Arch Resources Inc (ARCH) 2010 Q4 法說會逐字稿

Good day, everyone. And, welcome to the Arch Coal Incorporated fourth quarter 2010 earnings release conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Deck Slone, Vice President of Government, Investor, and Public Affairs. Please go ahead, sir.

Good morning. 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, to different degrees, are 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'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted to the Investor section of our website at ArchCoal.com.

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

Thank you, Deck, and good morning. This morning, Arch Coal reported adjusted net income of $1.14 per share for the full-year 2010 and generated the second highest EBITDA total in the Company's history at $724 million. We also set a record for cash flow from operations and achieved record free cash flow of $382 million. It was a significant step up from 2009's performance and was a particularly impressive showing, given that the US coal markets are still in the process of recovering from the economic downturn, but they are recovering.

For the quarter just ended, Arch had adjusted net income of $0.33 per share and EBITDA of $192 million. While this was solid performance reflecting strengthening in the US coal markets, it fell short of our previous expectations. As previously announced, fourth quarter results were dampened by lower than expected shipments, poor easements, and poor eastern rail service from one of our providers, and lower than planned production at Mountain Laurel. While the issues at Mountain Laurel will adversely affect first quarter results, we are expecting another big step-up in our financial performance in 2011. We expect stronger realizations in each of our three operating basins. We are focused on delivering another year of solid cost control, and we are targeting at least seven million tons of metallurgical shipments in 2011.

In short, we believe Arch is exceptionally well positioned to capitalize on resurgent coal market environment, and we firmly believe the stage is set for such an environment to occur. The US economy appears to be shifting into higher gear. Industrial activity may finally be reaching critical mass after 15 months of slow but steady growth, and US coal exports appear poised to climb in response to strong demand and constrained supply around the globe. In preparation for this strengthening market environment and the super cycle for coal that we see emerging globally, Arch has taken several important steps in recent months to continue to enhance our competitive position and bolster our access to international markets.

In the first of these efforts, we completed the acquisition of a 38% stake in an export terminal project on the Columbia River system in Washington State. If all goes according to plan, we would expect throughput at the Millennium Bulk Terminal to reach an annualized five million tons by 2012 with the potential for further expansion thereafter. In addition, we recently entered into an agreement with the Ridley Terminal in northern British Columbia that assures us throughput capacity of up to two million metric tons in 2011, and up to 2.5 million tons in each of the four years thereafter. We believe that both of these projects represent key building blocks for the opening of significant new markets for PRB coal in the Asian Pacific region. We believe that PRB exports through Bulk Millennium and Ridley can compete very effectively with comparable Indonesian coal, and we are aggressively pursuing opportunities along the Pacific Rim for our coal products.

In another significant development, Arch further ratcheted up its stake in Knight Hawk Holdings during the fourth quarter, increasing our equity interest from 42% to 49% in exchange for total consideration of $26.6 million. Knight Hawk continues to perform well, shipping approximately four million tons last year. Moreover, we continue to make good progress in our efforts to secure the necessary permits for a portion of our wholly-owned 300 million ton, low chlorine reserve base in the Illinois Basin. We expect the PRB to play the primary role in meeting new domestic demand growth and filling gaps in supply created by declining output in the East, but we believe Illinois Basin will play an important supporting role. With more than 30 years of operating experience in Illinois, Arch is poised to participate in this market's recovery over time.

Now, let's take a closer look at the coal market dynamics in the year just ended, as well as our expectations for 2011. During 2010, coal market fundamentals improved dramatically. US power generation increased an estimated 4.4%, and coal use for power generation rose an even more impressive 5.6% as coal recaptured some of the market share it lost to other fuels in 2009. At the same time, international demand for US coal climbed dramatically, giving rise to a 21 million ton, or 35%, in coal exports. That matches the strong export levels achieved in 2008. In total then, demand for steam and metallurgical coal increased by 72 million tons during 2010, a significant jump. 2010 coal production on the other hand was up just ten million tons with modest growth in several basins, including the Powder River Basin, offset largely by declining output in Central App.

Power generators stock piles declined by 33 million tons from the peak reached in 2009, ending 2010 at an estimated 170 million tons. While stock piles nationally remain above the five year average, it was a sizeable liquidation and a very significant step on the path to complete recovery of the US thermal market.

Perhaps more importantly, we believe the stage is set for another big inventory draw down in 2011. While it will be tough to match the weather extremes of 2010, the winter so far has been very encouraging, and the improving US economy looks to provide even a more significant boost. Furthermore, the output -- the outlook for US coal exports continues to improve. Many of the world's major exporting nations including Australia, South Africa, and Columbia are confronting significant weather-related and infrastructure-related challenges. We expect US coal to continue to step into the breach to help alleviate these chronic supply shortfalls in the international arena. At present, we conservatively anticipate US coal exports to increase by approximately 12%, or ten million tons in 2011.

In short, domestic coal markets continue to rebound, export demand is increasing sharply, and global supply sources are constrained. The outlook for 2011 and beyond is highly encouraging. With our strong operating platform and assets in place, we believe all of the pieces are coming together, and Arch is exceptionally well positioned to capitalize. I will now turn the call over to John Eaves for some additional comments on the quarter. John?

Thanks, Steve. Clearly, the outlook for coal markets both here and abroad are improving. The met market was already strengthening before the severe weather events in the southern hemisphere, and those supply disruptions have only served to push the market higher. While thermal markets are still in recovery, market fundamentals appear to be strengthening at a very good pace. As Steve indicated, generator stock piles are still on the high side, but the excess is being burned off rapidly. We expect another 25 million tons or more of inventory liquidation in 2011 which should drop generator stock piles below the five-year average before the year is out.

Not surprisingly, we are already starting to see customers come back into the marketplace to supplement their 2011 commitments and to line up tonnage for 2012. We expect the level of activity to strengthen as we head into the spring. In short, we see the potential for meaningful inflection point in the US thermal markets at some point during 2011. While we believe there's potential for significant upside in coal markets as we progress through 2011, we continue to follow a patient, but prudent, approach to contracting. As a result, we have committed our price to approximately 15 million tons of coal for delivery in 2011 and roughly equivalent amount for delivery in 2012 since the last earnings call. As I'm sure you've already noted, we provided a schedule in the release showing our committed volumes for 2011 and 2012 along with the prices at which those tons are committed. Consequently, I won't take the time to walk through that data here. However, I did want to spend a few minutes talking about the progress we've made on our met business.

To date, we have committed approximately 3.8 million tons of met coal for delivery in 2011 at an average price of $105.28 per ton. Of that total, approximately two million tons is PCI coal which typically achieves a lower price in the marketplace. We've now put nearly all our expected PCI business to bed and would anticipate the vast majority of our remaining 2011 met tons to be sold as coking coal.

Now, let's turn to the performance of our operations during 2010. Generally speaking, our mines performed impressively. Operating costs were down in two of the three operating regions and were relatively flat in the third after adjusting for sales-sensitive costs. In the PRB, operating costs declined more than 6% year-over-year as we captured cost reductions and synergies stemming from the Jacobs Ranch acquisition. We did experience some cost inflation from Q3 to Q4, largely due to higher diesel and sales-sensitive costs, but we believe we're doing a very solid job in managing controllable cost. In the Western Bituminous region, costs declined by nearly 5% year-over-year despite five long wall moves. And we saved the best for last, achieving our lowest quality quarter performance in Q4. In Central App, costs increased approximately 3% but almost all that increase was attributable to higher sales-sensitive costs. Given the challenging operating and regulatory environment in that region, we view this as a significant achievement that we were able to hold our cap costs relatively flat.

