Arch Resources Inc (ARCH) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Incorporated First Quarter 2011 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 and 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'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the investor section of our 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 VP& 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, everyone. Today, Arch Coal reported adjusted earnings per share of $0.36 in the first quarter of 2011. The Company also generated $191 million in EBITDA, marking it as one of our top quarters on record. We're pleased with these financial results, even more so because we have absorbed the impact of the temporary idling of the Mountain Laurel longwall during the quarter. Building upon these results, we have raised our full-year 2011 earnings guidance to reflect our current view on the continued strength of the global [met] markets, as well as our increased participation in the seaborne steam markets. We are poised to deliver a record financial year for our shareholders in 2011, a testament to the size and scale of our operations, our diversified asset mix and our growing access to seaborne markets, as well as our success in following a market-driven strategy.

Turning now to our current outlook for coal, we expect global markets to remain tight through 2011 and into the following year -- a function of growing international demand and constrained supply. We believe domestic markets should also tighten as the year progresses. Let's start with the met markets, since they have attracted everyone's attention. Domestic steel utilization has rebounded nicely off the lows of the great recession and is up another 6 percentage points from last April to stand at 75% today. While still below the heights achieved in 2008, the growth in utilization has allowed Arch to further penetrate this market with increased coking and PCI sales. On a global scale, year-to-date steel production is up more than 9% through March and up 20% from the recessionary levels. We expect production to increase in coming years, as steel is needed to build infrastructure in developing countries, such as China, India, and Brazil, as well as in mature economies, such as Japan, where significant rebuilding will occur.

We forecast met markets to remain tight over the next five years. As for the seaborne steam markets, we are bullish as well. We're building real demand again in Europe, driven by the need to rebuild coal inventories depleted considerably by a harsh winter, the high price of competing fuels, such as natural gas, and the step-up in demand from offline nuclear plants in Germany. Coal prices into Europe remain in the money for US coal producers and we're seeing steam coal, like met coal, migrate offshore. As a result, our forecast for US coal exports industry-wide in 2011 is now -- and our total expected exports are now expected to approach 105 million tons. This forecast represents the highest level of US export since the early 1990s. We are also -- we also project coal imports into the United States, which have been falling over the past five years, to continue their decline this year, as international coal supply gets pulled into the higher priced seaborne trade market.

As we've seen in prior market cycles, a pickup in coal exports and a decline in imports can have a dramatic effect on the overall domestic industry. In the last run-up, net coal exports grew by 35 million tons from 2006 to 2008, which consequently drove up pricing in domestic steam coal markets. We're seeing an even stronger dynamic now. On the supply side, we expect an uptick in production in 2011 as companies and some supply basins ratchet up production in response to stronger international markets, offset to some degree by ongoing declines in other basins, namely Central Appalachia. First quarter MSHA data released to date suggests that underground production in Central Appalachia has overtaken surface production in that region, further supporting our thesis that this region will, over time, transition into primarily a met coal producing region with ancillary steam output. Despite a muted outlook for domestic coal markets in 2011, generator coal stockpiles have been declining. We estimate that coal stockpiles sit at 65 days of supply at the end of March, well below the 80 days that prevailed at the peak in November 2009, but still 10 days above the five-day average -- five-year average for this time of year.

However, the continued trajectory in global coal markets unfolding, we believe further reductions in coal stockpiles could occur by the end of the year. Now I'd like to focus on a few things Arch is doing to capitalize on the strength of the current market cycle. First, we're prioritizing our met sales with plans to expand our met volumes to 7.5 million tons in 2011. This represents a more than 35% step-up in met sales from last year and underscores Arch's growing status as a met coal supplier. Second, we're exporting steam coal -- we're exploiting steam coal exports to open up new markets, improve our profitability and help balance the domestic market. John Eaves will provide some commentary in his prepared remarks on specific opportunities to expand our Central App, Western Bit and PRB sales overseas.

In particular, we're participating in the development of export capabilities on the West Coast to expand the PRB sales into the Asia-Pacific market, with our equity interest in Millennium Bulk Terminal and pursuit of other throughput options along the North American western coastline. We're preparing for a new frontier for the PRB. Naturally, it won't happen overnight. Time delays and challenges are expected, but in the end, we believe significant new port capacity will come online in the next three to five-year timeframe. In addition, we're planning to open a business office in the Asian Pacific region in the not too distant future. This direct approach will increase our exposure to international customer base, augment our market intelligence, and expand our business development activities. Third, we remain committed to following a market-driven approach by matching our production levels to current estimates of market demand.

Our first quarter results reflect this success. We believe being market-driven allows us to be nimble in our responses to changing market conditions, helps improve our operating flexibility, and delivers the best overall long-term results for our shareholders. Fourth, we remain focused on maintaining a strong balance sheet, which has and will serve us well through the full market cycle. From reducing leverage to keeping our legacy liability low, we are always striving to be prudent stewards of the capital. Lastly, I want to briefly comment on our recently proposed -- on recently proposed EPA regulations and their potential implications. Now that we've seen the proposed rules, we are refining our modeling on potential coal plant closures and currently believe that such closures will amount to approximately 35 gigawatts of coal-based electricity which could be at risk over the next 10 years. That's 11% of the installed coal capacity, which is no small number, and we believe it will and could have detrimental impact to consumers, industrial competitiveness and electric reliability if such large amounts of shutdown scenarios were to play out.

However, it is important to note and put the figures into perspective. The units that we believe are potentially at risk are also the oldest, smallest, and least utilized units in the grid. As a result, those at-risk units only consume about 40 million tons of coal in 2010. Moreover, we believe that any lost coal consumption related to the retirement of those units would be offset by increased utilization at the approximately 300 gigawatts of grid backbone coal plants, as well as demand from new coal-based units which are still coming online. We also believe that certain coals, particularly very low chlorine coals such as those found in the PRB and the Western Bituminous region, could be an advantage in such an environment. In closing, I'd like to reiterate that the global coal markets are climbing, domestic markets are correcting, and we at Arch are poised to deliver our best year yet. With that, I will now turn the call over to John Eaves for some additional comments on the quarter. John?

