Arch Resources Inc (ARCH) 2011 Q4 法說會逐字稿

Good day, everyone. Welcome to the Arch Coal Incorporated fourth 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 from St. Louis. Thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the Securities and Exchange Commission, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events, or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investor Section of our 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. Good morning, everyone. 2011 was a transformative year for Arch Coal, as we executed on our long-term growth plans that boosted our reserves by 1.3 billion tons, added low cost productive capacity in our core operating basins, and expanded our reach into the global coal arena. To that end, we deepened and broadened our met coal profile with the acquisition of ICG, facilitated continuing penetration into the overseas markets with new offices in Asia and Europe, and bolstered our port access along the East, West, and Gulf Coast, all supporting our objective of delivering even stronger financial returns in the years ahead.

Our fourth quarter results reflect these efforts. Arch generated $1.2 billion in revenues, $270 million in EBITDA last quarter, representing our best performance yet. These results also capped off a record year from our core values perspective. In terms of safety and environmental performance, Arch again ranked first among its majority of its industry peers for its low incident and environmental violations rates. Also, four of our facilities ended the year without a single safety incident or environmental violation. We're proud of these accomplishments, even more so considering that we welcomed 13 new mining complexes and 2,800 new employees into the fold, half way throughout the year. In terms of financial performance, we topped $4.3 billion in revenues and $921 million in EBITDA in 2011, despite lower Company sales volumes. We also set these records while acquiring and integrating ICG over a very short time frame, while overcoming operational challenges at our Mountain Laurel complex, and flood-related disruptions in the Powder River Basin, and while managing through a weakening market environment as the year ended.

As you know, the coal industry will face some headwinds in domestic thermal markets in 2012. Power demand is down approximately 8% through the first week in February, a function of the exceptionally mild winter to date, and a tough comparison versus 2011. Heating degree days are also off 20% from normal, which has contributed to the glut of natural gas and depressed prices for that fuel as well. As a result, we're taking a conservative view of 2012, and expect US coal consumption to decline by approximately 50 million tons or so from 2011 levels. This drop off is due to unseasonably warm weather in this winter season, and to decade low prices for natural gas, which are causing some displacement of coal burn. Given these headwinds, we're seeing a significant coal supply rationalization. Of course, a swift and deep correction can set the stage for a stronger and longer rebound. In fact, we believe that Arch is one of the few producers in Appalachia region that has cash cost below the current market price levels. Thus, it wouldn't be surprising to see Central Appalachian thermal production fall by well -- fall well below 100 million tons by year-end.

In summary, we expect to see more supply cuts in Appalachia and elsewhere in the near-term, supported by industry announcements to date, and by our own reduced volume expectations this year. All of these production cuts, along with the 20% drop in natural gas rig count should help reduce the oversupply of gas, and also aid in rebalancing the US thermal coal markets over time. Despite the current challenging state of the US thermal markets, we do see some positive signs in the economy, and in the sector overall. For one, coal exports out of the US have been, and should continue to be a bright spot. In 2011, the industry hit a record 108 million tons of exports. In 2012, we expect a total to grow by another 5 million to 10 million tons, as US thermal coal continues to push into Europe, even with lower ARA prices, and as port capacity increases along our domestic coastlines -- facilitating the movement of additional tons to the Atlantic and Asian Pacific seaborne coal trade.

In the Atlantic Basin, we remain bullish, certainly, in the intermediate term. Seaborne coal demand will increase as Europe recovers from it's debt crisis, power needs arise from offline nuclear plants in Germany, traditional coal supply sources divert shipments to Asia, and high prices for natural gas overseas make coal very competitive. We're even more bullish on the Pacific seaborne market. Roughly 220 coal plants should come on line around the world between 2012 and 2015, with the vast majority of those plants located in Asia. These trends continue to support increased demand for PRB coals overseas, and we are making steady progress in our efforts to establish port capacity on the west coast of North America.

We also expect supply/demand fundamentals to remain tight in the met markets over the next five years and beyond. In the near-term, US steel utilization rates remain reasonably high at 77%, driven by improving sectors of the economy such as autos, oil and gas, E&P, and heavy equipment. Global utilization rates also appear to be gaining traction, which should bode well for the met coal demand in the coming quarters. These steel market indicators, along with the threat of new met supply disruptions, suggest to us that met prices are bottoming out, and could strengthen as the year progresses.

Next I'd like to spend a few moments discussing the specific actions that Arch is taking to properly ride through this trough, and to excel in the next market upswing. We firmly believe that rationalizing production targets, and exercising tight fiscal discipline in the near-term are in the best long-term interests of the Company, and will create long term value for our shareholders. As discussed, we are reducing our expected volume levels in 2012, in response to a weakening market demand. These reductions will be spread across our operating regions, but mostly concentrated in Appalachia and the Western bituminous region. From [crud] cutting shiftwork to idling certain pieces of equipment, our goal is to reduce the high cost incremental production, while retaining the operational flexibility to respond as market conditions evolve. As you know, we've previously announced that Dugout's longwall would be idled in the first quarter, and we've reduced the workforce at our operations in Eastern Kentucky. Beyond those reductions, we are also cutting back on contract mining and slowing the pace of mining at some of our operations to preserve high quality reserves, for a time when the market returns are a bit better. These actions, along with other streamlining efforts, should result in volume reductions of more than 5 million tons in 2012.

Going forward, we will also continue to be market-driven, and we'll further evaluate market conditions as the year progresses to make appropriate adjustments as necessary, including potentially pursuing further supply rationalization -- again, depending on the market. Furthermore, we are adjusting our capital spending to better align with market demand expectations. However, we will continue to invest in expanding our full export network, and in advancing the build-out of our met coal portfolio. We strongly believe that the US is becoming a base-load supplier in the seaborne coal trade market, and that scarcity of high quality met coal supply will persist over the next five years and beyond. With that, I will turn the call over to our President and COO, John Eaves, for a further discussion of Arch's performance and plans for 2012. John?