As we look ahead to 2011, we expect modest but manageable cost pressures in each of our operating regions. In the PRB, we expect some of our input costs, particularly diesel, to increase in 2011. We are approximately 60% hedged on diesel Company-wide for 2011 at a price that is $0.23 lower per gallon than the current spot price but nearly $0.30 higher per gallon than the average diesel cost last year.

In the Western Bituminous region, we currently anticipate running at a modestly reduced rate, due to continuing market weakness which could have an impact on unit cost particularly during the first quarter. Despite that fact, we expect our average cost for the year to increase only modestly, if at all, in the Western Bit region.

And, in Central App, three month outage of the long wall at Mountain Laurel will exert upward pressure on cost during the first quarter of this year. While we expect to make up some of the delayed volumes as the year progresses, and while we believe we can again be the low cost producer in the [Capp] region we anticipate some cost inflation. We're focused on offsetting these various cost pressures and fully expect to turn in another solid cost performance in 2011.

Before concluding, let me provide a little additional context on the long wall outage at Mountain Laurel. Initially, the mine had planned to move to the long wall to the next panel -- the number eight panel in late December. However, the mine encountered geologic challenges in the tailgate area of that panel which will require additional development work. Consequently, the mine now plans to move the long wall to a different panel, the number nine panel, as soon as the development work is completed. We expect the long wall to start up in the number nine panel by mid- to late April and are focused on shaving as many days off the outage as possible. We have five continuous miners operating at Mountain Laurel, which, in aggregate, supply approximately 30% of the mine's output, and we have significant inventories on hand. As we previously indicated, we expect the long wall outage at Mount Laurel to have an impact on our first quarter results, but we should make up some of the delayed production as the year progresses. Despite the temporary outage, we remain very comfortable with our targeted met volumes in 2011 of at least seven million tons.

Before closing, I want to take this opportunity to applaud the achievements of our employees in the areas of safety and environmental compliance. Arch improved on last year's record performance while lowering our lost time incident rate by 35% and again ranked first in safety performance among large, diversified coal companies. In addition, the Company achieved its best year on record for smacker compliance with a 45% reduction versus 2009 and once again led its major coal industry peers. It's an honor to work for a Company with such a dedicated employee base. With that, I'll turn the call over to John Drexler, our CFO. John?

Thank you, John, and good morning, everyone. From a finance perspective, the fourth quarter capped off a strong year with record cash flows and a strengthening balance sheet. Operating cash flows for the quarter totaled $240 million and, for the year, reached $697 million. Both company records. Capital expenditures in the quarter were $93 million, bringing the total for the year to just under $315 million, slightly below the bottom end of our guidance range for the year. As mentioned in the release, free cash flow for the year was also a company record topping $382 million. With that cash flow, we aggressively paid down debt, reducing our outstanding borrowings by $68 million in the fourth quarter and nearly $200 million for the year. In fact, since the Jacobs acquisition, we have now reduced our outstanding debt by more than $370 million.

At the end of the year, debt levels totaled $1.6 billion, cash on hand was $94 million, and our liquidity remained strong at nearly $1.1 billion. Our debt-to-cap ratio was just under 42%, down from more than 46% at this time last year. And, while that decline highlights our focus on strengthening the balance sheet, it doesn't tell the entire story. In addition to lowering our overall leverage, we also improved the maturity profile of our debt during the year. Last year at this time, nearly two thirds of our debt balance had maturity dates that were less than five years away. Today, that number is less than one third. In short, we are very proud of the progress we have made in strengthening our credit profile since the Jacobs Ranch acquisition.

I should note, however, that we didn't exclusively focus on the balance sheet in 2010. We've also continued to invest in the business, acquiring reserves in Montana, investing in the Tenaska Trailblazer Project, and growing our presence in the Illinois Basin with the additional Knight Hawk investment. And, we have continued to return cash to our shareholders with an increase in our dividend earlier in the year, the fourth such increase in the last five years. With that, let me now discuss our outlook for 2011. We expect the following. Total sales volumes, including brokerage tons, to be in the range of 155 million to 160 million tons. EBITDA in the range of $910 million to $1.03 billion, adjusted earnings of $2.00 to $2.50 per share. The adjusted EPS range excludes an expected $20 million, or $0.08 per share, of non-cash intangible asset charges related to sales contract amortization. DD&A excluding sales contract amortization in the range of $378 million to $388 million and capital expenditures, including reserve additions, of $370 million to $410 million.

As you can see from our guidance, we expect 2011 to be a strong year, and we anticipate another record year for free cash flow. We currently expect to deploy that cash flow in a similar manner to 2010. With that, we are ready to take questions. Operator? I will turn the call back over to you.

Thank you. (Operator Instructions)We'll go first to Shneur Gershuni with UBS.

Hello. Good morning.

Good morning, Shneur.

First of all, thank you for putting out the contract table. Very much appreciated.

You're welcome.

My first question is related to your production guidance. Your comments on the call talked about a strengthening market and so forth. Seems that your production guidance is kind of on the light side. Is that something you believe is possible to be marched up throughout the year? And then secondly, if you can talk specifically about your Appalachia production because if you back everything out it seems that there's a lot of growth expected out of Appalachia as well for this year.

Yes, Shneur. This is John. We do think we're conservative in our forecast. We're cautiously optimistic on what we're seeing in the market but want to be fairly conservative in our forecast. So could we bring on some additional volume in the PRB if the market was there? We could. We're not going to bring it on for short-term business. We want to make sure there's a sustained demand there before we bring on additional reduction and spend any additional capital.

Your question on Central App, I would say we've always indicated to the market we have the capacity to do about 15 million tons in Central App. And as we see the market continuing to improve, we're trying to increase that volume with that market improvement. In the Western Bit region, the volumes -- we had a pretty good fourth quarter with Dugout. We would expect to have good performance for 2011 as well. So we're conservative in our forecast on the production side, but if we saw a material movement in the market, I think we would have the ability to bring some on with very little capital.

Great. My next question is just with respect to the met market. I was wondering if you can give us your expectation given the Australian impact? How it's impacting contracting situation? If you can also comment on where you think steel producer inventories -- and I have a follow-up on the port comments that you made?

Well, I would say that in terms of the met business, we have certainly seen a material improvement over the last 30 days. Price is up at least $25 to $30 per ton. We feel pretty good. We've got the 3.8 million place. We've got another 3.2 million with most of that going in the international market. So clearly the prices we're seeing -- the interest is material. So we're encouraged by that. We'll have to see. Most of our business that's been put to bed so far out of the 3.8 million, two million of that is PCI. The balance is mostly domestic. So we really have yet to place hardly any of our international business. We really like our position going into a market like this. Current estimates in Australia impact would be somewhere around 15 million to 20 million tons and growing. The weather forecast for the Queensland area is not very positive over the next month or two. So you could see that impact worsen over the next month or two. The other question was on the port?

Yes, on the port. Do you anticipate Western Bituminous to be going out? I noticed that you had a bit of an inventory build? And is that the plan with respect to Prince Rupert? And if you could talk about the permit approval process for the Millennium port in a little more detail?

