 million unpriced uncommitted left to go. I'm guessing most of which is in PRB. So my one three part question, a, how much of that 30 to 40 million should we expect to see committed in price by the end of year? b, are you confident you will achieve prices above the current forward curve for those remaining on price position? and c, how much of that 30 to 40 million would you consider to be swing supply for Arch? Thanks.

It's the market dynamics will dictate the final pricing of any contract bids. But, I think, what we would say is we are comfortable going into 2011, even without the additional five to ten million that we are currently in negotiations about. But sometimes it gets confusing, when you look at unsold position like that, the reality of it is, that coal is being consumed this year and the prior year in most instances and there may be a little bit of swing out there, but it is not like we have to find new customers. It is just that the customers that we are currently selling to or maybe others are currently selling to come back to the market. We look at the stockpile levels. Right now, assuming we have normal weather in the winter and maybe the economy is looking like it might be a little stronger than we have anticipated, that we end up with the PRB numbers and stock piles. Right now we're project that go they'll be lower than they currently are. Could be approaching the low end of the five year range by the end of the year, certainly on into the winter. Feeling pretty good about that. Where the market goes, obviously, gets dictated by lots of things and from everything from what happens in Central App, to winter weather, to the economy, to what happens perhaps with natural gas. We are pretty comfortable with it, David. We have been here before. We were here at this point a year ago and I think our patience and our views in the market turned out to be exactly right. Fundamentally, we see the general market much stronger than it was a year ago. So, we are still getting bids, requests for bids, going into '11 and we would expect that to continue. And, from a swing supply standpoint, let's assume the negative kind of what you are asking in your question, Arch will follow the market and the markets get very, very soft or they don't need to coal, we'll make the appropriate adjustments. The other thing you can always do is, you have planned maintenance at 2011, we have flexibility of moving those up a quarter sometimes for a drag line, or whatever. So you can better match a short-term decline, if say, the weather is mild or something and then particularly given the size of the operation. You've got more flexibility really than you do often with some of the smaller lines.

I think I have a sense for A and C on that one. I'm just coming back to B here on the. What I'm really trying to get at is, with the large on price position, in your current negotiation and what you are aiming to commit for 2011 on the year-end term basis, is it still forward curve plus? Is that still a reasonable assumption for us to be using for pricing?

That would be our expectation. As we sit here today, that is absolutely our expectation.

Great. Thanks very much.

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

Hello, in terms of your Western Bit sales, obviously you had flat sales versus Q2 despite Dugout being down for most of the quarter. As we think about that coming back online, if we get a sense maybe of what to expect in 2011 out of this segment on the production front?

You know, it's certainly good to have Dugout back. I think, overall, we are in the planning process right now, but I would suspect the volumes, if you take out the impact of Dugout during the third quarter, would be comparable in 2011, saying that 17 million to 18 million ton range, as we have indicated we've got some market roll off. We repriced 4 million tons during the quarter. We've got additional roll off that we're negotiating currently that we would expect to get resolved over the next 60 days or so. We would expect to maybe get improved pricing on that volume as well. I do think you are going to see a margin expansion that's real in Western Bit as we move into 2011. As I mentioned earlier, we condition to work through the planning process and look at our cost. But, as you look at that cost range that we have given you this year that $25.00 to $27.00 range, we're going to be really on top of that upper end of that and hopefully we can stay somewhere this that range as we move forward. Clearly, with that contract roll-off and repricing we are going to see a margin expansion in Western Bit.

Very helpful. Thank you.

Thank you.

We'll go next to Dave Martin with Deutsche Bank.

Yes, thank you. Wanted to come back to coking coal and PCI, and sorry to ask such a short-term focus question. John, in your comments you mentioned that you have some shipments or boats scheduled to depart, I think you said in late, late December. Can you reference what percentage of your book of business that would be for, for this quarter and can you give us and comfort those are going to happen? Then secondly, you referenced of the met you've contracted for next year, you have realized prices in the digits, triple digits. Can you give us any color whether it is in the 110, 130 range and if can't do that, what the price change would be year-over-year?

Your first question if terms of what we're exposed to fourth quarter, I would call it 75,000 to 125,000 tons, kind of this that range. That is kind of in the back half of December that we are pushing to get shipped. I think everybody's making the effort to that. Anytime you have a boat that falls in the second half of month, you are at risk. Does the boat show up? Do the railroads show up? I would call it 75,000 to 125,000 tons or so. Triple digits, we really didn't say a lot more than that. What we did say was the 2.5 million tons, that we have sold for 2011, it was 50% met, 50% PCIs. So that's a blend obviously. You have been reading about what the others are getting for the high vol B, I would say we are getting comparable pricing. But as we see the high vol A move up, we would expect to maybe move up with that. I hate to say a lot more than that, given we have a lot of discussions going on with customers right now, but we are very pleased with what we are seeing on the met side as well as the PCI side. Very attractive numbers and if you look at our cost structure in Central App, it gives us tremendous margins.