Thanks, Steve. As you know, we're seeing strong momentum in met coal markets. As indicated, we expect to sell 7.5 million tons of met coal in 2011, with 40% designated as PCI sales. This percentage is higher than previously expected and reflects our ability to blend additional steam coals in the mix, as well as gain entry into new markets for a particular suite of products. Our met shipments in the first quarter totaled 1.4 million tons, despite the temporary longwall outage at Mountain Laurel. We pulled from inventories to mine and used our CM operations to maintain shipments in the quarter and expanded met shipments at our other regional complexes as well. In total, we have nearly 6 million tons of met coal committed and delivered or scheduled for delivery in 2011.

Since our last update, we have sold an additional 2 million tons into the met market, including several hundred thousand tons that were carried over during the quarter. Excluding those carry-over tons, our implied pricing on met commitments would have been around $135 per ton, reflecting a blend of coking and PCI sales. Looking ahead, we would expect our met coal shipments to rise over the remaining quarters of 2011, as the Mountain Laurel longwall resumes normal operations. Turning to steam coal markets, we're expanding our seaborne sales to serve the growing global thermal demand. Each operating region is participating in this expansion, with ports on the East and West Coast, as well as the Gulf of Mexico being utilized. In particular, we're moving steam coal out of Central App to Europe, primarily through DTA. In Western Bit, we're moving West Elk coal through the Gulf to Europe and to South America and are shipping small amounts off the West Coast to Asia. In the PRB, we've lined up shipments through the Gulf to Europe for the second quarter and continue working on lining up shipments off the West Coast.

In total, seaborne steam sales should reach more than 2 million tons in 2011, which would equate to more than doubling of our steam exports versus 2010. More importantly, these deals establish Arch as a growing participant in an important market segment and help to reduce the supply that otherwise would have been moved in the domestic power markets. Additionally, as indicated in our release, we signed new domestic steam commitments, totalling more than 10 million tons for 2011 and 2012 across our operating regions at attractive price levels. These new commitments should further increase our realizations in future periods. Looking ahead, we will continue to remain patient and selective in committing our open tons in future years, especially as we believe further correction in domestic power producer coal stockpiles and strong coal exports from the US will translate into meaningful upside in pricing. Now let's review the performance of our operations during the first quarter compared to the fourth quarter 2010 and our outlook for the remainder of 2011. In the PRB, operating margins per ton rose 13% in the quarter, helped by a dollar increase in price realizations.

Operating costs were up as well, with a significant component being sales sensitive costs. Further costs were impacted by planned lower volume levels and higher diesel costs. As we look at the remainder of the year, we would expect costs in the PRB to be roughly in line with first quarter, if not modestly lower. In Western Bit, we delivered a near-record cash margins in the first quarter, thanks to a continued steady improvement in price realizations and good cost control. For the rest of the year, we still anticipate running at modestly reduced rates due to continuing market weakness, but we'll try to manage any volume-related impacts as we've done in the first quarter. In Central App, we earned quarterly margins that were comparable to the bull market of 2008. The substantial step up in realizations reflects attractive pricing on met volumes and improved pricing on steam sales shipped during the quarter.

Somewhat offsetting the price increase were higher costs per ton, due to higher sales sensitive costs and the lost production on the longwall at Mountain Laurel during the quarter. We're also experiencing some cost creep as we bring on additional higher cost met tons at Cumberland River, although we expect these tons to provide a significant margin enhancement overall. As forecasted, Mountain Laurel's longwall restarted on April 17. In total, the longwall outage lasted about 90 days, with 80% of the impact occurring in the first quarter. Looking ahead, we still expect some cost pressure in Central App due to input costs, but are forecasting better performance for the balance of the year.

In closing, I'd like to recognize the employees at Coal-Mac and Mountain Laurel in the East and Arch at Wyoming and West Elk in the West for being honored by third parties for excellence in safety and environmental performance. Also in the quarter, four of our operations achieved a perfect record for both safety and environmental compliance. That's a tremendous achievement and one we're focused on replicating system-wide. With that, I will now turn the call over to John Drexler, our CFO. John?

Thank you, John. As Steve and John have discussed, Arch's first quarter performance was among the Company's best in history on several metrics. In fact, trends improved as the quarter advanced, with March revenues representing the highest monthly total on record. While reported income exceeded our expectations for the quarter, our cash from operations fell a bit short. The primary reason for lower cash flow was higher working capital requirements, with the biggest driver being increased accounts receivable. The increase in receivables was due not only to the record March revenues, but also to the timing of some significant export sales. Additionally, free cash flow totaled $47 million in the quarter just ended, as capital spending was light.

We expect operating cash flows to increase significantly throughout the remainder of the year. While CapEx will also increase, we continue to expect record free cash flow in 2011. Turning to balance sheet metrics, quarter-end debt levels were essentially unchanged from our year-end position of $1.6 billion. Cash on hand was $69 million, and our liquidity exceeded $1 billion. Our net debt-to-cap ratio was just over 40% at March 31. As Steve mentioned in his remarks, our balance sheet is in excellent shape. With that, let me now discuss our revised 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 $930 million to $1.05 billion, adjusted earnings of $2.10 to $2.60 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 $376 million to $386 million, capital expenditures, including reserve additions of $370 million to $410 million, and an effective tax rate between 17% and 19%. Given our percentage depletion deduction, we would expect to pay at rates similar to an AMT taxpayer. Based on our revised guidance range, we forecast substantial growth in earnings in 2011, including an EBITDA increase of between 28% and 45% over last year's near-record levels. With that, we are ready to take questions. Operator, I will turn the call back over to you.

