Arch Resources Inc (ARCH) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Incorporated second-quarter 2012 earnings release conference call. Today's call is being recorded. At this time, I would like to turn the call offer to Ms. Jennifer Beatty, Vice President of Investor Relations.

Thank you. 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 according 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 the Securities and Exchange Commission, may cause our actual 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 required by law.

I would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which is posted to the Investor section of our website at archcoal.com. On the call this morning we have John Eaves, Arch's President and Chief Executive Officer; Paul Lang, Arch's Executive Vice President and COO; and John Drexler, our Senior Vice President and CFO. John, Paul, and John will begin the call with some formal remarks, and then we'll be happy to take your questions. John?

Thanks, Jennifer. Good morning. Today, Arch reported an adjusted net loss of $0.10 per share in the second quarter and generated $181 million in EBITDA. These results reflect the impact of the depressed coal markets, as well as our success in adjusting to operations to address these conditions. Our quarterly results exclude one-time non-cash charges related to mine closures and goodwill impairments, which John Drexler will address in his prepared remarks.

It has been a busy and challenging three months for Arch Coal. The year-to-date decline in coal demand has been unprecedented, yet we've been successful in executing on a plan to improve our operational efficiency, optimize our asset portfolio, and enhance our financial flexibility, and we've made great strides on each of those areas. First and foremost, we proactively addressed any near-term covenant or refinancing concerns by restructuring our debt to eliminate any maturities until 2016 and relax any restrictive covenants until 2014. We've also increased our cash on hand to over $500 million and have additional liquidity available under our undrawn revolver to manage through this downturn.

Second, we continue to take aggressive steps to control costs and improve operational efficiencies, and we're seeing results with an increase in our second-quarter operating margin, despite 11% drop in shipments quarter over quarter. Paul Lang will provide more detail on how we're controlling our costs and allocating capital in the current market condition. Third, we're realigning our Appalachian asset portfolio towards higher met mines. Given the muted outlook for domestic thermal coal in that region, we've taken the hard step and idled five higher-cost thermal operations that were unable to earn an adequate return in the current market. It was a difficult but necessary decision that was made to enhance our competitive cost structure in Appalachia and to position Arch for long-term success.

Beyond those actions, we continue to evaluate non-core assets and reserves for possible divestiture, although I don't want to set an expectation that a transaction is certain to occur. We know the inherent value of our assets and our reserves, and we don't plan to give that value away. We've taken the right steps to strengthen our balance sheet, allowing us to take a disciplined approach as we review our portfolio. With that said, at this time we don't intend to provide any further details on this matter.

Turning now to market dynamics, we believe that we've reached an inflection point in the domestic thermal markets. It has felt like spring from January until May, which caused a record build in US coal stockpiles. Those stockpiles most likely peaked at around 205 million tons in May, just above the record set during 2009. Recently, though, demand has begun to outpace thermal supply, with stockpiles declining in June. Over the last five years, the average drawdown in stockpiles from May to August has been around 20 million tons. And that includes the last two years where the summer was very hot. It's certainly possible if the summer weather holds up to see a drawdown of 30 million tons this year, resulting in stockpiles of 175 million tons by the end of August. While this level's still 20 million tons above normal, it would be a step towards rebalancing the US thermal market.

Another potential catalyst for coal demand is the rise in natural gas prices. Above $3 per million BTU, we think the economics has swung back in the favor of PRB coal. Of course, most units are running reasonably hard right now anyway, so an increase in coal burn was relatively certain. But at prices above $2.75 per million BTU, we think PRB will compete with the combined cycle gas plants even after the summer ends. In fact, train traffic is increasing out of the PRB, which is evidence that demand is improving. Arch's shipments in the PRB for July have been picking up from second quarter levels. In addition, deferrals, which were commonplace in the spring, have diminished. Overall, we believe that customer stockpiles in the PRB-served regions could approach more normal levels by the end of the year.

Another positive market data point is the pace of US coal exports. They continue to surprise to the upside. We recently raised our total industry forecast to 120 million tons based on strong trends through June. And our forecast does anticipate some weakening in the second half. At Arch, we have shipped a record 7 million tons for export year to date, and would expect that we'll reach our goal of 12 million tons for the full year. While pricing is not where we would like, we continue to see solid demand for our coals. We are moving PRB coal to Korea and China, Western Bit coal to Europe and the Middle East, and Appalachian coal all over the world. Since we strategically hedged these movements last year with higher API prices, our export shipments remain in the money despite the recent price declines. Even with the current global macro uncertainty, we expect coal imports into Europe to rise 10% in 2012, as coal burn has been strong in the UK, Spain, and Italy.