Thanks, Steve. We ended the year on a strong note in the PRB, with operating margins climbing to nearly $2.00 per ton. Quarterly shipments rose as flood-related disruptions from previous quarters faded. Price realizations were flat to up, while operating costs per ton declined 4% versus the third quarter, benefiting from higher volume levels and effective cost control. Looking ahead, as Steve mentioned, we are targeting lower volume levels in all regions due to the weak thermal US coal markets. This approach insures that the value of our low cost reserves is preserved, until markets are more attractive. At the same time, it's important to note that Arch is highly contracted in the near-term, with up to 90% of it's thermal tons committed in 2012. This provides us with a solid base to selectively layer in tons, as appropriate.

Just this past quarter, we repriced or layered in some 8,800 and 8,400 tons and shipped two vessels of PRB coal to Asia through Ridley. Looking ahead, we expect to ship more than 2 million tons of PRB coal overseas during 2012. On the cost side, we're entering 2012 with 70% of our diesel consumption protected at cap prices. This strategy allows us to benefit if diesel prices drop, while protecting us against drastic rises in prices. At current market prices, we would expect our diesel cost to trend $0.25 higher per gallon in 2012. Coupled with the lower production levels and normal inflation, we expect annual cost to increase in the PRB, as detailed in our release.

In the Western bit region, price realizations expanded, and cash costs declined during the fourth quarter, resulting in a 7% increase in operating margin. For 2012, we previously announced plans to reduce our volumes in the region, and project costs to increase due to lower production levels, but somewhat offset by the idling of higher cost production. In Appalachia, fourth quarter operating margins increased over the third quarter, thanks to the return of Mountain Laurels' longwall, cost containment efforts, and the realization of synergies from the ICG acquisition. Per ton price realizations declined slightly, in line with lower benchmark met settlements. Offsetting the price decline were stronger met shipments in the fourth quarter, which totaled more than 2.2 million tons, and represent a record for Arch.

In 2011, our met shipments reached 7.5 million tons at the low end of our guidance range. As met demand softened during the fourth quarter, for 2012, we currently are targeting met shipments of 9 million to10 million tons, based upon our current view of North American and international steel sectors. To date, we've committed more than half our met volume in 2012, primarily to domestic steel producers at attractive prices. We're also in the process of placing our international met business now, and would expect to conclude most of that during the first quarter.

Furthermore, as you know, Mountain Laurel will transition to the Cedar Grove seam in the first quarter, and will experience an extended longwall move there. We project the longwall to begin it's transition in mid February, and start production in the Cedar Grove at the end of March. As discussed on the last call, the Cedar Grove seam is thinner in the current Alma seam, which will result in a loss of yield at the mine, translating into slightly higher costs. However, we anticipate enhanced margins at the mine as the quality in the Cedar Grove is much more consistent than in the Alma

We continue to focus on achieving the synergies from the ICG transaction, and expect to drive these to the bottom line in 2012. Our cost guidance reflects these efforts, with cash costs expected to remain well under $70 per ton. Looking ahead, I'd like to project out what Arch's met profile could look like by 2015 and beyond, and to give you an idea of why we continue to advance our low cost, high quality met projects. In 2011, our met profile was skewed 25% towards higher quality coals, low vol and high vol A, with 75% representing high vol B and PCI. As we further develop our met reserves, we would expect met quality to improve, with more than 50% of our mix coming from high quality products by 2015. We remain on track to hit our goal of 15 by '15, that is 15 million tons of met coal sales by 2015, with the largest driver being Tygart Valley, with the longwall scheduled to start in mid 2013. During the fourth quarter, we completed the build-out of the shaft at Tygart, produced our first development ton, and placed the order for the longwall to arrive in the spring of 2013.

Beyond Tygart Valley, Arch acquired a vast met coal reserve based with the ICG transaction. Since the acquisition, we've begun the planning and permitting process for those reserves, in an effort to expand and upgrade our met portfolio over the next decade. We've already discussed the potential for developing Shelby Run, with the goal of starting up that operation towards the end of our five-year time horizon. In addition, we plan to add another continuous miner operation over the next few years, and see opportunities to grow output at several other met properties as well. Moreover, we still have further development opportunities beyond those already identified, and we will be gauging the market carefully, to determine when to begin the move forward with those additional projects.

Moving to the thermal markets, we're scaling back lower margin production in Appalachia due to the weak market, and continue to evaluate our portfolio to assess whether there are non-core assets in the mix. We're also targeting the export market to expand our presence in the seaborne trade. While pricing isn't what we want it to be, we are see demand for our thermal coal. In total, Arch is targeting 12 million to 13 million tons of exports in 2012. That's up substantially from 2011, and includes all the operating basins. Our throughput arrangements and [direct] investments in ports across the country will help facilitate reaching this goal. Certainly, our recent announcement with Kinder Morgan will help Arch over time transition us into a base-load seaborne supplier from right here at home. With that, I will now turn the call over to John Drexler, Arch's CFO, to provide an update on our financial achievements in 2011. John?

Thank you, John. As Steve and John have indicated, it has been a transformative year, from a finance perspective as well. We arranged financing for the largest transaction in Company history. We successfully integrated all of the finance and accounting functions of the ICG operation, and we have substantially completed the purchase price allocation, in accordance with the accounting rules. In the quarter just ended, we incurred a nominal amount of ICG transaction-related costs. These costs include incremental severance costs and miscellaneous transition expenses. We have excluded those costs from our adjusted EBITDA and EPS calculations, to better reflect results from our continuing operations. As of December 31, we do not expect to incur any additional transaction-related costs.

We also adjusted the valuation of ICG's assets and liabilities, including property, equipment, and coal reserves. The resulting changes required us to recognize additional non-cash depreciation, depletion, and amortization. Accounting rules associated with purchase price allocation require us to adjust all periods affected, so we have made adjustments to our previously reported results. The impact of these changes was $31 million on a pre-tax basis for the year or $0.09 per share, and $12 million on a pre-tax basis for the fourth quarter or $0.04 per share.