(Operator Instructions) And our first question will come from Jim Rollyson from Raymond James.

Good morning, Jim.

Good morning, Jim.

Very good quarter. Steve -- or I guess just first off on the met production side, you're bumping it up 0.5 million tons roughly from where we were last quarter. Remind us where you think that can head as you go into next year? I seem to recall at some point you were talking about an 8 million ton figure as a potential, is that still around the ball park, or has that gone up?

Jim, this is John. Yes, if you look at our met sources, I would say the biggest source being Mountain Laurel, now that, that longwall's up and running, we would expect pretty good performance for the balance of the year. We expanded a little bit at Cumberland River. That's where we've been spending some expansion capital there. And we continue to maximize our PCI sales out of Lone Mountain. So the 7.5 million we expect to hit this year, I think we can easily attain the 8 million as we move into 2012. Had we not had the issues at Mountain Laurel, I think we would've easily hit that this calendar year.

That's helpful. And as a follow-up, last quarter everyone was thinking exports in the US this year are 90 million to 95 million tons. Now based on performance so far, we're kind of at the 100 million-plus ton range. Steve, where do you think that number can go feasibly in the next year or two, given the capacity that's there and considering the rail performance, et cetera, et cetera?

Sure. We are seeing -- start with rail, we're starting to see some better rail performance. Certainly as the quarter progressed, they've got a little bit better each month and that trend line has continued, principally in the east rail. So we would expect that to continue. I think when you look at the into the money sales, particularly into Europe, but into really all of the other regions of the world, you're seeing some pretty inventive and thought-provoking approaches to expanding export potential out of the US. If we look back in the 1990s, it was that 110 million ton number as a cap, we're projecting 105 million this year, we would probably be comfortable with saying that we can exceed the 110 million. Exactly where that ends up, the new Houston announcements, people are looking at Galveston, Ridley, some of the things that really weren't in play off the West Coast in the 1990s, it probably approaches 115 million, 120 million tons if everything ran smoothly, which is an optimistic statement in the coal business. But we think that capability does exist and now it's just making it happen.

Very good. Thanks for the color.

All right, thank you.

And we'll now go to Paul Forward with Stifel Nicolaus.

Good morning.

Good morning, Paul.

And good job taking PRB tons off the market and I just -- following up on that, looking at your table, it looks like you've got an extra 10 million to 15 million uncommitted tons this year. I was just curious, looking at where PRB markets are today, how willing are you to just keep doing what you did in the first quarter and just back off on the PRB shipments if pricing's going to be in this kind of mid-12's territory or worse?

Paul, this is John. Yes, certainly the prices have dropped off a little bit. I'd say they're in the $13 range. We're always looking at our mix and what makes sense and what doesn't. I will tell you, the marketing guys have done a good job in evaluating the market for the balance of the year. We certainly see the demand there. I think it's a question whether pricing'll be there and I think we'll evaluate that on a case-by-case basis.

But clearly with what we have to put in the market and the demand we see there, we would expect that to really present a real opportunity. As we go into the summer months, any kind of summer at all, we think the inventories will continue to come down. And we were forecasting a better market back half of the year anyway. That's kind of the way we designed our sales book. So, we think we're in good shape. If the prices continue to deteriorate, we could very well leave it in the ground.

All right. And Steve, I just want to follow up with -- one of the things you said in your prepared remarks was that you're focused on keeping legacy liabilities low. I was just wondering if you could talk about your acquisition strategy? And when you think about potential acquisitions, do you look at firms with big legacy liabilities, or is that a non-starter for Arch?

Paul, we'll look at lots of things. Rarely do we come to a conclusion that we want to make a bid and even rarer do we win a bid. But that's not a lens or filter that is a yea or a nay. But we weigh that in. All of our analysis is done on a complete life of mine, discounted cash flows, if you will, and -- whenever we look at an acquisition and we include the liabilities in an actual cash cost and the terminal value of the liability as far part of that analysis where I know many investors who have a shorter time horizon than somebody owning the coal mine forever may not include that, but we do. So, it's an important input into our analysis.

Okay, thanks.

Thank you.

And we'll now go to David Khani from FBR.

Yes. Hi, gentlemen. Good quarter.

Good morning, David.

I want to dig into the coal retirement work that you guys have done, the 35 gigawatts that you mentioned. How much does it depend upon, in your mind, the trona works as far as on the DSI process?

I think that's a piece of it, but its -- you have to look at the entire hazardous air pollutant side of it, the Mercury removal side and in some cases, those work against each other in terms of technology, from our understanding, and you're going to quickly go past my technological ability here. But I think more and more people and experts as they analyze the proposed rules really do come out that it's in that 30 gigawatt to 40 gigawatt type scenario, and it's the oldest, not surprisingly, the oldest lease-run plants. And it really comes down to that with some fuel switching, some additives, activating carbon injection, the enhanced coal that we've been testing with our -- and some of our PRB sales all allow the utilities to achieve the proposed rule-making it looks like, with the trona and other things. So right now, we don't see anything technologically that says that we can't make that happen.

Okay, good. And could you just give us an update on Millennium and where it stands? And give us like a little bit of somewhat of a milestones that you guys are looking for?

Sure. Millennium got challenged. And, as -- and really need to probably talk on the principles. We are a minority holder there. But basically the management team and the board of Millennium thought, all right, let's pull back. We'll pull off our -- the coal part of our proposed permit. We will look at and do a complete analysis of what the maximum size -- or the achievable size might be a better word through the whole system of what we could have for a potential coal export facility.