I would tell you in terms of Prince Rupert, most of that will be PRB coal. There's always an opportunity to move some Western Bit, but I think our focus for the moment is running PRB coal up to the Ridley terminal. Western Bit though, as we continue to develop the Millennium Bulk Terminal, that is a dual-serve facility, which takes BN delivery as well as UP. So we would expect to bring PRB coal as well as Western Bit coal into that facility for blending.

Great. Thank you very much.

We'll take our next question from Michael Dudas with Jefferies & Company.

Good morning, gentlemen.

Good morning.

Steve, can you share with us your Illinois Basin strategy? You've started some perming presses in your own reserves. You're up to 49%. Is going to a majority stake in Knight Hawk dependent on investment, permit, or market opportunities? And does that have to play into what you want to develop in the Illinois Basin? Maybe you could share what the next two to three years might look like for Arch in expanding that region?

Well it will be market-driven, of course. But with Knight Hawk itself, it would be driven -- really not a permit issue -- with some additional investment and the market doesn't make sense to do so. We have a great relationship with our partners there, and we see that as a good way to keep our information current and really insights into that market to make sure that reality is what we think it is, I guess, is the way to describe it.

As far as the permitting of our larger wholly-owned mine, that's progressing well. Our view of the world is that permitting in every basin, but certainly any of the basins as you move progressively East from the West, becomes more difficult and harder and harder. And we see putting that permit in place as very sound and logical. The actual development of the mine will be driven entirely by the market. And I've said many times on different calls and in different presentations that we still see, and it really hasn't changed. That the Illinois Basin's resurgence is in that 2000 timeframe. And I was saying that I think as early as 2008. And as you look at it, we're still sticking with that number. Certainly, new production is coming on in the Illinois Basin. What's harder for everybody to get their arms around is the depletions and the declines. And as we study that and from our information of looking at the market as a whole, we see a net increase in production in Illinois. But it's much less than just the raw increase of new mines because depletions are significant moving forward. Certainly over the next four or five years. And then opportunity probably has stepped in.

Appreciate that. My follow-up is for John. Relative to your peers, you've had terrific cost and operating performance in Central Appalachia. Have you been finding increasing issues with regard to inspection? MSHA rules? Obviously, you can comment on Spruce if you'd like with regard to the permitting. Do you expect an alleviation or normalization in the Appalachian region in 2011 to allow the industry to get a sense of getting back to a normalcy? And if that's the case, is that going to cause a cost jump in productivity decline for the industry, in general, and Arch, in particular?

I don't know if it will ever go back to normal. Clearly, we're getting hit like others with inspections and certainly a real distraction. And the operating team has done a very effective job in managing our costs. But as we move forward, certainly the first quarter this year we're going to have an impact on our costs just driven by the Mountain Laurel situation. But sales-sensitive costs continue to mine tougher and tougher reserves. I think all of those things along with additional inspections will put additional pressure on Central App costs. We still expect to be the low cost producer in Central App, but from 2010 to 2011, you are going to see a step-up in those costs.

But do you see the industry in a sense normalizing in 2011? Or is there still just going to be continued creep and pressure on productivity and inspections and rule-making as we move forward?

This is Steve. I think John is being modest in one sense just to complete his last comments. I think our position and our approach to safety and environmental, which is just a core value of the Company, is paying off. It helps us in addressing the new regulations and the increasing inspections. All of us face declining reserves. If you want to think about that in terms of mineability over time, it's just the nature of Central App. But really that core value has helped us deal with what has been a certainly significant increase in inspections. And really no debate, you would like to think about safety rules being black and white, but the reality of it is there are lots of interpretations. In the last year, those interpretations have been pretty much the way the government sees them as opposed to any discussion.

I think it just continues throughout 2011. I think the pressures in the East continue to move forward. There's no sign of letting up. There's no sign of stabilization. There are some lawsuits. We have the Spruce lawsuit that we'll file -- or has been filed actually -- and gets amended. But that will take two or three years to play out. The regulatory environment out of Washington doesn't look like it's going to change any -- or certainly any time soon. So really I look at it as there will be significant pressures on cost partly driven by reserves for the industry, but that Arch is probably going to be the best positioned of the group to maintain and keep a lower cost increase than anyone else.

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

Good morning.

Hello, Jim.

Steve, maybe going back to export terminal stuff. I think Shneur was getting to this. But your Millennium Bulk Terminal investment, can you talk about the permitting hurdles to get that up and running as a coal terminal? And maybe where the longer term capacity might go to? Or if there are plans to expand that beyond that 2012 number?

Sure. Obviously it would be driven by the majority owners of Millennium. But as we see it, the site is an old aluminum smelter and alumina-importing terminal if you want to -- . So it's a brownfield site. In fact, we think once -- or in fact, Millennium's plans are once they get all of the permits cleared that there will be some clean-up. And they will actually make the site look better plus creating a lot of jobs, both in the construction and then permanently. And having a significant economic impact in the local's county and area.

The permitting hurdles, of course, are getting coal approved for bulk-terminaling there. It's already a bulk terminal. It's just getting coal approved. As I think someone said -- it wasn't any of us -- that said if we were talking about wheat it probably would have been done and over with. But we're talking about coal. So there's certainly environmental opposition. We don't think that the lawsuits are -- the permitting hurdles are going to be such that it doesn't occur. And we're pretty optimistic as we look at it, and even one, I think, of the county commissioners said that we're talking about a terminal here for exporting. We are not debating the debate of global climate change. So it is what it is. And right now, the plans are and the expectations are that it will be operational in 2012. And we haven't changed that view at all. So pretty encouraged by it.

As far as any future expansions, really that will be up to the marketplace. And then there would be significant environmental studies that would have to be done along with additional significant investment. If those environmental studies prove out, our current view and advertising is that it's 5-million-ton-a-year terminal, and then it depends on really Millennium and the owners and Arch being part of it. If it's appropriate to undertake those environmental studies driven by the market, and then the outcome of those studies would determine where it might go from

Jim, it is a 400-acre site. So one of the things that intrigued us when we made the investment was that the potential for expansion. As Steve said, it's going to take some time and be market-driven, but there is plenty of real estate there for expansion.

Perfect color. And then maybe this is a follow-up. You're not alone in mentioning rail performance this past quarter, and it all seems to be centered around one provider. But curious if that rail provider is making any moves to improved service? Or what you think can be done about that going forward?

Jim, clearly, one railroad caused us a lot of pain fourth quarter. I would tell you, year to date, so far in 2011 things are improving. They have some locomotives. They've done some hiring. And I think we're seeing some slow but steady improvement. But clearly, the impact to us fourth quarter was significant and we're having multiple sessions and talking to these guys every day. And we are holding hands, and we think we're making a positive change. But it has been painful.

I will add that particular railroad has told me they will improve every month going forward here for the first half of the year. And I fully expect it to occur.

Moving on we'll go to Curt Woodworth of Macquarie.

A question on the PRB volume outlook for this year. If you look at the last two quarters, you've been running at production run rate quotes are at 140 million tons. But I think the midpoint of the guidance is in the high 120s? And I'm just curious kind of what's driving that step-down from where you've been in the back half of 2010?