Just to be clear on any boats at the end of a quarter, it is not that we expect to lose the boats. But it could easily, and certainly, have from time to time, we have seen a boat move from second quarter into third quarter because it finished its loading at 12.01 on midnight of the first and that's just the nature of the business. But around the holidays, we have just learned over time that if it is scheduled during that time, you have got to really work to make sure it happens it done get shoved into January too often seems like things crop up.

That is fair. Thanks for the details.

Thanks.

We'll go next to Justine Fisher with Goldman Sachs.

Good morning.

Good morning Justine.

I know that in relation to someone's earlier question about what seems to be an anemic thermal coal market, but very strong realizations for you guys, not only in this quarter but on the forward curve, I was wondering whether or not the better pricing in the third quarter had to do with reopeners that were bench marked to that curve an then, how much volume needs to take place in a trade in the OTC market in order for that to actually become the new benchmark to which you price your tons?

Yes, there was one reopener. But it was actually probably on the downside with that as opposed to pushing the pricing higher. But when you look at it, unfortunately I guess, all of the coal indices are somewhat thinly traded. Some real thinly traded and others a little more active. But all of them are not as liquid as you would like. So typically, or very often, a private contract between a producer like Arch and a customer never gets reported at all in the indices. It is really, we may enter the indices market and it may be a train a month, or a train a week, or whatever, that actually will start setting or moving and an index or someone else can enter that and it is a combination of traders, utilities and the producers. But on the whole, it's all pretty thinly traded, even in the typical PRB markets or the OTC markets in the east. So the contract market has always been different than the indices and I've always tried to say the indices are an indication of market direction. We don't disagree with that. The market that you see contracts done at often are above, or they can at certain times have been below, those particular indices, but they are a data point they everybody does use. So we don't want to misstate that. But it is like yesterday, I don't have the right number in front of me. But the PRB markets dropped $0.30, $0.80, whatever the number was and the market didn't change that much from a contract negotiation market. So it is pretty thinly traded. I always look at them as directions as opposed to facts.

We will take our final question from David Cass with JPMorgan.

Hi. I just wanted to come back a little to the natural gas chain with PRB. I know you guys said you have been seen anything yet but there is a story out that Excel decided to close a coal burning plant in Boulder and convert some of its units at its Cherokee plant in Denver to burn natural gas and coal. I'm not sure that is directly to do with the price of natural gas, but I was curious, if you are seeing somewhat of a shift in attitude toward natural gas based on perhaps environmental concerns?

Well, there is always pressure out there in the trade-off between you know the various fuel supplies. But, might ask Deck to answer this question, actually. But Colorado passed a law last year that if you strip it all away, it was very favorable toward natural gas and less so toward coal. That is really not PRB coal, it typically was aimed more at some of the Colorado producers, fortunately, not really Arch. Excel is looking at it in an overall environmental bubble of what they have to do as they go through the next decade. I think at the same time, and I could get this confused on which plant, they were talking about trying to run the plant beyond 2022, is that right? So, I look at it and say it is something we are very focused on it paying attention to what's going on, but there is a lot of coal and natural gas that flows under the bridge between now and the end of the decade on as every utility wrestles through those same things. But it is a little bit referencing my commence earlier we do expect some of the older, less efficient coal plants to close over the next decade under the environmental regulations. But we've spend a lot of time on that and looking at all of the plants in the United States and I think there is something like 1,050 coal units or maybe a couple more than that. If you look at the oldest and smallest one, they account for maybe 300 or more of the units. When you look at the capacity factor then the actual amount of coal burned in those units, and maybe go back to 2008 which is hopefully more representative of the economic environment than '09, you find that it is really not very much coal. But that is something that I think all of us have to watch. It is not a 2011 or '12 question, but it's certainly a 2014 or '15 question and we would anticipate that Arch and others and probably investors will all be talking about that over the next five years.

This concludes the question-and-answer portion of today's call. I would now like to turn the conference back to Steve Leer for any additional or closing remarks.

Thank you, Operator. Thank you for joining us on the call today. We certainly appreciate your interest and support. Let me just summarize, and close by summarizing, that I hope we have clearly communicated that the company is running very well. We have managed through increased pressures in the regulatory environment. We have managed through any kind of coal problems that we typically would call, see as an industry, Dugout would be a good example this last quarter. But to put it simply, Arch as a lot of positive momentum as we go through this quarter and enter 2011. We are on pace to deliver industry leading record safety performance, industry leading record environmental compliance, record free cash flow and potentially record EBITDA for 2010. We fully expect to carry that momentum into 2011.

On the contracting front, we are in the final stages, as we have talked about at a couple of the questions, that we expect in the next week to ten days or two weeks to complete, where we'll place another five to ten million tons in 2011. These numbers are not include in our uncommitted volumes, or excuse me, in our committed volumes that we've discussed today. And I don't think anybody will be disappointed by the pricing that ultimately gets signed on those agreements. So again, our focus is to deliver long-term value to our shareholders and to do it safely and in an environmentally responsible way and we think the momentum is there. So appreciate your time and we look forward to talking to you in January at our next conference call. Bye now.