China is on pace to import 220 million tons of coal this year, and India should increase another 10% as well. Through the first half of the year, we think seaborne supply probably outpaced seaborne demand by about 25 million tons. That oversupply situation, however, represents less than 3% of the total seaborne coal trade, demonstrating just how tightly balanced the global markets are. In fact, a little bit of a demand acceleration or supply constraint here or there could end up impacting global coal markets very quickly.

Despite near-term concerns, we believe the long-term thesis on coal remains intact. We're positioning Arch to capitalize on expected growth in the seaborne coal demand with our low-cost, competitive met and thermal mines, and with the access to export infrastructure via direct investment, as well as throughput rights.

Turning to supply, rationalization in the US coal industry has accelerated during the second quarter. In fact, if you annualize second-quarter production, the industry would be on pace to trim 130 million tons versus 2011 levels. These trends are not limited to the US, either. Reports out of Australia suggest that miners there are considering delaying expansion plans and, in some cases, reducing current capacity. The reality is that it's getting more costly to produce coal in Australia, Indonesia, the US, Canada, and Russia. Third-party estimates suggest that cost to construct greenfield met mines in Australia are nearly $200 per metric ton, compared to $134 per ton for the build out of our Leer project. These findings support a belief that the US will come even more a strategic supplier to the seaborne coal trade.

Lastly, I wanted to touch on the current state of the met markets. Clearly, there is uncertainty in Europe resulting from the sovereign debt crisis, and that is affecting consumer demand, which, in turn, is reducing steel production. Consequently, we are seeing softening in the global and US capacity utilization rates at steel mills, partly attributable to seasonality and partly not. Thus, we've lowered our expectations for the full-year met sales to roughly 7.5 million tons. In the first half, we shipped 3.5 million tons of met at net back prices of $121 per ton. To date, we have 7 million tons committed in the met markets for 2012, with only a very small amount to be placed in the second half. While our met coal capacity lies well above the 7.5 million tons, we don't feel it's prudent at this time to push met coal into the saturated market.

In short, we're successfully managing the factors under our control and proactively responding to those elements beyond our control. While the current market is a tough operating environment, we believe that we are well positioned to weather the downturn and emerge as a stronger company as the market recovers. With that, I will now turn the call offer to Paul Lang, Arch's COO, for a discussion of our regional operating performance and capital plan update.

Thanks. I'm pleased to join the conversation today. As John mentioned, we continue to execute our plan to improve operational efficiencies, even while we scale back production and right-size operations in each of our regions. We believe the decision to reduce volume targets and capital spendings are in the best interest of the Company and our shareholders. By taking these actions, we will preserve the value of our low-cost reserve base until market conditions improve.

On the operating side, we continue to focus on aggressive cost-control efforts across the organization. In the Powder River Basin, we lowered our total dollar cash cost in the second quarter versus the first quarter, mitigating the impact of a 20% reduction in shipments. As previously indicated, we removed three drag lines from production, with one of those redeployed for reclamation and the other two idled outright. During this period, we managed our costs by reducing labor expense through scheduling changes that cut employee man hours by approximately 10%. We limited the replacement of people off to normal attrition and we eliminated most of our contract and maintenance work through reclamation. Finally, we reduced parts and supplies as well as repair and maintenance costs, as we calibrated the operations to a reduced-volume expectation. These efforts collectively help offset the impact of reduced shipments and contributed to a unit cost reduction of $0.23 per ton in the region, from Q1 to Q2.

Looking ahead, we've lowered our full-year 2012 cash cost guidance expectations in the PRB by roughly $0.50 per ton, as a result of the successful efforts made to date, and the increase in shipments we expect out of the region in the back half of the year. Offsetting this, in part, will be a decrease in reclamation credit when compared to previous quarters.