We ran better in the back half of the year. We had better weather, better efficiency. We continue to get the synergies out of the Jacobs Ranch. But really our volume forecast for 2011 is really predicated on the market we see right now. And as we see material improvement in the market that's sustained that we bring on additional volume. But right now our volume forecasts are based on kind of what we're seeing in the marketplace and where we can get the highest returns. So that's something we're always evaluating almost daily, monthly, quarterly, as to what that volume should be. And we can bring on a little additional volume with very little capital, but we're not going to do that unless we see a solid, long-term market for that coal that gives our shareholders their appropriate return.

So as we look out to 2012 and if we assume that the inventories normalize or the market gets short, would you think your capacity for that year would be closer to the 140 million you've ran out in the back half of 2010? Or would it be higher than that?

Again, I think it depends on what we see in the market. Right now, the markets are heading in a good direction. We're booking business at prices that are good. We don't think they are near where they should be. So as we get to 2011 and continue to evaluate 2012, we'll be making those decisions on what volumes we run in 2012 and 2013.

And then just a question on the guidance -- the EPS guidance. What are you assuming right now for your unpriced coking coal? And do you have any ability to participate in what's a pretty attractive spot market right now? Obviously, the tonnages aren't that great, but you're hearing prices well above 200 for spot deals right now on the East Coast.

Yes, I mean if you look at -- we've committed 3.8 million tons, and that's the average of the $105.28. So we have guided to at least 7 million tons in the met market. We very fully expect to exceed that. We think we're being conservative. So you've got another 3.2 million tons that is yet to be committed in the market, and our goal would be to put all that coal in the coking coal market, primarily in the international market. Certainly based on what we're seeing coming out of Australia. Those opportunities are there today at materially higher prices. So we're very encouraged by the position we're in today on our met situation.

What's kind of the spot price you're seeing right now for that quality?

Most of the coal that we'll place into market for 2011 is the high-vol. B product. I don't really want to give you a number, but clearly we've seen a step-up of $25 to $30 over the last three or four weeks. And since we're in pretty sensitive negotiations with some of our larger customers around the world right now, I'm a little hesitant to talk about pricing. But a major step-up in that area.

We'll take our next question now from John Bridges with JPMorgan.

Good morning, Steve, everybody.

Hello, John.

Hello. Just wondered -- just wanted you to give us a little bit more color on the confidence you have with the new mining plan at Mountain Laurel. I'm guessing there are fractures which if you go at it from a different direction will work a whole lot better with your long wall. Could you talk a little bit about that?

John is the expert on it more than me, but it's really just as he described it. We're skipping Panel Eight which was developed. We have encountered some problems in Panel Seven, and they were spilling over into the tailgate section of Eight. And just again, driven by our safety concerns and our focus on making sure that that mine performed at the level we expect it to, we decided to redevelop, if you want to call it, the tailgate entries for the long wall on Eight. And in that, that takes longer than completing the development of Panel Nine. So there's nothing unique about it. There's nothing what I would call particularly difficult from an engineering standpoint.The guys are working on it as we talk right now. The real goal is just to speed up and complete it sooner. So we'll skip -- we'll go from Panel Seven to Panel Nine. And then by the time the Panel Nine is done, we'll come back to Panel Eight and mine it. So it's just coal mining. It's unfortunate. I wish it would have occurred at a different point or never occurred, but nonetheless, there's nothing unique. And we fully expect to meet -- and John won't like this -- but I fully expect for the guys to beat that timeframe.

And John, we have been holding hands with MSHA on this. So there's no issues in that regard either. So as Steve said, we do expect to beat the forecast we put out there, and we're trying to manage that every day. And then, we should get back to a normal run rate second through fourth quarter of this year.

And the geology in this new panel is a whole lot better?

Yes, the geology is fine. If you look at our run rate fourth quarter of the MSHA data, we're running at a pretty rapid pace, and we would expect to do that again post-first quarter. So yes, we're pleased with what we see.

Okay, great. And then as a follow-up, you're expressing more confidence in Knight Hawk. Where do you expect to see that coal going? Is that domestic, international? How much do you expect to go in different directions? And what sort of volume do you think you could get out down the River system?

Well, they're running in that 4-million-ton range, John, and we think they can move that up probably in the 5-million-ton range pretty easily. Their customer base is primarily in the Midwest. It's the utilities on the River system as well as the industrial sector. They have historically exported a little bit of that coal, but they've got a nice market here in the Midwest that they are pretty well committed this year in very good shape. So I would say the growth over the next year or two could be, say, another 1 million or 1.5 million tons. If there's a market. They are a market-driven company, and they aren't going to force tons into the market unless they can put it to bed for a period of time.

Okay, excellent. Many thanks guys. Good luck.

(Operator Instructions)We'll go next to Paul Forward of Stifel Nicolaus.

Thanks. Good morning.

Good morning, Paul.

You just had a quarter in which the bottom-line number was $0.33. Looking at the first quarter and thinking about the changes that we'll see from the fourth to the first. It looks like pricing will step up a little bit, but you'll see volumes likely down in Central App due to Mount Laurel. And I think John you suggested Western Bit might have a volume impact in the first quarter. Can you talk about directionally from that $0.33 number you just posted, should we be flattish? Is the pricing enough to overcome the volume impact? Or potentially are the associated costs with things like Mountain Laurel potentially going to drag things below what just happened in the fourth quarter?

We really refrain from trying to give quarter guidance, but I think a conservative view of it would be that we would be down a little bit, but I won't guarantee that to you. It really depends on Mountain Laurel performance and the ultimate pricing for the quarter which certainly is very positive and some of the costs. We think we've been conservative on some of our costs, but we will see where that shakes loose. But I think if I were building my model, I would heavily weight it towards the second, third and fourth quarter as opposed to the first quarter in terms of overall EBITDA and cash.

Okay, thanks. And Steve, you had mentioned earlier that Arch's view was that we're at an early stage of a coal super cycle. Can you talk about how that colors your view on acquisitions? Maybe potentially major acquisitions in an export-oriented region like Central Appalachia?

Well, we never comment on specific strategy ideas there. But clearly, we think over time the total industry continues to consolidate both domestically and internationally. And that then, led by the Pacific Rim, we are in a global super cycle. And there are no signs that energy demands, whether it's in oil or coal or any of the other energy sources, are going to alleviate any time soon. Certainly, there will be variability and one year could be up or down, but it's a long-term cycle it looks like. We are -- some of the capital this year is aimed at further trying to increase our metallurgical production. And as we said a year ago at, sans Mountain Laurel, we were shooting for, kind of 8 million tons. That's still on target for us, and going beyond that. And we'll just see, but we're feeling very good about where we're sitting right now. It's like I said I think in the prepared remarks. All of the pieces are coming together, and we like what's going on both from a market-driven demand situation, from the overall pricing situation, from our port and export capabilities as some of the West Coast things come together. Also some of the Gulf Coast -- we're exporting down through the Gulf both from our Western Bit operations and also in conjunction with some of the Illinois stuff out of Knight Hawk. So it's all going the right way.

Okay, thanks very much.

All right.

Next up, we'll go to Mitesh Thakkar of FBR Capital Markets.

Good morning.

Hello.

The first question is more down to what Paul asked you, just in terms of free cash flow. You generated a lot of free cash flow this quarter and for the full year, also. How do you think about free cash flow deployment going forward? I know you have mentioned that you are expanding Mount Laurel and stuff like that. But you still have a decent amount of cash flow for 2011if you look at even your current guidance? How do you think about that?