Put that in the permit application, at the same time begin the full EIS on that and that process has already begun and then resubmit all of that data, which occurs over the next year. And then we would have expectations that in 2012, the terminal would have its initial throughput of coal beginning and then the ultimate construction to whatever size is finally decided upon.

Okay. So the EIS will be put in and hopefully then how long does a permitting process once you put EIS-- ?

The data's being gathered now and the expectations are that near the end of 2012, that we would be able to move forward.

Okay. That's great. All right. Thank you, guys.

We will now go to John Bridges with JPMorgan.

Morning, everybody.

Good morning, John.

Hi. I'm interested by the new port at Houston. Could you give us the pros and cons of shipping out of there versus taking it across and down the Mississippi and out the Gulf?

Well, I think that everybody in the industry right now is looking for export opportunities and -- in that same infrastructure, and so any capable port is being examined and reviewed. For Arch, the Gulf is working very well. We saw some of this coming. Its probably more robust than we were projecting, let's say a year ago, but we do have some facilities to load barges and controls and contracts with barging, with midstream off and on over the decades. So, you're likely to see more of our coal moved to the Mississippi, but nonetheless, we would look at Texas ports and basically it comes down, can you make the math work and do they have the infrastructure to handle the tonnage?

Okay, okay. And then freight, the prices seemed higher. Is that just price increases on the routes or is there something else going on?

Well, our friends at the railroads are always pricing to the market. So they're pursuing their pricing strategies. But I think as the market improves and history would tell us this, as the market improves, there is cost pressures to all the inputs and I don't think this cycle will be any different.

Okay, great. Well done, guys.

Thank you.

Our next question will come from Michael Dudas from Jefferies.

Good morning, everybody.

Good morning, Michael.

Relative to your thoughts on West Coast, you talked about other options. Over the next five to ten years, maybe on a big picture basis, can the US make up what might be a more difficult thermal coal consumption environment domestically with the ability to export as much is required to rest of the world over the next five to ten years?

I think we'll be challenged to meet the demand. When you look at the next five years out, right now we're under construction on a global basis, it's estimated 715 million tons of annual demand is -- coal demand is under construction and will be online by the end of 2015. If you take the plants that are being discussed in an advanced design stage that's in addition to the ones actually being built, that number raises to 1.3 billion. Then you start looking at the producing countries and certainly there will be expansions in a lot of producing countries. But every country is faced with infrastructure challenges. We see opportunities for the US to grow dramatically off the West Coast. You're certainly seeing the Port of Vancouver make some steps to advance some of their throughput. Obviously we have Ridley, we have Millenium, we have the announcements of other Washington ports. We've exported some through some of the other US -- smaller amounts through California.

So I think there's going to be a constant pressure to meet that demand and I have every confidence that the reliability and the inventiveness of the American transportation system and the coal supply system. We will do our best to meet it. But I think we'll be challenged to meet that demand.

Well, I'm sure there's one rail company you're familiar with that will be very happy to do that.

Yes. Well my expectation is all those rail companies are happy to do it.

Yes, no, understood. And that makes my follow-up question is, relative to what you're seeing in the Illinois basin with your investment in Knight Hawk, any further update on thoughts, trends, opportunities are you seeing? There's been some pretty expansive talk of production expansion in that basin from some other companies in the marketplace recently. Can you maybe share your thoughts on the availability and the likelihood of significant growth out of that basin?

Michael, this is John. Certainly we have been pleased with our investment in Knight Hawk. We continue to pursue a permit for Lost Prairie. We won't bring that production into line until we have some base load contracts. Yes, there's been a lot of talk about additional production coming on in southern Illinois, but I think the thing that people fail to look at is what we see coming off over the next five years. So, we see a net increase of about 20 million tons over the next five years with what we see rolling off. And with what's going on in the international market, what's going on in the domestic market, we think that coal will probably do just fine in the markets it has right now.

I think the problem with some of the production coming online is it may be higher in chlorine and have a receptivity problem in some of the domestic markets and may have to look to the international markets to place some of that volume. We're fortunate that most of our Illinois coal was a higher BTU, lower chlorine coal that's not only very well marketed in the US, but is pretty well received in the international markets as well.

Thank you for your thoughts, gentlemen. Appreciate it.

All right.

And we'll now go to Curt Woodworth with MacQuarie.

Hi, good morning.

Hi, Curt.

I was wondering if you could talk a little bit about the market dynamics you saw in PRB in the past quarter? It seemed like in the back half of last year there was a pretty good volume surge tick up in the basin and the pricing responded. And then this quarter, the volumes sort of ticked down, pricing went down, despite a pretty supportive market in the east. I'm just curious, what do you think drove that? And then you made the statement that you think the market picks up in the back half of the year, is that more of a seasonally-driven effect? Or do you think the inventories get to a point where the utilities, based on where you think they are, they have to come back into the market and procure more coal?

Curt, this is John. We placed about 10 million tons for '11 and '12 during the first quarter at pretty attractive prices. If you look at the implied price, we're pretty proud of what we did.

Yes.

With all the layering in sales in the quarter, I would say a lot of that higher price stuff was probably done in the first month or two of the quarter. We're in the [shoulder] seasons right now and we fully expected to see a soft market and that's what we're seeing. There's been obviously a little deterioration in pricing, but as we look out for the balance of the year, we're pretty encouraged by what we see. Inventories are at average levels for the last five years. With any kind of normal summer at all, we would expect to be able to easily place our PRB coal. As I mentioned earlier, if we don't see pricing that makes sense for us, we'll leave the coal in the ground.

We're going to be market-driven, we're going to get a return on our coal, and we're going to be selective in selling it. But what we see right now, we definitely identify more demand than we have to put in the market back half of the year. So, I'd tell you we feel pretty good about where we are right now.

Okay.