In Appalachia, additional sales volumes, along with the return of the Mountain Laurel longwall to production on April 9, helped reduce our unit cash cost by $3.17 per ton. Regional figures include the operating results of the recently closed operations, but exclude severance and mine closure costs. Looking ahead, we've lowered our full-year 2012 cash cost guidance expectations for Appalachia by $0.50 per ton, reflecting the closure of higher-cost thermal mining complexes. Our goal is to realign our asset portfolio in that region to favor higher-margin metallurgical assets, while we maintain low-cost thermal mines that can profitably serve both domestic and export coal markets.

Currently, between 35% and 40% of our Appalachia volume is sold in the metallurgical markets. As we look out over the next several years, we expect those met volumes to rise considerably and account for a much larger percentage of Arch's Appalachian volumes, sales, and profitability. All things being equal, we expect our cost to rise as our leverage of metallurgical markets increase. But we also expect our margins to expand meaningfully.

In Western Bit, higher unit cash costs per ton in the second quarter reflect the impact of two planned longwall moves in the region versus none in the first quarter. Looking ahead, we expect our full-year 2012 cash cost guidance for the region to be $24 to $27 per ton, despite a better cash cost performance in the year. In particular, the longwall at our Skyline operation was idled recently during its transition to a new district in the same field. While a normal longwall move in the western US takes 2 to 4-weeks, this move will be extended. Given the continued market weakness in the region, we anticipate returning Skyline's longwall to production in October. In summary, I believe our low cost and geographically dispersed mine operations, as well as our strategic reserve base, will help us weather this market trough and position us to capitalize on the inevitable turnaround in energy markets.

Turning now to capital spend, we've narrowed our CapEx guidance range to $410 million to $430 million for 2012. We also continue to review our future plans to reduce spending, including deploying equipment from idle operations into active ones. As just one example, we moved two continuous miner units and associated support equipment from the idled Left Fork mine to the Leer mine, reducing future capital spend by $10 million. Initiatives like this should save us $30 billion to $40 billion in future years.

In short, the outlook for metallurgical coal markets and the cost competitiveness through our expanding met mine platform are spurring us to redeploy capital into areas we believe potential returns are most attractive. One such area is the development of the Leer mine in Appalachia. During the fourth quarter, we anticipate that continuous miner production at Leer will increase as the main mine belt becomes operational and the preparation flank comes on-line. We still anticipate Leer's longwall start-up to be mid 2013. In addition, we recently finished an upgrade of Sentinel's preparation plant and have begun the plant upgrade at Beckley.

Briefly, I also want to touch on our forward sales commitments made during the second quarter. We have committed virtually all remaining open thermal volumes for 2012 and have strategically left open only 500,000 tons of metallurgical volumes in the second half. For 2013, we committed volumes at levels similar to, or less than, what has been done in the past because of the current soft market conditions. Our forward thermal sales position is now approaching 70% for 2013. At the same time, the commitments we've made to date will reduce some of our sales exposure in future years and allow us to run our mines efficiently. Throughout this, we've retained the capacity necessary to capitalize on improving markets, particularly at Black Thunder, which remains poised to bounce back in a significant way.

Let me close by congratulating our operations for another strong performance in safety and environmental stewardship. Even in the midst of this challenging market environment, the men and women at our operations have remained sharply focused on these essential areas of performance. I will now turn the call over to John Drexler, Arch's CFO, to provide an update on our consolidated financial results and liquidity position.

Thank you, Paul. As John noted earlier, our second-quarter results were impacted by several one-time non-cash charges stemming from the idling of five operations in Appalachia and the impairment of goodwill. Given the severe downturn in coal demand, we closed several higher-cost thermal Appalachian operations, resulting in one-time closure and impairment charges of $526 million recorded in the second quarter. These charges consist of a non-cash write-off of $502 million related to the carrying value of the assets of the closed operations, $12 million in severance costs, and $12 million for future royalty obligations.

In addition, we were required under generally acceptable accounting rules to evaluate our goodwill as a result of the continued weakness in coal markets and the decline in our equity market valuation this past quarter. Our evaluation determined that the implied fair value of goodwill for a portion of our goodwill balance was less than the carrying value, resulting in a $116 million non-cash charge. It's important to note that these one-time charges have minimal impact on our liquidity and cash flow from operations, and have no impact on our ongoing business operations. In addition, calculations to determine financial covenant compliance specifically exclude all asset and goodwill impairment charges.