During the fourth quarter, capital expenditures were higher than forecasted, primarily due to our acquisition of the South Hilight LBA. We made the first of five payments of $60 million in the fourth quarter, with the remaining payments due annually beginning in 2013. We also had an acceleration of capital spending at Tygart, where development continues to run very well as we target a mid 2013 start-up date. As we look to our capital spend in 2012, we have reduced our expectation of spend, given the current market conditions. With our announced reductions in production, we have been able to eliminate or postpone a substantial amount of expected capital. We currently expect our capital spend in 2012 to be between $450 million and $490 million, with approximately half of that amount associated with Tygart's development. This model level -- this modest level of capital spend in 2012 demonstrates our ability to adjust to market conditions, and manage our cash flows during challenging times.

Turning to our balance sheet and liquidity position, we ended the year with a net debt-to-cap position of 52%, and liquidity of more than $1.1 billion. During the fourth quarter, we were successful in expanding our accounts receivable securitization program from $170 million to $250 million. Despite expectations for reduced profitability and cash flows in the near-term, we will continue to focus on generating free cash flow and debt reduction over the course of 2012. As you have seen in the press release, with the uncertainty that exists within the coal markets, we have elected to adjust the way we provide guidance, giving more direction in each of the regions that we operate in. We believe this will provide additional transparency allowing investors to make their own assumption about future market prices. We expect the following -- total sales volumes including brokerage tons to be in the range of 151 million to 168 million tons; cash costs in the range of $10.75 to $11.50 per ton in the Powder River Basin; $25 to $28 per ton in the Western bituminous region; $64 to $68 per ton in Appalachia; and $32 to $33 per ton in the Illinois Basin.

In addition, we expect DD&A, including sales contract amortization, in the range of $570 million to $590 million; SG&A in the range of $135 million to $145 million; interest expense in the range of $280 million to $290 million; and capital expenditures, excluding acquisitions and new reserve additions of $450 million to $490 million. Given our current outlook and contemplating the impact of percentage depletion, we would expect to record a tax benefit for the full year. Our low cost portfolio, ability to significantly adjust capital spending plans, and scale our production will allow us to persevere through the market downturn. Despite the challenges, we expect to remain profitable, and to generate meaningful free cash flow. As we have stated previously, our priority for that cash flow will be to pay down debt. With that, we are ready to take questions. Operator, I'll turn the call back over to you.

Thank you.

(Operator Instructions).

We'll go first to Paul Forward at Stifel Nicolaus.

Good morning.

Good morning, Paul.

On the -- you have a wide range of thermal coal production guidance for 2012 sales. I was just -- when you see this market today and the PRB where --for what it's worth the -- you've got a kind of a sub $10 number in the first half deliveries on the -- or what we can see in the traded markets, which would be below your cash costs in the region. Do you see yourselves as likely to stay closer to the bottom of your thermal coal guidance range, if there's no improvement here in the PRB?

Well, I think there's a couple things, Paul, as when you look at the current indices -- and this is not unusual for this quarter, the actual transactional market for any meaningful tons often is different, and it currently is different. I think you could even look at our -- kind of the implied pricing if you do calculations in the fourth quarter, you could see that as well. And so really, we're seeing opportunities out there, whether we're successful in them or not, will be the competitive environment. So obviously, the low end would imply that the market is soft and continues to be very soft. The high end would imply, probably a hot summer. So, I think we're pretty comfortable with that range and our cost guidance reflects both ends of that range as well.

Great. And it was good to see the development tons coming out of Tygart in the fourth quarter. I was just wondering now that you've had a chance to actually get into the coal seam and do a little bit of production, I was just wondering have you learned anything new about the geology, and the likely mining conditions there? And how does that compare to the expectations you had when you pursued ICG?

Paul, this is John. I was there a few weeks ago actually, and went down the shaft, and the conditions actually look very good. The operating guys are excited about it. As you know, we've advanced the longwall start-up to mid 2013. We expect it to be a very low cost operation, probably one of the lowest cost in the Eastern United States. And really, it's similar roof conditions to what we've had at Sentinel. We managed through those, and we think we're going to be in great shape from a cost standpoint, from a quality standpoint. If you look at the high-vol A product, and the US market as well as the global markets, we think it's going to be very well-received in both markets. And with the proximity, we have with that product to the East coast, we think it's going to serve the global markets very well. But so far, we're excited about it. We're anxious to get it up and running, and we think that mid 2013 is a realistic expectation.

Great. Thank you.

Thank you.

We'll go next to Shneur Gershuni at UBS.

Hi, good morning.

Good morning, Shneur.

I just -- a clarification before my question. In your guidance, you talk of cuts, but you sort of didn't mention the PRB. Is it somewhat of a back door cut with the PRB if you're flat with last year, given you've lost tons related to the floods and so forth?

Well, you could look at it that way. But the reality of the PRB is that, we have I think demonstrated in the past, that we can adjust staff production up and down to meet market conditions. But at the same time, as we look at the PRB currently, Black Thunder is producing we think probably the highest quality coal available out there, in terms of both BTUs and in terms of a lot of the other parameters. So it's kind of a little bit of a unique position -- so I guess our message to all of the investors is, that we will be market-driven there. And we'll operate that mine to certainly, generate attractive returns. And so, it will be driven by the marketplace, and we'll see how it goes forward.

Shneur, I think your [assessment] is a good one. Certainly, we're not seeing anything in the short-term in the PRB that gets us very excited. We hope as we go through this summer, that as these inventories get drawn down a little bit, that there will be better opportunities. But as Steve said, I mean, we're going to be market driven. I mean, we think we can make money at these lower price levels. We don't like it. We're not going to go out and sell our coal very far forward. We might sell some coal short-term to run our mines optimally. But we really like where we are, and like being patient until we see an improved market.

Okay. Great. A follow-up question if I may. You had some pretty good cost performance in the fourth quarter in Central App, and you talk about kind of free cash flow generation throughout next year. While you didn't provide guidance per se, I was wondering if you can talk about kind of where you think your cash flow will be, kind of at the end of the year? And then you sort of talked about deleveraging as part of the equation. Are there targets you're looking to hit? Is there going to be anything left over to do share buybacks and so forth? I was wondering if you can sort of discuss it in that context?