Mitesh, this is John Drexler. I guess, as we said, our prepared remarks, we were very pleased with the generation of free cash flow during 2010. And as you indicate and we agree with, we expect significant free cash flow. Moving forward into 2011, and as we indicated, our view right now is we'll approach how we utilize that cash flow similar to how we utilized it in 2010. We'll continue to focus on the balance sheet as we did in 2010. We'll continue to look to invest in the business when there's compelling opportunities to do so. And we feel that there are opportunities to create value as we did in 2010. And we'll also look at opportunities to return cash to the shareholders. So as we look forward, we expect to continue to approach that very similar to how we did.

So balance sheet is a top priority relative to maybe acquisitions and returning to shareholders, right? Is that a fair way to think about it?

I'm not sure. I think we'll look at all three, and as there are opportunities to create value, we'll look at all three of those opportunities to deploy that cash.

Fair enough. One last question. Your 2-million-ton export capacity at Ridley for 2011? Is that reflected in the guidance? If you lock in some contracts -- I know you mentioned you're in negotiation with some customers in the Pacific Basin. If you lock in some contracts, and you decide to export some coal out of Ridley, is it a part of the guidance yet? Or is it pure upside?

It would be upside. It would fall in the open market tons, and that would just be a place we would market some of those tons.

All right, sounds good. Thank you.

Thank you.

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

Good morning.

Good morning, Brian.

Question for you on Central App. Walking through it earlier, you mentioned 15 million tons of capacity there. But given all of the issues there and given your run rate for 10, it seems like you might be a little over-committed for 2011 on the steam side. Is there the potential that you might have to go out into the market to fulfill some of those commitments?

We are always looking at buying coal, where we can buy steam coal, free up met, et cetera. Once we get through the Mountain Laurel challenge, we do think that our run rate can improve a little bit. I would tell you that most of our uncommitted coal in Central App is met coal. So we do have a little production coming off the Spruce operation at about 50,000 a month, and it's purely steam coal that we put in the market. But most of our exposure in Central App would be the coking coal.

Great. And then Steve, just a bigger picture question. Has there been any fundamental shift in your thought process with regard, how you see ACI in a five- or 10-year timeframe? There's been obviously a lot of rumors floating around the market about different acquisition targets and things like that throughout the industry. What is your view with regard to -- and you've given a little bit of your Illinois Basin discussion. But basin by basin, any opportunities that you see that have shifted over the last 12 months?

Well again, my view of the world is that we don't tell the world all our strategy until we start implementing it. Just makes it more expensive to implement it if you do. But long-term if you took a 10-year view, I would expect us to continue to expand our export capabilities really from every basin. As I mentioned, we're exporting Western Bit down through the Gulf. There may be opportunities to take some of that up through the port. Certainly the US ports as they develop PRB through the Canadian and US ports and through the Gulf. We see that developing. Eastern ports are pretty well established. There may be some opportunities for those to expand and us to service that. But I think just as an overarching theme from where we sit is you'll see Arch continue to emphasize this move and expansion to participate in the international market. We anticipate modest growth in the US market, but the more dramatic growth is going to be able to participate both in the Atlantic, and certainly, the Pacific Rim. As you look at coal flows around the globe and what's happening in South Africa starting to supply the Pacific Rim which is shorting -- we think will short the European market. So we're pretty focused on that. You can see our announcements on the West Coast stuff. I think you'll just see more of those sorts of transactional announcements.

Thank you.

Thank you.

Moving on to Holly Stewart with Howard Weil.

Hello. Good morning.

Hello, Holly.

A quick question on port capacity. New ports aside here. Can you walk us through what your existing terminal capacity is?

You mean the US, or just us?

Yes. Specific to Arch.

Well, we own -- what is it -- 22% of DTA. And the actual capacity of DTA somewhat gets dictated on how many stockpiles do the partners maintain. But if you use 20 million to 22 million maximum capacity, I think you can be talking about 3 million or 4 million tons that would be Arch's. And then we trade capacity back and forth between the partners and different boats. So it's hard to define an exact number. Obviously, it's all open contracts with Lambert Point, but I think NS announced that they thought Lambert's Point could expand or achieve 30 million annual tons. Last year, they were about half of that, a little over 15 million annual tons.

And then the Gulf again is one of those capacities that we're shipping through the Gulf today. It's almost impossible to define what the midstreaming capacity is, probably limitations are through the Gulf are barges more than the capacity down at the port itself. And then you have Mobile which we don't ship through. So others could answer that better. But our total view of it is that you'll see continued expansion of Arch's exports, and that right now is currently constituted US export capacity somewhere around 110 million tons.

Okay, thank you. And then just trying to get a better idea John, about how to model the Eastern division going forward here. I know with Mount Laurel it's hard. But just kind of thinking about the progression throughout the year, can you just give us a little bit of help?

Yes. Clearly our focus, Holly, in the East is going to be on the met. For the balance of the year, that's going to be our focus in getting Mountain Laurel up and really trying to improve our run rate. As Steve indicated earlier, we're spending some capital dollars to improve our ability to participate in the met market. We are going to have some upward pressure on our costs for 2011 versus what you saw for 2010. Certainly first quarter, but even for the year. Given the sales sensitive, the reserve challenges, the inspections are all going to put pressure, not only on Arch, but on the industry.

But as we've indicated a few times earlier, we still expect to be the low cost producer in Central App. Where that number lands, I think it's moving around a little bit. And probably give you better perspective once we get through this challenge with Mountain Laurel. But clearly, we like where we are given the demand opportunities on the met coal side from this point forward. So I hope we're being conservative in our forecast. We have said at least 7 million tons of met. We would hope to exceed that. And like I said, the opportunities we see right now are international and mostly coking coal. Since we've gotten most of our PCI put to bed. So we kind of like our position in the East.

And if you think about Mountain Laurel, really starting in the second quarter, we would expect it to be at its normalized run rate. There's nothing unique or special or plus or minus on moving to Panel Nine. It's just getting it developed.

Yes, and Holly, the run rate for fourth quarter was about 1.25 million, 1.275 million. So we would expect to get back to that at least for the balance of the year.

Great. Thanks.

Our next question will come from Brian Yu with Citi.

Great, thank you. Could you comment on your broker ton assumption for 2011 versus 2010? And is any of this helping Arch hit the 7-million-ton guidance as you shuffle some product around? 7 million from that full guidance?

I think our brokered volumes for 2010 were about 8 million tons. Call it about 2 million a quarter, and 2011 is about 1.5 million per quarter. So somewhere around 6 million tons is in the numbers for 2011. What was the other piece of your question?

Actually you answered it. And then the other question is, just on the PRB netbacks, as you look at the opportunity in the international markets, and we've seen some calculations where it suggests huge opportunities. I'm wondering, are your customers sharing some of the favorable economics on a delivered basis for them with you? I.e., better netbacks on what you saw in the international.

Well, as we look at the PRB call, and we evaluate its competitiveness in the international market we typically look at Indonesian coals. And if you look at the Indonesian coals today, call it $92 to $95, and if you run those numbers and the freight can move around on you, the netbacks at the PRB are pretty attractive. So I would tell you we're having very meaningful conversations with customers in Asia right now about those very things. But it is a sensitive thing. I wouldn't really want to give you exact numbers. But when you look at Indonesian prices at a comparable quality, we like our position here. The limiting factor being the port capacity, and we're certainly working on that.