Turning to liquidity, one of the most important events of the past quarter was Arch's successful refinancing initiatives. In light of the challenging market conditions the industry is experiencing, we proactively took steps to ensure that Arch has the necessary liquidity and financial flexibility to manage through the down cycle. We put in place a structure that eliminated all near-term debt maturities -- our next significant debt maturity is not until 2016; paid off all of our revolver borrowings; and allowed us to put over $500 million of cash on the balance sheet.

These actions were accomplished with a comprehensive refinancing package that provides us with the most flexibility to manage in a challenging operating environment. This package includes an upsized $1.4 billion term loan and an amended revolving credit facility. The term loan has a six-year term, carries no financial maintenance covenants, and is pre-payable. The amended revolver was reduced to $600 million from $2 billion, while the expiration remains 2016. The credit facilities covenants were amended to suspend the total debt to EBITDA ratio and ease other financial ratios over the next two years, in exchange for minimum performance targets that we believe are achievable under current market conditions.

As of June 30, Arch had approximately $860 million of available liquidity, consisting of cash on hand and available borrowings under our credit facilities. Although we have no borrowings outstanding under our credit -- our revolving credit facility, we do not have full access to it as a result of secured-debt limitations within the indenture covering our 2016 bond. As we look out through the remainder of the year, we expect liquidity to remain consistent, and we expect to end the year with approximately $500 million of cash on the balance sheet and no borrowings on our revolver.

In addition, we earned incremental income from our risk management and trading group during the second quarter. In late 2011 and early 2012, Arch entered into API2 swaps for a portion of our expected 2012 export volumes. We view these transactions as economic hedges and part of our ongoing strategy to participate in the seaborne coal markets. As the price of the API2 index has dropped, the value of our swaps has increased, resulting in a mark-to-market gain. Although not considered an accounting hedge, these positions will convert to cash over the next several quarters, absent a material increase in API2 markets.

Lastly, I'd like review our updated guidance. As you can see, we expect continued success in controlling our costs despite the drop in volumes and will work diligently to manage the balance sheet and our liquidity. We now expect thermal sales volumes in the range of 128 million to 134 million tons, with met sales of approximately 7.5 million tons; cash costs in the range of $11.25 to $11.75 per ton in the PRB, which is an improvement from our previous guidance; cash costs between $24 and $27 per ton in Western Bit; cash costs of $68 to $72 per ton in Appalachia, down slightly from our previous range; and cash costs of $33 to $36 per ton in Illinois Basin, up slightly from our previous range; DD&A now in the range of $500 million to $525 million; SG&A in the range of $125 million to $135 million; interest expense in the range of $305 million to $315 million, which includes the effect of the upsized $1.4 billion term loan; and capital expenditures of $410 million to $430 million, which has been narrowed from our previous range. Given our current outlook and the impact of percentage depletion, we still expect to record a tax benefit in the range of 40% to 60% during the back half of the year.

In summary, we are taking the right steps to manage through the challenges in the market and position ourselves to capitalize on the inevitable market turn. With that, we are ready to take questions. Joyce, I will turn the call back over to you.

(Operator Instructions) Andre Benjamin, Goldman Sachs.

First, in terms of the costs, how much would you say was a result of lower commodity prices -- I'm sorry the cost improvement was a result of lower commodity prices and service concessions? And if there were a rebound in the second half of the year or into 2013 and commodity prices, how much of the lower cost level would you expect to be able to retain?

The cost reductions we made were a mix of both variable and fixed and we continue to monitor the situations, and we'll continue to look at ways to reduce these. If you look particularly at Black Thunder, about 60% of our costs are related to labor, diesel and explosives. And as I mentioned in my comments, we did a good job of controlling each of those areas. That being said, I think a lot of what we've done is relatively sustainable in which we brought about our decision to lower the cost guidance about $0.50 in the Powder River Basin.

Given you guys are a diversified producer, it would be great if you could give a little more detail on what you're seeing in terms of coal burn and inventory at utilities burning the various types of coal you sell? Are the trends you're seeing for the PRB specifically very different than what you're seeing for Appalachia and what are customer's actually saying in terms of when they're looking to make decisions around 2013 contracts?

Certainly we've seen a pick up in shipments over the last couple of weeks out of the PRB. We think at the current burn rates you could, by the end of the year, have PRB inventories back to somewhat normal levels. As I indicated in my opening remarks, typically from May to August you see about a 20 million ton draw down in inventories.