And if I could add, is we signed some small test deals to take PRB into Europe down through the Gulf. So again, the entire world dynamic -- I describe it sometimes as -- if we go back a decade, I would argue the US coal business with regional transitioning to national and then in the latter part of the last decade, we started transitioning from national to global and we see that transition continue. We're feeling very, very good about where we sit at the moment vis a vis the market in each one of our basins.

Okay. That's helpful. And then just a question on Central App, I think you made a statement that the cost performance should look similar over the back half of the year. Did I understand correctly? And what's driving that, because it seems like inflation is still running pretty high in that basin?

Certainly there's cost pressures occurring. You're not going to see the costs we had in 2010. We were impaired first quarter because of the longwall at Mountain Laurel. The costs were in that $67 range. We would expect some improvement over that. Still some cost pressures in Central App, we brought some additional production at Cumberland River. It was higher cost production, but created tremendous margins in the met markets. I think if you model the Central App in that mid-60s number, you'll probably be in pretty good shape. Hopefully we can do better than that, but we do expect to see improvements over the next three quarters.

Got it, and just one last quick one. Where do you see the Highvale B price right now in terms of the spot price?

If you look at our chart, in my opening comments, I said if you would have excluded couple hundred thousand tons of carry-over volume in the first quarter, we would have had a blended price of about $135, which would imply that the Highvale B price was in the low to mid $140s.

Okay.

I would tell you that the market's probably stronger than that right now. I would also tell you that the PCI market was in the low to mid 20s. I would tell you that market may be a little bit better as well. But clearly the Highvale B, we're seeing strong demand and good pricing for that for the balance of the year.

Yes. Okay. Thank you.

And our next question will come from Brian Yu with Citi.

Great, thank you. I was wondering if you can comment on the Central App thermal coal markets? It didn't seem like you placed that many tons in the first quarter, but for the tons that were placed, prices were pretty impressive, in the mid-80s. Is that reflective of the market? Or were there some contracts shuffling and can you elaborate if that was for domestic or international customers?

Yes, I mean the prices -- that was contract adjustment that kind of inflated that price a little bit in the east. We're not seeing a whole lot of demand for thermal coal in the east. Quite frankly, very little at all. We would expect maybe as we move into the back half of the year, we would see some. What we are encouraged by is what we're seeing on the international. We're placing more and more of our thermal coal in the international market at prices that are well above what we're seeing in the domestic market.

So that's pretty much what we're focused on right now. We think as the summer starts and people start to draw their inventories down, we may see more opportunities in the domestic thermal market the back half, but we're very pleased and encouraged by what we're seeing in the international thermal markets for our coal.

Okay. And my second question is with regards to the 2 million tons of thermal exports this year, could you provide a breakout of the various regions that's adding up to that 2 million?

Yes, I tell you roughly right now, we're targeting about 1 million tons out of Western Bit and about a million tons out of the east. I mean, hopefully it'll be more than that, but right now, that's probably a pretty good guide.

Great, thank you.

We'll now go to Brandon Blossman from Tudor, Pickering, Holt and Company.

Good morning, guys.

Good morning, Brandon.

Let's see, just probably a couple brief follow-ups. One, you mentioned test shipments of PRB out of the Gulf coast to Europe, what would need to take place to turn those shipments into meaningful tonnage?

We actually think that there's one particular customer will be moved at meaningful tonnage. Obviously the -- they've done some tests with other coal and other PRB. They're testing ours and we expect really second half of this year or maybe early next year that they'll enter the market in a major way. But we'll see. And it'd be multimillion tons or could be.

Interesting, okay. And then as a second question, sounds like you've had a chance to review some of the recent EPA rule makings, any chance that you'd thought about -- this is a 2015 plus timeframe -- the relative competitiveness in Illinois versus PRB coal?

We've spent a lot of time on that and we continue to work on it. We actually think that PRB, and part of it's driven by the hazardous gases, when you look at -- now I'm going to get in the weeds here, but if you look at the hazardous gas ruling, or proposed rule-making, where they're going to use hydrochloric acid as surrogate for all of the other hazardous gases. Well, to make hydrochloric acid, you need chlorine and PRB compared to some of the high chlorine eastern coal has like 1/1000 of the amount of chlorine in it. So, we think that ultimately could become an enhancement to the pricing and the marketing of PRB as we move forward.

Great. Thanks for the color, guys.

You're welcome.

And we'll now take a question from Morgan Stanley's Wes Sconce.

Hi, good morning.

Hi, Wes.

You said you expect a million tons of western bit exports this year. Curious, what do you see as the potential going forward with the current infrastructure?

Excuse me?

Western bit infrastructure through the Gulf.

Oh, yes. Steve said we think there's probably 115 tons to 120 million tons in place right now. I think things would have to go reasonably well. There are a number of initiatives right now on expansions in the East Coast and the Gulf and we think most of those make a lot of sense economically and you could see those coming on. And they're not long-term projects, they're probably 12 to 24-month type projects that could have a meaningful impact on East Coast Gulf capacity. But with what we see right now with the next six to twelve months, we think there's adequate capacity to put our eastern coals and our Western Bit coals, as well as some PRB coals through the Gulf.

And what do you think is the ultimate tonnage that you could place of your Western Bit coal into the export market?

I mean we're certainly encouraged by what we're seeing in Europe and South America. I would think it could be a couple million tons. Time will tell. We're cautiously optimistic we'll get to a million this year and continue to grow that. We've been working real hard, or the marketing guys have been working real hard on trying to diversify our customer base out there, and this presents a real opportunity. So it's something that we'll continue to spend time on. But I wouldn't hesitate to think we could put a couple million tons in that market over the next few years.

All right. And then just lastly, I'm just curious, how are the Western Bit export prices comparing to what you're seeing in the domestic market?

They're pretty good. There really hasn't been a domestic market to speak of with inventories as high as they are. We haven't seen a lot of market, but we're pleased with what we're seeing on the net backs in Western Bit for our European and our South American shipments.