But as we move forward, a lot of the growth that the Indonesians are forecasting is a lower-ranked coal. If you look at that step-up from where they're saying this year of, say, 245, most of that increase is a much lower-ranked coal than what we see the PRB. So we like our competitive position going forward in the Asian markets.

Our next question will come from Andre Benjamin with Goldman Sachs.

Thank you, good morning.

Good morning.

A couple questions. First, on the met market. I was wondering if you see any difference in how your customers are thinking about annual versus quarterly contracting this year? Given how high spot prices are, and the expectation that they will come down in the second half. Are you seeing more of the people that used to want annual go to quarterly? Or potentially negotiate off an annual benchmark that's lower than where the second quarter is likely to settle?

We're certainly having conversations with all our international customers right now. I would tell you that most of our met PCI business is done on an annual basis, and we're actually continuing to see that. There might be discussions about quarterly versus annual or semiannual. But really, my expectation from here would be that most of that business, at least for Arch, would continue to be annual business for the time being.

Okay, and then I guess on the West Coast port. Does your $25-million commitment cover all the spending that you need to get that facility up to ship coal in 2012? Do you expect the terminal to be online -- is that most of 2012? Or is that more of a late year event? And then as you look out to the future, is it a foregone conclusion that you're planning to ramp the $20 million to $25 million to something bigger? Or is there something you and your partners need to see in the market to move forward with that?

A lot of questions there, but on the $25 million investment. There is some nominal in the -- small, you'll never even see them really -- but dollars that would go in on achieving a couple of the hurdles. One of them is obviously getting the port finally open. So it's really not significant. Any future expansion will be driven by the markets, by complete environmental studies. Realistically, that takes a lot of time, and it will be determined at that time. We would be responsible for our share of 38% of expansion capital if in fact that ever occurred. Right now, that would be out there several years in our estimation if in fact it happens.

So we do expect it to be up and running in 2012 assuming we move on through the permitting process appropriately. We think we will, but that remains to be seen. There's not a lot that has to be done to the present. It presently is a bulk terminal that's operating. So there is certainly some handling that needs to occur but nothing significant.

And I guess one last short follow-up. Could you just refresh us on where you think you'll actually source the 7 million tons of met coal this year given some of the challenges that you've cited at the Mountain Laurel mine for the early part of the year?

Yes. Even with the issues at Mountain Laurel that's going to continue to be our horse in the met market. Beyond that, we have met coal and PCI coal coming from Cumberland Resources and from Lone Mountain. So the combination of those three will make up our 7 million tons. And as I said earlier, we hope that's a conservative estimate at this point.

Thanks.

Thank you.

We'll take our next question from Meredith Bandy with BMO Capital Markets.

Hello. Good morning. It's probably afternoon now, sorry. So anyway, most of my questions have been asked and answered. Thank you very much. And I'll just add one more thanks for the table on the pricing. But the price carryover -- in 2011, what you have priced for met? What of that is carryover because you had some issues in Q4 getting coal out?

Meredith, that would be between 400,000 and 500,000 tons that we carried over from fourth quarter into 2011. And that would be scheduled throughout the year based on vessel scheduling, et cetera.

Okay, thanks. So then you have basically -- that's 2.5 of PCI in carryover. So the remainder then, is that also high -- ?

The remaining would be coking, yes.

So high-vol. B, basically?

Yes, that's correct.

Okay. So when we take the -- when you gave us the $20 to $30 that you've recently seen price increases. That's not just added to the $105. That's added really to the high-vol. B price? It's embedded in that $105?

That's correct, yes.

Okay, thank you very much.

Thank you.

And now we'll go to Brandon Blossman, Tudor, Pickering, Holt & Company.

Hello, thanks for taking the question. First, to check off all of the boxes on the West Coast exports. Any concerns about rail to Ridley either this year or next? Either in terms of availability or cost?

Well, we have some agreements in place. We're always negotiating those agreements. The rail has a significant impact on the final pricing, or netbacks, and we'll certainly pay attention to it. So we didn't enter the Ridley agreement without some understanding of what those rail pricings would be. Always have concerns with my friends at the railroad, but I think we're okay.

Okay, helpful color. And then on CapEx, it looks like about a $75 million year-over-year uptick. Is there any additional color that you can give on break out there?

I think the midpoint was about $390 million, of which $50 million or so was land additions. And then we had about $50 million in terms of pushing met in the East, trying to bring on additional volume. We've kind of skeined our capital budget down over the last couple of years, and quite frankly a lot of it is catch-up. If you look at our maintenance, we've indicated in the past $250 million to maybe even $300 million. I would think as we have grown and gotten bigger that that run rate on maintenance capital of maybe $300 million plus or minus would be a better guide as you move forward.

Our next question will come from David Gagliano, Credit Suisse.

Great. Thanks for taking my questions. First, I just have some pricing questions. If you could talk about your Western Bit prices for 2011. I don't recall them being below $40 a ton for a long time. I know you had a big contract that was opening for repricing. So wondering if you could talk about why Western Bit realized prices are only expected to be $32?

Dave, this is John. Clearly, as we look at the marketplace right now, we're encouraged by what we see with met. We're encouraged by what we're seeing in PRB. What I am a little concerned about in the near-term would be our Western Bit. We're just not seeing the market demand there. There's just not a lot of activity on the utility side. Obviously as you move out and you look at the chart for 2012, we have quite a bit of roll-off as we move into 2012 that hopefully we can reprice it at much higher numbers.

I think as Steve indicated earlier, the one area in Western Bit that we are encouraged by is the level of interest in the international market. We're moving pretty significant volumes now into St. Louis down the River system to the Gulf whether it's going to Europe or South America. So we continue to be encouraged by really a new marketplace for our Western Bit coal. But if you look at our traditional customer base for Western Bit in the US, their inventories continue to be high. Some of our industrial customers hadn't cranked back up, and we're just not seeing the demand or the pricing in that region yet. And near-term, it's a little bit concerning.

On the positive side, you look at our cost performance on the fourth quarter, the guys did a great job. And hopefully, we continue that cost performance into 2011. But the $32 is kind of where we are right now, and as we move out over time, we expect it to step up. But our goal is still to improve our margins, and a lot of that driven by our cost performance until we see a market improvement.

When did you price the Western Bit -- the 17 million tons? Was that fourth quarter? Or earlier in the year?

It was probably throughout the year -- probably third and fourth quarter.

And there are some legacy contracts in there that haven't rolled off at all so you get weighted by that as well which are below that number.

And then just on the -- I appreciate the full-year targets, especially given the open positions that are still in place. I don't recall -- I don't know if the answer was provided earlier or not. I apologize if it was. But the price assumptions for the PRB volumes and the 3 million tons or so of met that you have unpriced. What are the price assumptions to get to your full-year targets?

I don't think we've given those out, David. We've been silent on that. As we've indicated, we've seen an improvement in the met markets on the coking coal side of at least $25 to $30. We would expect to see those type of improvements in the international market. PRB, we really haven't given any guidance there, but to say that the business we're doing is well above the average price here for the fourth quarter -- I'm sorry, for 2011. The business we're doing now is in excess of $14 for this year moving forward.