We're anticipating at least 30 million tons during that time frame, so we're seeing strong burns, inventories peaked out at about 205 in May. We think they're probably in the 195 million range by the end of June and continue to come down. Gas prices directionally are going in the right way.

We're seeing good demand for the PRB coal in 2013, 2014. We're getting bid requests in and we'll be responding to those over the next couple of weeks. Inventories remain a little bit high for our eastern thermal products, but actually we've seen a couple opportunities in the east over the last couple of weeks that had been pleasant surprises.

Western Bit continues to have higher inventories in that region, but we've been pleased by the international demand that we've seen out of Western Bit. The API prices have come off a little bit recently and made it a little bit more challenging, but we have been encouraged by what we're seeing about demand in the international markets there.

Met coal, obviously, the uncertainties in Europe, the perceived slow down in Asia has pulled that back a little bit. That's why we pulled back our mid range for met coal to 7.5 million tons. We've got 7 million tons committed currently, so we don't have a whole lot of coal to put in the market the balance of the year. They're making very good progress in the third quarter in placing those tons. As I stand here today, I'm cautiously optimistic that we'll get that placed at reasonable realization.

Overall, I think things are going in the right direction. Like where natural gas price prices are. We think PRB clearly is back in the money. The fact that we're starting to see some demand for our eastern customers is encouraging. What we've done as a company to right size our thermal production, Paul and his team has down an extraordinary job of managing the cost in a low volume environment.

As we stand here today, I feel pretty good about where we're headed in our ability to manage through this thing to get to the other side. But we are very positive still in the long-term fundamentals of our business and think we've got the Company well positioned and be able to take advantage of that.

Mitesh Thakkar, FBR.

First of all, congratulations. My first question is for Paul, on the cost improvements, can you just -- with the $0.50 improvement on the PRB side into fuel buckets? What are your saving on the supply and labor and what is the saving from other cost optimizations which you might have done?

As I mentioned earlier, labor by itself at Black Thunder accounts for about 30% of our cost and that category alone we were able to decrease our man hours about 10%, so that translates almost directly into proportional savings.

We've also had good efforts along with vendors. We have a great relationship with several of our strategic and alliance vendors, and we've had great success in terms of working with them in the area of supply chain management and that has also translated into reduced costs. As far as the commodities, we got a little bit of help in the second quarter, but that really did not -- was not a big portion of our savings.

How do you think your long-term steam cost production should be modelled as far as Appalachia is concerned? I know you have idled a lot of the mines, so if I look at the steady state, how should we look at long-term steam coal in Appalachia?

What we've tried to do is right size our thermal production and I think we've done that in recent announcements. We're at about a 9 million to 10 million ton run rate, very low cost that we think will be competitive in the US and international markets. As you think about going forward, I would model that kind of range.

We think if you look at the cost structure, that $68 to $72 cash cost range is something we think we can stay within. We've got some pretty attractive thermal operations now that actually can be competitive in tough markets and make a whole lot of money as markets start to prove and that's really the way we position ourselves with these thermal markets.

Brandon Blossman, Tudor, Pickering, Holt.

John, just a housekeeping item here on the income statement. So the $32 million worth of fair value derivatives, that was related to the API hedges; is that correct? And is that solely for four periods and none of that is for the current period?

Yes, that's a good way to look at that. As I described in the prepared remarks, we put in place some positions late 2011, early 2012 associated with our expectation for export volume. What you have flowing through on that line item, the vast majority of that is associated with those mark-to-market gains. We didn't get hedge accounting treatment for those, so that's the movement flowing through on the current period. However, absent a significant movement in the API 2 position market going forward, those will convert, that position will convert into cash in later quarters throughout the remainder of the year and into early 2013.

And we will see the reversal of that on the ops realization side or will we see it in this line item?

You'll see it actually coming through on that line item.

Paul, the cost control exceptional, so I'll just add another question on that, just because it's such a highlight for this quarter. Is there any risk that some of that is getting capitalized and we'll see that unwind in future periods or is this just a clean, very nice cost control number for the quarter?

I think the best way to characterize this, it was just a clean cost control effort for the quarter.

Shneur Gershuni, UBS.