Thanks, guys.

Thank you.

We'll next go to Andre Benjamin with Goldman Sachs.

Good morning.

Good morning, Andre.

A couple questions. First, I was hoping just to get a little bit more color on your PRB volume outlook again. You did have a step down the last quarter in contrast to some of your peers. And as Paul said, you do have 10 million to 15 million tons of coal uncommitted for the year. Most of your contracting was done around $14 to $15 a ton or maybe even higher. So, to be a bit more explicit, is it fair to assume that if PRB prices stay at the current $12 to $13 range, we should see your sales come in at the low end of guidance?

Well, again, we're not going to telegraph exactly what we would be doing, but what we have always said and I think over the years, certainly over the last decade, is that we'll be market-driven. And if the market doesn't want our coal or isn't willing to allow a fair return, we're perfectly willing to scale back production and match the market needs. Right now, in a shoulder period -- I've been in this business way too long, I don't get too excited when I see traders going back and forth on a train per month or some other pricing, because it's very low volume right now on the shoulder periods. It's not necessarily indicative of where the market would be and as we move forward into the summer months, then we'll get a better sense of -- in talking with our customers, our sense is that there are fairly significant opportunities for future sales of PRB in 2011, as John outlined earlier in the call. So, we're very comfortable where we are. If the market -- if we have a 75-degree summer, I think your assumption there would be correct. If we have a normal summer, I would probably -- maybe not at the high end, but I wouldn't be at the low end of that projection.

Andre, this is John. I would correct you -- we don't have 10 million to 15 million tons in the PRB. It's a number less than that.

No. I figured that was across the whole portfolio, but given the production mix, I figured a lot of it was probably in the PRB.

And even the pricing as you look at this first quarter, I think we were selective and we obtained attractive prices out there. So that's our approach to the market and I don't think you'll see that change.

Yes. All right. The pricing was definitely strong for the stuff you did get the contract. Switching over to met, the contracting that you did, would you be able to discuss how much of that was contracted in the second quarter versus, say, the rest of the year? And then for the coal that you did do on an annual basis, any color you could provide on what level of discount you had on the implied benchmark, given it probably wasn't as high as the 330 from the second quarter?

John's going to get that one, I think.

As we look at the volume and when we booked it and how it's going to ship, most of that, with the international stuff typically is April 1 and end of March. So most of the volume we book during the quarter will be shipped after April. So for the balance of this year. The other part of your question on the pricing? Hello?

Just a moment while we open his line back up. Just a moment, please. And his line is now back open. Thank you.

Sorry. I think that was a problem with my line.

What was your question on the pricing?

Yes, I was saying I'm assuming that what you guys signed on an annual basis was something lower than the 330 that was just concentrated on the second quarter. So, I was just wondering how big of a discount you guys are probably talking with customers on that business?

Well, as I mentioned earlier, we're pretty encouraged by what we're seeing with our quality of coal. We've got a Highvale B. You've got transportation differentials relative to the benchmark. You've got a lot of variables that go into that. But clearly our implied price for Highvale B in that low to mid 140s we think has continued to improve and we're pretty bullish for the balance of the year on our negotiations. So, in terms of discounts at the benchmark, there's a lot of -- lot of different things that go into that, but we're pleased with the pricing we're getting on all our met right now, and especially the international stuff.

And most of our sales are on an annual basis as opposed to the quarterly basis.

I'm assuming that you guys are -- now that Mountain Laurel is back up and running, you're running closer than run rate needed to hit the 7.5, or is there another writeoff that needs to happen?

John and I after them to run higher. Right now, I think the mine is off to a good start. We're two weeks into it or a week and a half into it, but there's nothing out there that would cause us any concern.

And now we'll go on to our next question from David Gagliano from Credit Suisse.

Hi, thanks for taking the question. Most of them have been covered. I did want to drill down a bit on the coking PCI commitments. And I was just wondering if you could break down the 5.8 million tons that's committed in price between say PCI, how much was lower price carry-over and what was the price associated with that carry-over and how much was higher grades?

David, we've got roughly out of that 5.8, we've got about 2.4, 2.5 I think are PCI sales. The carry-over tons, it was lower priced business that was booked earlier last year. I don't want to give you the exact number, but it clearly was lower. I mean, you can see the impact it had, but that was shipped during the first quarter. So that's behind us.

Okay. How much just volume-wise, how much was the volume associated with the carry-over?

It was a couple hundred thousand tons.

Okay, all right. And then just a quick question on the -- just on the Q1 realizations in the PRB, there was a jump sequentially. I'm assuming that, that was mostly from just contracts resetting previously. Or was there anything else going on in Q1 on the price change?

No.

Okay.

We had some index stuff and we had some open market sales and the combination of that drove the price change.

Okay. And I'm assuming that the index stuff actually reset lower. And what I'm trying to get to is what's the percentage mix between contract and spot in Q1 in terms of -- and what was the reset lower on the spot side?

I don't have that number. We can get that to you offline, David.

There weren't many spot sales per se. Just one-off.

Index I should say.

The index, typically the index are set quarterly, but every -- of our index sales, every one is different, so there's not an absolute rule of thumb, but they're typically set quarterly.

All right. I'll take it up offline. Thanks.

Sure, thanks.

And we'll now go to Jeremy Sussman with Brean Murray.

Hi, good morning.

Good morning, Jeremy.

You mentioned that you still expect record free cash flow this year. Can you maybe give us a sense of how you expect to deploy that? Obviously it's a high quality problem to have, but maybe on the M&A, if M&A is a possibility, are you focusing just on the met side? I appreciate the color.