Shneur, this is John Drexler. We didn't provide earnings guidance for the year, and we're reluctant to give cash flow. But I think we did indicate in the prepared remarks, that even with the lower levels of income that we're expecting due to the market conditions, we still expect meaningful levels of cash flow. And I think in the prepared remarks, we did indicate also that our focus will be to continue to focus on debt reduction at this point in time, in these market conditions. And we're able to do that by focusing on our capital spend program, on being very diligent in how we spend our capital as we move forward, and are comfortable with how we will progress throughout the year. I think we've also stated historically and on various calls, that we have been in the range of low 40% debt-to-cap, and that's been a comfortable position to operate from. And we're higher than that right now, to acquire the ICG acquisition. But once again, a very strategic acquisition for us, that we feel and continue to feel very good about. So we'll continue to work that leverage down as we move forward.

Final question and I'll jump off. What are the qualities of the met coal that's left to be signed? Is it PCI or high-vol or is it some of the low-vol?

It's a combination. Right now, I think we're 40%, 50% of what we've placed is kind of the lower quality, high-vol and PCI. So it's kind of a mixture. I think overall, Shneur, we're going to be 75% high-vol B and PCI, and about 25% low-vol and high-vol A.

Okay, great. Thank you very much.

All right. Thank you.

We'll go next to Michael Dudas at Stern, Agee.

Good morning, gentlemen.

Good morning, Michael.

I think the market welcomes the production and the capital discipline. Encouraging remarks on your thoughts, Steve, or John, on the export market given where prices are and demand overseas. Maybe you can shed a little bit more insight on the met versus thermal mix, as we see potential import -- exports rather, and how PRB in 2012 may be additive to that throughout the year?

Michael, this is John. Certainly we're encouraged by what we see in the global markets. If you look at the growth, and Steve referenced in his opening comments, that we've identified about 450 gigawatts to 470 gigawatts of new coal-fired demand over the next three or four years. And we think that's going to drive a pretty significant shortfall in the world markets. And that's really why we've positioned Arch the way we have. And we -- one, we made the ICG acquisition, we've worked hard on expanding our infrastructure. And as a Company, we exported about 7 million or 8 million tons in 2011, growing that to 12 to 13 this year. And I would say, we're typically about 60% of that being met, 40% in thermal. It might be closer to 50/50 this year, given what we're seeing in the domestic markets. Steve also referenced a 77% capacity factor in the US. We see potentially, some additional opportunities in domestic market throughout the year, if they continue to run at those higher capacity factors.

But as we look at the global market, we think the PRB coal is going to continue to go off the West coast. We are forecasting about 2 million tons in 2012 in that market off the West coast, as well as through the Gulf. And we shipped about 0.5 million tons of the PRB in 2011. So clearly, we see a growing market there. I would tell you on the Western bit region, we seen very little demand in the US, but we've seen a strong demand in the global markets. And we've placed almost 2 million tons of Western bit in 2011, and are targeting 2.5 million to 3 million tons in 2012. So the global markets are becoming a very important market for Arch, and I think the US coal industry. If you look at the growth in demand, the shortfall in supply, it's clear that the US is going to go from the traditional swing supplier, to a more long-term strategic supplier over the next couple years. And that's really how we've positioned Arch to be able to take advantage of that.

I appreciate that. And then my follow-up, John, is in your remarks and looking at Central App, and the cost structure you have relative to the competition, when do you think the market is going to see some more layoffs, more notices, more production on some of the non-public companies that are trying to survive at NYMEX at net back below $60? Thank you.

Michael, I think it's going on right now. I think it's going to be a process throughout the year. But if you look at people's cash costs, and where the current market is, I just don't see how some of those guys survive. It's going to be tough out there. There is virtually no demand on the thermal side, and that's why we think we've got a competitive advantage where our cost structure is, and the Central App was 182 million, 183 million tons in 2011. And we -- our internal forecast has that coming off pretty hard, and I think that's probably even conservative. We've got it in that 160 range, and I think that's quite high the way we look at it today. So I think it's already started. I think you'll see it accelerate, as we move through the year.

Thank you, John.

Thank you.

We'll go next to Brandon Blossman at Tudor, Pickering, Holt.

Good morning.

Good morning.

So can you just talk a little bit about the 50 million tons of coal that you see potentially coming out of the thermal generation market in the US? And kind of what maybe split between central Appalachia, PRB, where you see the most pressure on demand from that standpoint?

I think the main pressure is going to be in Central Appalachia. Again, as John really answered in the last question, the nature of the cost structure in Central App is -- just makes it very difficult. And as we look at the global markets, and some of the crossover tons that probably we're going into the met coal markets a year ago, are trying to find a home, perhaps in a domestic thermal market, and costs aren't supportive, and the demand is not supportive. So if in fact, if you look at total thermal production in Central Appalachia last year -- John referenced, total production was around 185 million to 186 million tons, including metallurgical coal.

If you scale that back and say, what was the thermal production? It was about 125 million to 130 million tons or so, and that I'm -- we're projecting right now internally that's going to drop 25 million to 30 million tons, perhaps more by year-end on an annual run rate basis. So that's going to be a big chunk of it. You'll also see some of it go into the overseas market, as we said 5 million to10 million tons. Most of that increase is likely to be thermal exports, so you'll see a piece of it going there. And then the rest will be spread across all of the other basins, from Illinois to northern App to the PRB to western bituminous. And everybody will take a little chunk of that -- or absorb a little chunk.

Okay. That's very helpful, and then just one follow on with that, kind of the drivers of the cost increase in Central Appalachia, the guidance of $64.00 to $68.00 a ton, does some of that just have to do with the mix shift away from thermal, to a slightly more expensive met product?

I think it's just generally inflation. You got Mountain Laurel transitioning to the Cedar Grove seam. It's about a foot thinner than what we had in the Alma, so the costs are going to go up. It is a better quality coal so we should see that on the realization side, but it is putting a little pressure on the cost. But we do think we can fall in at $64.00 to $68.00 cash cost range. And hopefully, we'll be in that mid point, if not on the lower end of that. I think it depends on what happens for the balance of the year, in terms of us having to make any further reductions in volume.