We'll take our next question from David Lipschitz of CLSA.

Thank you. How much coking coal do you expect to ship in the first quarter?

I'm not sure we have got that handy. We usually don't divide it up.

Just slightly up.

I'll have them looking it up, David. Do you have another question and we'll come back to you?

It's probably about 1 million tons, David, maybe plus or minus 100,000 tons would be right on top of that.

Okay. In terms of the Western Bit production, are you saying the market is not great. But you're going to do about -- based on your guidance -- 800,000 more tons of Western Bit production. And you said first quarter is going to be weaker compared to fourth quarter. So that means you are going to go back to the late 2009 type of run rate in the second half -- in the second quarter and beyond?

Right now, the way we see the market, we've got some flexibility. As I mentioned earlier, we're seeing some of the international demand develop. We'll see where that materializes. But, first quarter is going to be driven by a soft market as well as two long wall moves.

So would you not -- would you maybe not do the 17 million? If the market stayed as is, would you expect to be below 17 million?

I think that 17 million is probably a good place to model it right now.

Okay.

Also wanted to correct -- on the met for first quarter is getting closer to 1.3 million tons of shipments expected versus the 1.1 million.

(Operator Instructions)We'll take our next question from Lasan Johong with RBC Capital Markets.

Thank you. Whether you ask corporate CEOs on the utility generation side or you look at analyst reports, there are ranges of between 20 and 60 gigawatts of coal-fired, power plant shutdowns that are expected due to the EPA regulations coming in November. What do you -- first of all, what do you think the impact to coal shipments would be? And assuming most of that will be coming from Central App, what does that do for costs for ACI and production opportunities for ACI?

It's hard to get your arms around what that number is. As you say, it's a wide range of estimates out there because the regulations haven't been actually promulgated. We know they're coming. We've studied it in a myriad of ways and have torn apart unit by unit across the nation. And when you look at the units that are most at risk, the megawatts make a nice headline. But from a coal supplier's perspective it's how many tons do those particular plants that could be at risk actually burn? And we actually took it even higher, and said well, what's the worst case scenario? And we said that it could be over 100 megawatts. But then when you look at those 100 megawatts, it's unrealistic. And they don't burn any coal.

They operate with capacity factors of 25% to 35%. If somebody's sitting there focused on just the megawatt statement, over time it really doesn't make the kind of sense that we had. So you sit there and say let's take the midpoint, and it's around 40 megawatts which some of our biggest customers have talked about. We see it being really not as much coal as anybody might attach just to the megawatts. So you need to look at those capacity factors. I don't have our study in front of me so I'm kind of stumbling on this. But then when you think about it -- and I misstated, our worse case was 43 megawatts when we did that analysis. Not 100 megawatts.

So when the regulations come out in November, there will be a period of time for compliance. We would expect any shutdowns of some of the older tea kettles that probably do need to shut down to occur over the next five to six years. I think in a five-year plan, you would incorporate that. In fact, we do. It's offset by new plants coming online. They continue to come online. They started in 2010 that we've seen about 16 megawatts move from 2010 into the 2012 timeframe, that will come on. Plus we have the additional export opportunities that have been developing, and we spent much of the call talking about. Then we do see it -- as you said or implied -- that some opportunities probably open up for PRB coal moving further east as some of these older plants do close. The net-net of it all is we would rather not see it happen, but in fact, we see continued coal growth in the US and in the East.

Interesting. On the PRB coal front, there has been some suggestion that enhancing PRB coal at or near the mines before export would be a better option. Have you taken a look at that? And is that something that you're considering?

We have looked at it. We always look at that option to make our coal -- either Arch's coal or the industry itself more competitive. We -- usually every year -- it varies, and we'll invest $10 million to maybe $15 million in technology approaches. Some of them have paid off. Some of them haven't. During 2010, we talked about and you've seen one of the companies we've invested in, ADA, talk about being able to remove -- treat coal in the Powder River Basin and improve its mercury performance. We've seen great success in the field test -- live field test. We continue to test that. So I think you'll see continued advancements in the technology for enhancement and improvement in the combustion of not only PRB coal but other coals.

Thank you.

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

Yes, hello. How much met-slash-PCI coal did you ship in the fourth quarter? I didn't see a number on that.

We shipped about 1.5 million tons, fourth quarter.

Okay, great. Then just as a quick follow-up, of the 7 million plus tons of met-slash-PCI coal in 2011, is almost all of that coming from Company-produced coal or is there some brokered tons in there?

Yes, the vast majority of that all comes from our own production.

Okay, great. Thank you.

Moving on to Justine Fisher, Goldman Sachs.

Hello.

Hello, Justine.

I'm wondering if you can give us a bit more color as to what defines modest cost increases? Just because if you have PRB priced at $13.52 which is a great price, and you're pricing more at $14. And your open tonnage is all met. It seems like EBITDA would come in way above guidance, unless cost increases are in the high single-digit range. So is modest 3% to 4% cost increase? Or is it 6% to 7% cost increase?

It depends on the basin.

Justine, this is John. Our costs for the year in the PRB were $10.70. We're going to expect a little uptick in that. Some of that is driven by diesel cost. This spread we saw year-over-year and sale-sensitive cost. Everything else we're going to try to manage, but I can't sit here and tell you that it's going to be flat year-over-year. We're going to see some step-up. We are going to do our best to manage that effectively.

Western Bit, I would tell you the $26.29 in 2010. The guys had an extraordinary quarter, fourth quarter. We hope they continue. We've got two long wall moves first quarter that are going to impact our costs there. I would tell you if you model that in that $26.50 to $27 range for 2011, you are going to be pretty close on your targets.

Central App, I'd rather come back to you after we get through Mountain Laurel, but there is going to be a step up in Central App over that $57 to $58 number that we've been looking at. And I think everybody is looking at the same-type cost increases in Central App. And as we said a couple times, we would continue to expect to be the low-cost producer in Central App.

Okay, and then just a quick follow-up on the PRB pricing. Of the committed tons at $13.52, are any of those index tons? Are any of those available to be reopened? Or are those firmly priced at $13.52?

Those are all firmly priced. If you look at the chart, we've got another 7 million tons that are committed but unpriced.

Okay, thank you very much.

Thank you.

Thank you.

We'll take our next question from Sanil Daptardar with Sentinel Investments.

Thanks. On the volumes for 2011, if I just do the math correctly, you're expecting lower volumes from PRB year-over-year, right?

It will depend on the market. Right now, we're modeling a downturn when we started this. Stockpiles are still above the five-year averages, even though PRB stockpiles in our internal models are lower than anywhere else. But we see another year of stockpile contraction. So as a conservative approach we said, alright, let's match where we think the market will be. Right now with the winter weather we're seeing across the nation, there's more upside potential than downside, but we'll see.

Okay, on your comment of the natural-coal-gaining market share from natural gas in 2010. Just wondering, natural gas prices were still very low in 2010. Is it because there's no excess natural gas capacity for electric generation? That's why coal demand increased as a result of that which was about 5.6% on a year-to-year basis in 2010? Or is it something else which is happening in the coal markets?