I don't want to totally belabor the whole cost things, but it was a very good number, especially in context of the challenging volume environment. I was wondering if this is the state we should be thinking about. Are there some tricks up the sleeves to take it down even further? Implied at your analyst day that you guys were very focused on this. And at the same time I was wondering in the hypothetical scenario that volumes got better, whether there would be some operational leverage for it to come down even further, in that context as well too?

I think the way to look at these, pretty much as I mentioned in my opening comments, through the first quarter, we were really balancing or setting the operations in tune with the volumes we were shifting and we got it dialed in pretty well in the second quarter. I think going forward, as long as the markets -- or the volumes don't change appreciably, I think we've got a pretty good handle on where things should be. The one caution, we did have a benefit of reclamation in the first, or in the second quarter, which will diminish over the rest of the year.

My follow-up question is kind of on the CapEx front. You guys are moving full steam ahead with the Leer mine. I was wondering if there's any flexibility in the schedule at all? Given the backdrop that people are concerned about China's steel consumption whether it's never going to go much higher from where it is now, possibly lower.

I don't want to put words in your mouth, but that market is challenging to place ton these days. I understand it's a high margin opportunity, but do you run the risk of cannibalizing some of your other higher-cost net volumes if you move too aggressively forward with this project? Is there some flexibility to bring tons on later or respond to market conditions as you see fit?

I'll let Paul talk about the schedule, but I would say that given that project, we spent about $85 million last year, we're going to spend about $190 million this year, and then the balance in '13. But as we look at the cost structure of that project, we think it's going to be competitive, even in difficult markets, but if you look at the quality and the margin enhancements that we see with the Leer project, that's one area that we don't have any plans at this point to cut capital.

We think the softness that we're seeing right now in Europe and Asia is more short-term in nature. As we look at the long-term fundamentals in those markets, as well as the US, we see met coal being under supplied given the opportunities that we see.

So when you see the Leer project come on in mid 2013, it's certainly not going to have a negative impact on our cost structure in central App, so given the high quality coal, the margins this project's going to create, I think you're going to see a real benefit as that project comes on-line in the back half of 2013. Paul, you may want to talk about any scheduling movements that we might have.

So far we've been very pleased with the progress at Leer mine development. Currently we're operating two units, developing the area around the shafts, the slope, and the next couple of months are a pretty critical time at the mine. We'll be bringing on the main line belt, as well as preparation plant in the fourth quarter. And at that point effectively it becomes a normal operating mine.

As John said, we remain well on schedule and in my comments about starting the long wall mid 2013. At this point we feel pretty good about where we're at, and we plan to continue as we've laid it out.

It's fair to say that you don't think that it would cannibalize, it's a great operation, great quality and everything else, but it could cannibalize at Mountain Laurel, Vindex, Samples, or something like that if the market was still soft in Europe?

We do not. We see it as an opportunity. If you look at our overall portfolio right now, we're about 70% high volume B PCI, 30% low volume, high volume A. Bringing the Leer mine on and bringing that better quality, it actually enhances our portfolio of products in the US and around the world. We're excited about it. We want to get it on and get it in the marketplace.

Brian Gamble, Simmons and Company.

I wanted to touch on the PRB for a minute if I may. Still a nice open position for next year out there if the market improves to obviously take advantage of. You sold some coal in the quarter, my rough calculation was about 8 million tons at $11, maybe there's some deferrals in there so you can chat about that if you like.

My question essentially becomes if that $11 is really a real signing, or even if it's $11.50 or $12, what is the strategy for next year with regards to the open position? You can get to several different open positions depending on what quarter you give you guys for a true run rate, but how should we think about the position and how do you view the decision that needs to be made on produced versus curtailment as the back half of '12 progresses?

First of all, on what we did during second quarter in terms of sales for next year, we booked about 8 million at $11. That was a blend of 8800 and 8400. We've always said that we're going to layer in business as we see opportunities. We're not smart enough to always catch the top of the market, but I think we evaluate opportunities on a case-by-case basis.

I'll tell you right now that we're seeing a lot of opportunities for 2013, 2014. Given the burn rates that we're seeing, particularly in the PRB regions, given the fact that gas prices have moved over $3, we think that we're going to be involved in the marketplace. I'm encouraged by what we see at this point and we'll evaluate it as we go through the back half of the year.