And that does imply some reduction in volume from our overall production in 2011. And even though you're taking out high cost increments, it still spreads all of the fixed costs and everything else over [fewer] tons.

All right, Thanks.

Thank you.

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

Good morning.

Good morning, Jim.

Steve, if we go back to kind of late 2008, 2009 which was a pretty tough market, you had some of the producers out there kind of seeing deferrals of deliveries, by the utilities, or even some of the guys that locked in pretty high prices running up into mid 2008, maybe pushing out the high price contracts, a little bit further out in the future. Just curious if you are hearing or seeing any of your utility customers trying to defer shipments and/or pricing out into the future, just given the weak gas market, or if you think you're at risk of that?

I think there's a risk of it. We've seen a little bit, but not much to be quite frank. I was just upstairs going through some of the marketing guys yesterday. And it's a bit different this time. In one respect, 2008 is a good model I think. But this time, I think the sense of the industry, the cost structure, particularly in Central Appalachian production is such that, some of our customers are really fearful, that a lot of these guys just aren't going to survive or make it. And so they're turning their attentions to companies like Arch and a few others, that clearly probably will come through this thing, with a competitive advantage once it clears the marketplace.

I would anticipate that we'll see some of it. But our view of it is that Arch will -- if we have a contract with one of our customers, we'll always work with our customers if we can. But we're going to preserve the values for our shareholders. And really, the marketplace has gotten sophisticated enough anymore, that the sellers and the buyers all understand that. Then you just find out ways and opportunities, to see if you can make that work. The other advantage that Arch brings to the table, is sometimes we're able to substitute coal from one of our regions, or different sales that work for us, and the customer as part of an overall agreement to give some relief. But thus far, it's kind of on the radar screen, but not a lot of it.

Okay. And as a follow-up, there's been some stuff written in the trade publications about the possibility of the railroads maybe giving a little bit of relief to your utility customers, particularly out of the PRB. But have you heard or seen any of that happening, and do you expect that could be the case if gas stays down here for a while?

Well, again, that's really a question for the railroad and the utilities, in the sense that's where the contracts exists. I will say that, we see it more directly, when we talk about the export markets and the rails are very realistic. They want to preserve that export market, and they understand the weakness in the market, and they have indicated that they're willing to participate in some of the weakness in say, ARA pricing. Now, having said that, the flip side of that debate is, that when the markets strengthen, the rails are right there too. So they're here to make money, as well as the coal companies. But I really do think that the entire supply chain is looking at this market. And again, when you get to the size and breadth of an Arch Coal, that we had the ability to walk in, and talk about volumes and things that are of interest to the rail, or the barging companies, or the terminalling companies that make sense for all parties to feel a little pain in a weak market, and gain some opportunities in a strong market.

Helpful. Thanks, Steve.

Thank you.

We'll go next to Brian Gamble at Simmons & Company.

Good morning.

Good morning, Brian.

A couple things, on the open tonnage, can we either get a break down of where your -- what I calc'd as about 25 million tons of open coal is by basin? Or if you'd rather, does the mid point of the total sales guidance imply that PRB quarterly production remains around that 30 million ton level?

It's -- mid points are always kind of the way to think about, I think, ranges. And obviously, though, things can occur to take you up or down, but I think that's a way to think about things. We never really break things down by basin, but as we indicated, we expect more pressure on production tonnage across the industry in Central App, and then Western bituminous, but all of the basins will have some.

Okay. That's fair. On the -- backing up a little bit, when you think about -- with new EPA regulations, with new interest scrutiny, as you shut mines down, or as you idle mines, could you maybe walk us through the thought process, as to I guess how far into the idling process you really go? Just because of the difficulties of getting mines back up and running, once demand changes, and once you really like to have those mines back? Kind of walk us through how -- or what hot idle really means versus being able to bring something back on?

Brian, this is John, if you think about our Dugout announcement late in 2011, we are planning to idle that longwall some time in the first quarter of this year. And really put that machine in a place, where we could bring it back in a reasonable time frame. And when I say that, 60, 90, 100 days, but not willing to do that, until we see a sustained market. Some of the other cutbacks that we've made, we've changed or reduced work schedules, gone to a shortened work week, idled high cost equipment, especially in Eastern Kentucky. So all of those things would allow us the opportunity to bring that production back, were there a market that made sense on a longer term basis. So everything we've done thus far, I would tell you, we would have the opportunity, if we saw the sustained market to bring it back in a reasonable amount of time. But we will be very careful in making those business decisions.

Do you think that's consistent throughout Central App? Or do you think that because of your footprint, you're able to make those decisions with a little bit more clarity than someone who might be smaller, and really just have to shut down period?

I think this time, we're probably going to see a shut downs, period of -- having said that, coal miners are extraordinarily inventive and creative, and can hang on for longer than most people perceive sometimes and -- but when you think through -- as you started the question -- with the regulatory environment, some of the quality of coal, we haven't talked about permitting for a long time on some of these calls. But the permit issues that are hanging out there for lots of producers, it's looking like a perfect storm, to see perhaps a permanent reduction, particularly in the Central App region.

And again, I come back to -- when you look at the cash costs of Arch, and you look at that Central App cash cost, we see this as a competitive advantage that actually gets highlighted, as we go through the downturn in the market. And frankly, there's probably some opportunities out there as we progress through 2012 and into 2013, that there may be some interesting reserves, or other things that could occur. We're not saying we're going to do anything. But there's a significant proportion of the marketplace that can't compete at the current level of pricing. And once you close some of these mines, they become more expensive to open. So you need a big jump in pricing to really justify reentering.

And we'll go next to Mark Levin at BB&T Capital Markets.

Hi gentlemen, just a couple quick questions. First, as you think of sort of the capital structure where it sits today and the deleveraging process, are there opportunities -- or by opportunities, I mean maybe 2012 near-term opportunities for asset dispositions that could maybe accelerate the deleveraging process? And if so, what particular regions might look a little more attractive from that perspective?