Jeremy this, is John Drexler. Yes, it's a high class problem, right? And as we've indicated in previous calls, we evaluate how we're going to deploy that cash and create the most value in its deployment. And if you look back through 2010, we worked to strengthen the balance sheet. We were investing in the Company and we moved forward. As we sit here today, we'll continue to evaluate all of the options. We sit in a real nice position with our existing portfolio of assets. So we'll be investing in the Company.

We've given guidance on the CapEx from that perspective. And then we'll evaluate what else is out there. We'll look at M&A opportunities, as we always have. As Steve indicated, we'll be very selective and prudent in how we'll deploy any capital associated with that. We've got future organic opportunities as well that we've talked about previously, both in the Illinois Basin and Montana as examples. And then as we've done in the past as well, we'll consider returning cash to the shareholders. We've had dividend increases in three of the last four years and we have, although not in the last several years, had a share repurchase program as well. So Management, the Board continues to evaluate that on a constant basis and we'll continue to do that as we move forward.

Okay, thank you very much.

And we'll now go to David Beard from Iberia.

Good morning, guys.

Good morning, David.

I would like to focus on the 2012 contract book, because when I compare last quarter to this quarter, it seems like you had some pretty strong pricing signed that gave the change in the contract book. Is that correct?

That is correct.

So just maybe a little specifics, when I look at the coking coal, you went from 200,000 tons to 400,000 tons, but that implies the tons were signed at about $143. Is my algebra correct?

We're not going to be teachers on your algebra, but sounds like your math -- you have a good calculator.

Okay. And especially when I look at the PRB and even the cap thermals doing the same math, because you signed about 10 million tons, so the average came up to 14.25, that means in my math we're talking 1,583 for the PRB. Is there some export tons in there? Or is it just following the futures curve, or is there something else that would account for the strong prices?

David, it's -- again, the future curve, the indices are always -- they are indicative of broadly where the market is, but the market is always different than what that curve exactly is. And the guys were selective. They did a great job. There's a little bit of future export pricing in there, but the net of it all was just the combination of selective sales and some good contract negotiations.

Okay. And then the same math on the cap thermal business, it seems like you had priced stuff for 2012 up at $78. And these are all great prices. Was a lot of that exports or -- that would account for that higher price in 2012?

To be honest with you, David, that was a contract re-opener that was settled with a customer -- a domestic customer and -- for 2012.

Okay, great. Well, congratulations. The numbers look good out in 2012. Appreciate the time.

Thank you.

And we now go to Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

First, one just quick clarification. Did you guys say that you thought Central App costs would be in the mid-60s for the rest of the year?

That's correct.

Okay, and then just another question on acquisitions. It seems as though most of the coal reserves that have traded hands over the last call at six months have been smaller reserves, the Greenbrier reserves, James River, and those are sub-5 million ton acquisitions. Is that just too small to make a difference for Arch? Are you guys looking at things of that nature, or is your expansion in Illinois and anything you can do organically more of a focus for you?

Well, Justine, we look at organic and then certainly we have our project in Illinois and it really will be market-driven again before we really bring it online. We continue to work on the permitting process there and would expect that to complete this year. But as we focus, I mean, we have three primary operating regions and each one of them is important to us. So as opportunities come up organically, or for an acquisition, it really gets driven by, what's our market outlook for that particular type of coal, and does it make strategic sense and does it make economic sense and can we create long-term shareholder value? At the end of the day, the real filter is shareholder value. So, obviously small bolt-ons have less of an impact, but sometimes they can make enormous sense. But the larger projects organically or externally get evaluated as well.

So I guess I was surprised that we didn't see more interest in these reserves and that there wasn't any sort of bidding competition, or at least we didn't see any publicly. And so it does seem as though most of the larger players are overlooking those smaller ones because they wouldn't make sense from a shareholder value perspective. So it seems as though that's the tactic you guys have taken thus far.

Or sometimes you look and the price tag does make sense. I mean, all assets are good at one price and they may not be good at another price.

Okay, thanks very much.

All right, thank you.

Our next question will come from Lance Ettus from Tuohy Brothers.

I actually had, had two questions. First off, on the midstream coal operations, I've heard the problem here really is more in the barge side. There's not enough barge capacity or maybe there's too high a price and that's the real barrier there. Just talk about that, and also just wanted to see if -- obviously with PRB and your operations in general -- oil prices have gone up. Just wanted to see if maybe diesel prices rising were a big part of the reason why you started to trim back in PRB production and if you hedge that?

Yes, let me grab the first part of that. On the barging, I think the marketing guys were very proactive in going out and securing barging that gives us the ability to move our PRB coals, as well as our Western Bit coals down to the Gulf. They did that early. We're in good shape. We continue to work on those things. We feel like in terms of rail, barging capacity, midstreaming, that we're in pretty good shape moving forward.

On the diesel question, we consume between 55 million and 65 million gallons of diesel on an annual basis and as we've indicated in the past, we do have an active hedging program trying to protect pricing there. As we look out for the remainder of the year, we're 66% hedged at essentially a $2.85 a gallon diesel price, current markets are $3.50 and north, so we feel pretty good about that. We're much less covered for '12, but we'll continue to look at ways to evaluate that. So diesel is a significant component of consumption in the cost structure, in the PRB. I think it's an overall cost consideration. It doesn't necessarily drive our thoughts around our production levels out of that region.

The largest impact on PRB costs this last quarter was simply volumes, cost of volume and cost of sales, sales-sensitive costs.

Thank you.

Thank you. And our next question will come from Brian Gamble with Simmons and Company.

Good morning, guys. Just a couple quick ones. John, in walking through the calculations of what was committed, means that the open met position is roughly 500,000 or 600,000 of PCI with the rest being Highvale B. Is that about right?

I think it depends on where the market is. We've got probably 1.5 to 1.7 to get to our 7.5 million-ton sales level this year. I would tell you the way we sit right now, the majority of that's going to be met destined for the international markets.