I mean, it's yes. We have -- everything we've studied over the years, and we've said very often, we think the natural gas capacity, the ability to displace coal is around 30 million tons. That occurred in 2009. In 2010, we believe it was less than that. More importantly, from our research and talking to customers and looking at it, you really haven't seen natural gas ever replace or displace PRB. It's just uneconomic even at a $4-price range or a $3.75-price range for natural gas. If it goes low enough I guess conceivably that could happen, but we certainly don't anticipate that.

I think the natural gas guys -- you're starting to see signs that -- producing it just because they can. They are learning that it's not an economic model that's viable or that's strong. I'm told a few of them over the years that they remind me of the coal industry in the 1990s when we were great at producing coal. We weren't very good at marketing it profitably, and about one third of the industry went bankrupt. And we'll watch what the gas people do.

Over time, that could with significant investment -- that could obviously increase. But you have to build the plants. One of the interesting things that is tied to a previous question. As some of these older plants close for environmental reasons, you still have to replace that electricity. We forecast that some of the existing more modern coal plants will probably step up a percent or two in capacity utilization, and gas will get a piece of that. But those old plants are fully depreciated, basically not on the books. They produce typically very low cost in the scheme of things compared to a brand new plant whether it's coal or gas. So there's an interesting pricing dynamic out there that's going to occur. But nonetheless, we see a 30-million-ton displacement as the maximum, and it occurred in 2009. It was something less than that in 2010. There were some displacements and that resulted in coal regaining some share. Other people have that number higher in some instances of 40 million or 50 million tons. But that's kind of the maximum range. In a billion-ton market, that's meaningful, but it's not a huge hurdle.

Okay, if I may also ask a question on met coal. What were your volumes in 2010?

Our volumes per met PCI were 5.5 million tons.

Okay, and what's the max capacity that you can have on met coal?

When all our eastern mines are running well, we have said 8 million tons would be our capacity right now for met PCI.

Our next question will come from Dave Katz, JPMorgan.

Hello. I was hoping you could go back to the earlier conversation about the terminals and talk about the process of, in progress and lining up customers for the export tonnage coming out of those terminals.

It's like any other sales process. We've got teams overseas. Got a group leaving again here fairly soon and basic sales calls. Some people have tried PRB coal already. Others -- it's more of a test order approach, and it's a building process. But when you look at PRB's characteristics, it compares very well against a higher quality Indonesian coal. And it's even more favorable of the lower rank Indonesian coal and coming to a US standard the lower-rank Indonesian coal is about 8,100 BTUs compared to, say, the 8,800 to 8,900 BTUs we're seeing out of the southern PRB. So again, there are quality gains as they look at it. But like any customer, they are going to test it. They are going to try it. Once they've tried it, we find they typically reorder, and they increase the size of their order. But it's a unit-by-unit sale.

Okay. And then when looking at acquisitions, is there any area or region that you guys would like to focus on? Or what about any place that you might want to stay away from?

Well again, we don't talk about our plans there. It's just inappropriate in my mind, whether we have any or not. But some of the frontier areas -- if you want to take the extreme -- a frontier area in the international markets probably not the first place that we would ever consider something. We're more conservative, as I hope you can see, even reading the release today. But it's not that that's a bad idea. Just wouldn't be a good first step for Arch.

Okay, thank you.

We'll go next to Brett Levy, Jefferies & Company.

Hello. Thanks for taking the questions. Hearing that it may take between one and three years to clean up and drain all of the problems in Queensland, what are you hearing around that area and a return to normalcy in terms of the seaborne coal market?

I don't think anybody knows yet. I think if you took a one-year timeframe that's probably reasonable to model. But my observation over the years would be that when pricing moves to -- some of the forecasts out there of $300 -- or I think Wood Mackenzie came out with a $400 to $500 number. It's a great incentivizer to really move on cleaning up stuff and getting back to normal. So pricing has a great way of cleansing and clearing markets, but it's going to be an enormous challenge. But it would be better answered by one of the producers in Australia. But it won't be easy, and it will take some time. It will take a lot of money.

And then you obviously are addressing the Pacific Rim growth opportunity. Has anyone within your organization quantified starting today and ending five years from now what the incremental growth in demand that you see coming in the next five years from the Pacific Basin, maybe in aggregate?

Well, we have. We've done it more on a total international basis. We've talked about it where -- right now, and this was prior to the floods in Australia, we really haven't updated it. But we were forecasting in excess of 300-million-ton shortfall, cumulative, over the next five years through 2015 in the international markets of both met and steam combined. That number would be larger today driven by the production problems in Australia, but it has gotten a lot less press. But there has been production problems in South Africa, in Columbia. There seems to be some threats of strikes in some of the producing countries -- or in major companies. So it looks like we're setting up for a pretty dynamic pricing environment here for the next three, four, five years. Some of them driven by natural disasters. Others driven by just raw increases in demand from notably the Pacific Rim.

And did you have a split between steam and met in that 300 number? Granting that it's probably a bigger number now?

We do. I don't know it off the top of my head.

The largest piece of that would be thermal, obviously. But it was a pretty significant piece of met as well during that five-year period.

Thanks very much.

Thank you.

We'll take a follow-up question now from David Gagliano, Credit Suisse.

Thanks for taking the follow-up. Just a quick one. Just to clear up some confusion, the last earnings release -- it said Arch had 30 million to 40 million tons for 2011 delivery uncommitted, unpriced. This earnings release says the same thing -- 30 million to 40 million tons left to price. But I thought in the prepared remarks -- I thought John said Arch committed and priced 15 million tons for 2011 delivery. Can you reconcile that? Or did I misunderstand it in the prepared remarks?

Yes, I had said that we had placed 15 million tons in my opening comments. That was a combination of open tons and committed in price. So, yes.

And Dave, that should reconcile with the table. We think that reconciles well with the table. Remember that was new commitments, but some of it was committed. But on price tons, it had become priced.

Okay, we'll take it up offline. Thanks.

Okay, thank you.

Our final question will come from Brian Yu with Citi.

Great. Thanks for the opportunity for a follow-up. Steve, this is more a big picture question. But when you look at PRB coal prices that had been trying to bridge the value gap with eastern coal for a number of years, it has been difficult even though we have seen impressive volume penetration. As you look to move your product into the Pacific, what do you see that's different which would allow for a different pricing outcome?

Well again, in almost all energy commodities, domestic pricing and international pricing don't necessarily -- they are related, but they don't follow the same path. And as I mentioned in one of the earlier questions, when you look at the Powder River Basin, we think the right comparison of course would be against Indonesian coal which is the second largest coal exporting nation in the world after Australia. It compares very favorable right now when you look at the potential netbacks compared to the domestic market, and we see that continuing a little bit falling from the shortfalls we're projecting. So the numbers on the pure math could certainly have twos in front of them, and depending on what happens in the world, maybe more than that. But we'll just have to see.

That concludes our question-and-answer portion. I'd like to turn it back to Mr. Steve Leer for closing comments.

Again, thank you each and every one of you for your time and your interest in Arch. I hope we've conveyed that we see a strong year shaping up in 2011. If present trends continue, we hope we're being conservative in some of our forecasts out there. We are pretty confident we're likely to see a very dynamic pricing environment, particularly with all of the issues in the global markets surrounding production constraints and infrastructure constraints. And then just underlying demand as well. So we look forward to continuing our discussions of these developments as the year progresses, and again, thank you for your interest and your time. Bye now.

And once again, ladies and gentlemen, that concludes our conference. Thank you all for your participation.