Sure. Well if you look at Arch's history, I think we've always taken a portfolio approach on our assets, and we've bought them, we have sold them. And we certainly haven't changed that fundamental belief in strategy, that sometimes assets are worth more to somebody else than we perceive them in our portfolio, and vice versa. So we certainly are always exploring those kind of opportunities. We've had discussions in the past year on different things, we'll continue those kind of discussions. Where might they be? I mean again, it's hard to define but the Powder River Basin is kind of defined to what it is, so it basically comes down to Central App, and perhaps Western bituminous. But we're always looking to buy or sell, depending on the price as they say.

Got it. And then the second question as it relates to met, and sort of what you're seeing from an export demand perspective, not only for -- or I guess maybe more specifically, for some of the lower quality met coals, can you maybe talk about sort of what demand trends have looked like? And then, also pricing on the lower quality met coals, how they've been trending over the last say, two or three months?

Yes, I won't talk about the pricing, because we're right in the middle of our discussions for international. I mean -- and I don't think it's any secret they've been trending down a little bit over the last month or so. But the marketing guys over the next two weeks, have their initial meetings with the international customers. I would not expect anything to get finalized during those discussions, but kind of explain their relative positions, and how they may move forward. But when we give the 9 million to 10 million tons for the year, we've placed about 4.9 million of that -- and a lot of that domestic, so we think there's more than adequate demand to place the balance of that volume in the international market. So we continue to see opportunities, especially in the Atlantic market, the South American market, as well as the Asian markets. So we see that demand continuing to be there, and maybe even strengthening as we move into the back half of the year. Most of the international settlements will more likely be on a quarterly basis, so as we book that volume and we see improvements in the market, we'll have those opportunities as they present themselves towards the third and fourth quarter.

Got it. Thank you.

Thank you.

We'll go next to Mitesh Thakkar at FBR.

Good morning, everybody.

Good morning.

First of all, thank you for increased transparency on the guidance. My quick question is on the met coal -- on the met coal side. You mentioned you're planning to export about 6 million to 7 million tons of met coal in 2012, and about the same number for steam coal. How much of that is already contracted, and how much is -- what you're planning to do over and above what was contracted?

Well, I think the export volumes will depend on kind of where we see the opportunities. Like I said, we placed about 4.9 million thus far in the domestic market. And with the demand we see, we don't think there's going to be any real problems in placing the balance of that in the international market. So we'll see how that plays out. But clearly, we'll evaluate the market. We think South American growth, the opportunities in the Atlantic market, both, will give us an opportunity to export. I -- the met versus thermal in 2012 could be closer to 50/50 than our historic 60/40 range, so we'll again, just the market will determine, on how much volume we put in each of those markets.

Okay. And when you look at your total met coal capacity, obviously, it's more than the 9 million to 10 million ton guidance which you have provided. How do you think about -- what do you need to see, whether from a pricing standpoint, or just the depth of the market standpoint, what will it take, to bring -- to run it all out kind of thing?

Well, I don't want to put my prices out there, but if we saw sustained demand, I mean, as we indicated in our previous guidance for 2012 -- it was probably closer than the 10 million to 11 million ton mark, and we still feel confident in that. And if we saw the demand at reasonable prices, I think we could get to those levels. Hopefully, we're being conservative with our 9 million to10 million ton forecast right now.

Okay, sounds good. Thank you very much. Appreciate it.

Thank you.

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

Good morning.

Good morning, Andre.

First question, we've heard some utilities in regions that have historically burned a lot of PRB, say that the gas plant utilization rates are significantly higher than usual, at present. Are you actually starting to see the incremental signs of coal to gas substitution, at the expense of PRB over the last few months? Or is it simply something that you're expecting could happen, as you do your forecasting?

We have seen a little bit, where they have run some peakers in place of, what we think would be PRB, but it hadn't been a lot. But we anticipate, and as we forecast that, that could continue, and likely will continue. We certainly believe gas pricing will stay down at low levels for most of this year, or really all of this year, and the forecast projects that or contains that. I mean the gas guys, and I have said this publicly, to a couple of the CEOs of the gas guys. They remind me of the coal industry in the 1990s when we got a lot of new reserves from the steel companies, and we went and produced it, because we could. We drove our costs down, we drove our production up, and we drove the price into the tank. And about a third of the industry went bankrupt, so we'll watch with interest what they do.

Thank you. And I guess on the back of the discussion about reserves, I'd be interested your perspectives on the Illinois Basin, as you were talking a little bit about non-core assets, given the market is more focused on Appalachia than PRB. We know a number of investors and industry participants, a little more bullish on the growth prospects, given a lot of the nation's fleet is going to be scrubbed by the end of the decade. And there's also export potential, that a lot of large public companies we watch, all have reserves in the basin that are looking to redeploy their capital elsewhere. I guess, as someone that has reserves, but are also talking about expansion opportunities elsewhere, could you talk a little bit about how you're thinking about the long-term volume outlook in that basin versus the others?

Sure. We do believe that Illinois Basin will expand over time, and become a very important source again, I guess for coal supply. That's why I think we have approximately 800 million tons or more of low chlorine coal there, and relatively, low cost coal. You can even see that in the release, and from our small Viper mine. We see it as an opportunity. Those who followed us, and certainly have talked to me over the years, I have always said, that it was kind of a 2015 emergence of the Illinois Basin. I am really not off that number. We have been permitting a new major mine in Illinois. We don't plan on putting capital in it right now. But we see it being an important source of -- that really PRB, and Illinois Basin will be the beneficiary of the issues that are occurring in Central Appalachia right now.

Thank you.

All right. Thank you.

We'll move next to Dave Gagliano at Barclays Capital.

Great. Thanks for taking my question. I have got to say, I'm a little bit confused about the 2012 guidance, and I'm hoping you can help me understand this. So you're guiding to142 million to 158 million tons of thermal sales. If I add up the committed price and unpriced of $129 million, that $ 20 million left to go. So I'm trying to figure out, where do you get that from, especially considering, you just said you've got early signs of deferrals, and you think gas prices will be low for the rest of the year?