Great, and then I'd love to get your net balance for your expectation for Illinois Basin increases of 20 million over the next five years what do you assume in coming on versus coming off?

Probably have to walk you through that, Brian, offline. We've done a lot of work on that and it's a pretty detailed analysis and that's something we probably could do offline.

Okay, that's great. And then last one, current inventory levels, given that you're sold some during the quarter to make up for Mountain Laurel being down. What are you holding at right now?

It's roughly flat quarter over quarter. We haven't seen any significant increases in the volumes of inventories at our facilities.

Okay, great. Appreciate it, guys.

Thank you.

Thank you.

And we'll now go to Sanil Daptardar from Sentinel Investments.

Yes, thanks. Out of that met sales coal volumes 7.5 million tons for 2011, how much of that is going to be exported?

I'm sorry. Could you repeat the question?

Of the total met coal volumes of 7.5 million tons for 2011, how much will that be exported?

Between 4.5 million and 5 million tons met PCI will be exported in 2011.

And that would be an increase of about 30%, 35% on the year, two-year basis?

It's about right.

Okay, and going forward into next year, do you think that you can keep the same increase or the volumes might remain marginally higher in met coal?

Our plan would be to get to that 8 million ton level for 2012. As I indicated earlier, we'd have probably been there this year had we not had the impairment of Mountain Laurel. We feel good about our 7.5 million ton level this year and our plans would be to grow that to 8-plus for 2012.

Okay. You talked about European demand coming back for the steam coal. Do you think that the European demand is because there's less exports or less imports into Europe from the Asian markets that is causing the Europeans to look into the US market for the coal requirement and that demand is going back to the peak levels before the financial crisis?

Yes, I think a couple things. One, they had a pretty harsh winter. They've had a pretty significant drawdown in their inventories. That's driving some of the behavior. And then if you look back over the last year or two, there's been a real change in the coal flows around the world. You've got a lot less South African coal going into the Atlantic market. You've got less Russian coal going into that market.

And quite frankly, you got less Columbian coal going into that market. And all that creates opportunities for US coal off the East Coast and the Gulf. And we see that continuing.

And we'll now take a question from Matthew Vittorioso from Barclays Capital.

This is Kelly Quinn stepping in for Matt Vittorio. I was just curious if you had any plan yet for refinancing your 2013 bonds and how you might go about doing so?

Kelly, this is John Drexler. As we look at that maturity that's coming a few years out here, with the strength of the markets that we have, it's something that we'll continue to look at and evaluate. As a reminder, though, those bonds were issued out of Arch Western Resources as part of our partnership agreement with our partner in AWR, which is BP. We're required to keep a portion of debt outstanding through that agreement, which runs through 2013. So, it's something we'll continue to look at and evaluate. We're comfortable with where the maturities are right now, but as of right now, that is on our books, but we'll continue to look at it.

Okay, thank you.

And our last question of the day will come from David Khani from FBR.

Yes, hi, guys. Just a couple follow-up questions. Can you give us a little bit of color on the trading side of what's going on, how active were you this quarter versus prior quarters?

Dave, that's been pretty consistent. I wouldn't say it was anything unusual. We're typically a million, 1.5 million tons a quarter east of west and that's pretty much the way it'll be for the balance of the year, unless something changes. Not a lot of volatility there.

And Dave, that's on our brokerage volumes, in addition to the items that are running through the trading line. As we've indicated before, that's kind of a nominal piece of our business. We look at that trading platform as a great opportunity to enhance our knowledge base and what's happening in the markets and take that back across our traditional sales force and allow us to look at other optimizations of our existing production profile, et cetera.

So it helps you get smarter, in other words.

Yes, it does.

And why don't you -- we're watching Glencore go public and that's obviously going to provide some good insight into one of the better traders out in the marketplace. Why don't you grow this business also as well, and what's your thought process there?

I think you'll see us continue to grow our trading business. We've been at it a few years here and it started from zero and it is an adjunct to really optimizing our physical assets, but nonetheless, the net-net of it has been a positive and continues to be a positive. So, our expectations would be as the Company grows and expands and the markets continue to consolidate the trading will grow as part of our overall. And I think there's going to be increased opportunities, particularly when you think about export opportunities, because there's a handful of companies that have good access to the infrastructure export out of the US and Arch is one of those and that will help the trading arm.

And you talked about exporting a little bit of volume I think to Asia. Is the market reopening up to export into China? And what -- give us a little bit of color from your vantage point.

Dave, this is John. We continue our dialogue with the Chinese and Indians and currently that it will be a long-term important market to Arch. Some of the volumes we've seen in the near term off the West Coast have been to the Japanese market. Some industrial opportunities that we've seen at pretty attractive netbacks. Clearly longer term, I think the Chinese, the Indian, the Taiwanese, the Korean markets are going to be very important to the PRB. But really in the short-term, we've seen a pleasant surprise in interest for our Western Bit coal off the West Coast, into some of the industrial markets, primarily into Japan.

Into Japan. And then how has that been impacted by the disaster over there?

There really haven't been any impacts. We haven't had any impact on our shipments. And it's not a lot of volume, but it's clearly something that we continue to develop and work on.

Okay, great. Thanks, guys.

Thanks, David.

And that does conclude our question and answer session for the day. And at this time, I'd like to turn the call over to Mr. Steve Leer for any closing or additional remarks.

Thank you, Operator. I would like to thank everyone for their time and interest in Arch Coal today. I hope that we have left you with the impression or that you've taken away from today's call that we believe 2011 is going to be a record year for Arch Coal and that we've had a good, solid start in the first quarter and we look forward to reporting to you in the second -- at the second quarter call and everyone have a good day. Thank you.

That does conclude our conference for today. Thank you for your participation.