It doesn't mean we quit burning coal, David. Right now, again just having been upstairs, the guys had identified that they know of, for this year, 9 million tons of PRB opportunities that are coming down the pike. Now, maybe some of that doesn't occur -- maybe it's more than that. So it's -- and as John said, we also anticipate some increased exports as well. So it's early in the year. I mean, obviously if we have a summer, like we have in the winter, you go to the downside of that number, the low side of that number. And if we have a normal summer, and the US economy is showing some signs of being a little more robust than probably we were projecting even a month and a half ago, you could see a little pick up in the industrial load and demand. So we're assuming weak gas prices. We're assuming not a lot of growth in overall electric demand. I think the EIA came out today, and was projecting kind of a 2% decline, which -- that would be an improvement over the first six weeks here, but -- so we'll ride that out. And the important part is that Arch is prepared to react to that market up and down, and to maintain our costs within our range, and our profitability and free cash flow.

Okay. And then so -- but your low end of your range, $142 million assumes you find a home for that $20 million delta. Is that accurate?

At the low end, it's not that big a number.

Right, okay.

It's not even close to that big a number.(Multiple Speakers).

And then -- okay -- and just related, the 6 million incremental or 6 million tons into the -- I just want to clear this up -- 6 million tons into the thermal export market, how much of that is actually committed in price or committed?

Right now, David, we probably got a 1.5 million to 2 million tons of that committed currently.

Okay, thanks. I think that's all I needed, thanks.

All right.

And just a reminder, due to the overwhelming response to questions in the queue, please limit yourself to one question and one follow-up. We'll go next to David Beard at IBERIA Capital.

Good morning, gentlemen.

Good morning.

I'd like to ask you just a little longer term question on costs. As Tygart comes on line, would we expect to see upward or downward pressure on your cap costs?

I think it would be downward pressure. I mean, we think it's going to be one of the low cost operations in the East, and based on what we've seen so far in our forecast, that it would average our costs now in Central App.

Very good. And then just switching to PRB, maybe help us understand, because you sold I think about 13 million tons at just under $14, and then 3 million tons is admittedly small for next year, at just under $16, if my calculations are correct. Just walk us through how the PRB market works, relative to sub $3 gas and sub $10 spot PRB?

Well, I mean, obviously, we are not participating much in the market currently, with where we see short-term markets. But as Steve mentioned earlier, the market is pretty thin, and what you see the indexes are, really aren't necessarily indicative. The tons we booked during the fourth quarter for 2012, I think it had an implied price of about $12.50, $12.60 and half of that was 8,300, 8,400. So if you look at the 8,800 piece, it was a pretty reasonable price. But again, we evaluate the market. We're not going to force tons into the market.

You see where our cash costs are, we are not in the market trying to lose money. We want to be prudent, we're going to sell coal on a short-term basis, where we need to, to run our mines optimally. But long-term, we're going to preserve those tons, and wait until we can sell them and get a return. Hopefully, we'll have a normal summer in terms of weather, they will pull these inventories down the back half of the year. We'll see better demand. But right now, we're not seeing anything, at least in the short-term, that's very exciting price-wise.

There's been some press on the PRB being impacted more than we have seen. Again, when you get right down to it, over the long-term and when you are talking about 450 million tons of total production out of the PRB, on the margin, things can get nipped there. But it is an enormous market, and it will continue to be an enormous market as we go through 2012.

We'll go next to Lucas Pipes at Brean Murray, Carret & Company.

Hi, good morning, everyone.

Good morning.

My first question is kind of again, on the met coal side. You previously indicated that you could sell a little bit more. Could you provide us a little bit more color on what type of volumes you are now not planning to produce and sell, if this is primarily a lower quality coal? And then are you closing some mines, or are you essentially reducing work schedules at existing met coal mines?

We aren't closing any met mines, I mean, we've pulled back some of our work schedules. I would tell you, that if we had the opportunity, and the demand was there, most of that additional volume would be in the high-vol B, PCI type coal.

Okay, that's helpful. And then just for the US overall, what do you expect, in terms of met coal exports in 2012?

We're -- we exported about 108 million tons in 2011 with about 70% being on the met side, 30% being on the thermal. I would expect you see comparable numbers as we move into 2012. We're showing about 5 million to 10 million tons of growth potentially in that export number, and I still think that 70/30 split is about right.

And that growth, would you say, that's primarily Asia or where do you see it -- the growth?

I would say some of it's Asia, some of it is South America, and maybe even a little bit into the Atlantic market, with some of the coal flow changes that we're seeing with South Africa, Russia and Columbia.

Okay. And specifically on the met coal side, does it concern you that Australia is back up and running, or how do you think that factors into your estimates?

I mean, when we look at our forecast, and as I mentioned earlier we see tremendous growth over the next couple years, and a shortfall somewhere between 300 million to 300 million -- and 350 million tons cumulative over the next three years, we assume that Australia, all their projects come on as scheduled, on time on, on budget. And I think we all know that rarely happens in our business, so actually the shortfall is probably much larger. We see opportunities for the US to be a major player in the global markets with this shortfall. And we think we've got the cost structure on the met and the thermal. We've got the infrastructure, and we've got the transportation networks. And I think you'll only see that increase, as we start to develop some of the West coast ports, and unlock that pathway for some of our western coals, whether it's PRB or western bit. But clearly, if you look at that shortfall over the next three years, 60% of that shortfall is on the met side, and 40% is on the thermal side.

We'll go next to Brian Yu at Citi.

Great, thank you. My first question is just with --the 2013 contract in Central App, it looks like volumes were stable, but average prices came down by a little bit over a couple bucks. Could you elaborate on that change?

I don't have a lot of detail, Brian, but it's probably just simple negotiations in the markets. And I get some of the earlier questions of well, where sometimes you place some coal in 2012, and part of the negotiation is the 2013 and even 2014, and you look at the total transaction. I think if you even go back -- to like one of the earlier questions on the PRB we -- and how do we place that low end of the guidance, which including our committed, but unpriced tonnage which is already pretty firm, often you'll sit down, and you negotiate a two or three year deal. And you get some extra tons in 2012, but maybe you have to be a little more aggressive in your pricing in 2013 or 2014. So every negotiation is different.

We'll go next to Kuni Chen at CRT Capital Group.

Hi, good day. Most of my questions were already asked. Can you quickly just go back through the tax benefit that you expect for the year ahead, and what's driving that?

Kuni, this is John Drexler. Good question. If you look at the industry in general, we benefit from getting a deduction for percentage depletion. So at certain levels of pre-tax income, you see across the industry companies having a tax benefit. And if you just look at 2011, this year for Arch, we're essentially in that position, with $135 million of pre-tax income, we had about a 6% benefit. We expect to benefit, as we look to 2012 -- and I think maybe looking at 2011 is a good way to kind of gauge if we're going to have higher pre-tax income levels, than what we see out there in 2011, then that benefit is smaller. If you're going to have lower pre-tax income levels, that benefit gets higher. So I think that's probably the best way I can describe, looking at that tax provision as we look out into 2012.

We'll move next to Dave Lipschitz -- at S -- I'm sorry, CLSA Financial.

Good afternoon, or morning, I guess where you are.

Hi, Dave. Yes, morning.

Yes. In terms of -- you said 300 to 350, 65% shortfall on the met side. What kind of steel production numbers out of China are you looking at, for those numbers, because today, right now, obviously they're running more at the 615 level, not the 680, 700 they were running last year? Maybe they do run up, but what kind of numbers are you looking at?

David, I don't know exactly the number. We have backed off the steel production in China and India, and I think we probably used anywhere from 5% to 6%. We can give you that exact number, but we are showing reasonable growth in that market in steel production. And not only China and India, but we're showing reasonable growth in South America as well, especially Brazil.

We'll move next to Wes Sconce at Morgan Stanley.

Hi. I guess just a quick one for Steve. In your prepared remarks, you mentioned that -- or just cash -- Appalachia thermal coal cash costs are competitive at current prices. Is it fair to foot that comment against CSX at about $60.00?

I think it is fair on most of our operations because obviously, our average Appalachia costs have our met mines in there, some of which are below that number, and some of which are above that $60.00 number. But when you look at the overall thermal mines, they are pretty darn competitive.

We'll go next to Meredith Bandy at BMO Capital Markets.

Hi, thank you very much for your stamina this morning. (Laughter).

Oh, this is easy compared to mining coal.

There you go. So when you talk about the reduced workforce in Eastern Kentucky, is that all just the shift cutbacks that you're talking, about or did you actually have some layoffs?

We did. We had some layoffs about 103, 105 people, somewhere in that range, reduction in a number of operations, no particular one, and it was all in Eastern Kentucky.

So should some of the reduction in Central App thermal being a bit more permanent, maybe not forever, but harder to bring back?

I think it just depends. Labor has been tight in Central App over the last couple years. We've seen that ease over the last 60, 90 days, and I think it depends on market conditions. And as we look at Arch, I mean if you look at our safety record, our environmental record, our cost structure, and our focus on growth, we think it's a place that people want to work. If you look at our turnover rates, they're pretty low. So we feel like it's a good place, and that we'll always be able to attract talented and skilled people.

We'll go next to Chris Haberlin at Davenport.

Could you maybe talk about synergies a little bit, how much were realized in Q4, and can you remind us what your target is? And then how much of your synergies are driven by pricing, and is there a price, either a met or thermal price, where you revisit that target and think about adjusting it?

We've given you a range, I think, of about $110 million as a mid point for synergies in 2012. And we told you, we expected to get virtually all of those, as we move out. And that's still our expectation, and we're getting the G&A savings. We're getting the operating savings. I think where we could be a little bit exposed, is on the blending synergies. If we don't move all of the met volumes that we had forecasted, it may be hard to realize all those blending synergies that we laid out. But as the market improves, we would expect to get those. So I think, it's going to be market driven for 2012.

And due to time constraints we will take our last question from Lance Ettus at Tuohy Brothers.

Hi, thanks. Just one quick update on the Millennium port. I guess what other steps do you have to take, before you can actually break ground there? And also with all of the talk of, I guess potential I guess, PRB curtailments and your flexibility there, I know you said, you'll be market driven, but do you think anybody else there, will pull back if PRB prices continue to be weak, and if demand kind of slows due to the low natural gas price environment?

Well, we can't answer for the other guys in the PRB. I can answer for Arch, that we're going to drive for what creates the best long-term value for our shareholders, and that's really the commitment. It will be market driven, we think that creates value near-term and long-term. When you look at the value of PRB reserves, obviously, we just acquired some reserves from the government here in the last month or so. And there's more that will come due, at least announced to LBA bids, coming down the pike, so we think the value of the reserves must be calculated as part of the overall returns. So what other people do, you'll need to ask them. I just can answer for Arch.

Turning to Millennium, I mean, that project continues to advance. We're under no illusion that -- not everybody agrees with putting it in. But they're progressing to and having negotiations with the Department of Environmental Quality out there and the waterway, and continue to work on remediation of the brownfield site that it is. The design work continues, we'll be filing documents, and my understanding, is they will be filing documents in the next several months to move the project forward. So it will be, I think a slow process, but continued process, probably one that goes two steps forward, one backward, and three forward again. But it's a great project, and will be good for the employment and the health of the community, in that part of Washington.

And that does conclude today's question and answer session. At this time, I'd like to turn the conference back over to management for any closing remarks.

Well, let me close by thanking you for your interest in Arch Coal today. I'd like to just really reemphasize, that while 2012 will likely be -- let's call it an interesting year, we're really focused on Arch's low cost. We expect to continue to be able to expand our high quality met coal portfolio, to continue to strengthen and expand really, our export capabilities. We see that as the major growth market for the US base coal. As John Drexler mentioned, the free cash flow that we've generate and expect to generate this year will be focused on debt reduction. And really, I think as you look at Arch, where we are, what you'll see this year particularly, is that our very competitive cost position will be demonstrated, and allow us to be very competitive through the entire market cycle. So it will be an interesting year, I can say that much.

So again, thank you for your time and interest, and look forward to talking to you in April.

And that does conclude today's conference. Again thank you for your participation.