We're just in the beginning stages of our planning, budgeting process. I think there will be more clarity to that as we move over the next couple of months, but I'm encouraged by what I'm seeing in the US market, in terms of opportunities for PRB coal, particularly in 2013 and 2014.

At the 7.5 million rate for your met, could you break that out by what buckets you would put it in from a quality standpoint?

I think overall it would be about 70% high volume B PCI and the balance would be low volume and high volume A. That can move around a little bit, but if you look at the total year, that's about where it would shake out. As I mentioned earlier, I think the value we see in bringing on the Leer project next year is that percentage of high volume B and PCI goes down and the lower volume, high volume with the higher margin goes up. So that's why we're anxious to get that project on board.

Michael Dudas, Sterne, Agee.

Following up on Brian's question on PRB, so looking at 25%, 30% open position, that's based on if you're looking at 2012 tonnage correct, that we're just assuming that?

That is correct.

Some other companies in the region have some open tonnage as well. How are you going to characterize eventual pricing decisions when you take into consideration gas, where -- if you're looking at gas being competitive at $8 PRB or $14, and how flexible you would anticipate the railroads might be given the fact that it could be very small margin between whether a producer ships the coal or decides to keep it in the mine?

Is that going to be more important than just seeing gas pop to $3.50 or $4 to get the parity pricing better for you to allocate the coal at a price I think investors want you to do so?

I think so Michael. The recent movement we've seen in gas prices has corresponded in additional volume. The PRB, we think it will translate into additional sales opportunities for next year. In terms of railroads, they always contract with the domestic utilities, so we don't have insight into that, but I do think the railroads understand the challenges that we've seen recently with natural gas and they certainly make a lot of money moving the PRB coal.

I think given our cost structure and the things we've been able to do, we'll have to evaluate on a case-by-case basis, but as I stand here today, we're seeing quite a bit of demand for the next 24 months for our PRB coal.

If we go into the fall season, gas prices retreat, things continue to be shaky, we'll have to back up and evaluate that, but until we get through the planning/budgeting process, see where inventories end up, I think the draw down we're seeing right now in the inventories, a lot of that's hitting in the midwest. We've had 25, 30 days here in the midwest of 100-degree weather. So the inventories are coming down, and I think there's going to be a number of people in the market looking for PRB coal.

My follow-up question, John, would be relative to the initial indications on discussing with customers about your Leer product, about the good quality coal that I'm sure you're going to start have people think about test views, what have you, for when you ramp up next year.

Do you still get the sense that it's more of a quality issue in what customers are eventually looking for later this year for 2013 from a coking or steel company perspective? Is that going to continue to keep the spreads relatively wide, do you get a sense of that because of the products you do sell to the marketplace and what Leer could provide you in that mix?

Michael, I do. I will tell you that the marketing guys have been really all over the world over the last couple of months getting that product in front of our customers. We have gotten a very good reception from a big part of our customers for the higher-quality coal, and I think the ability to take that coal, even blend it with some of our other coals and maybe enhance the quality of some of those products is attractive as well.

So everything we're seeing really points towards a real premium for that high volume A, not only the US markets, but in the international markets as well. So we feel good about the cost structure, the quality, and the margins that it's going to create for Arch Coal in the back half of 2013.

John Bridges, JPMorgan.

Maybe beating a dead horse, but digging more into the cost things. In Appalachia, simply setting on the long wall at Mount Laurel probably contributed a lot of the savings this quarter. I'm used to, in weak markets, to seeing a line in the income statements or mothball mine costs that sort of thing. Do you have that line or is it mixed in with the other cost? Can you elaborate a little bit on that?

I think with the associated closure of the various assets that we closed during this past quarter, those are all separated out in the mine closure and asset impairment cost, goodwill impairment, et cetera. Any ongoing costs are flowing through normal cost of sales of any idled or shuttered operations. Those are the ways those have typically always flowed through for Arch historically since our founding.

What level of mothball costs do you expect to see for the next 6 or 12 months?

It's something as you move forward you continue it evaluate and those costs come down over time. We wouldn't expect those to be very material as we move forward and not distinctive in what we have rolling up.

Yes, I think those costs will average about $5 million a year.

$5 million.

Per year.

That's quite small.

Right. They are; they're immaterial as you move forward.

How many mines does that refer to?

It's essentially all the idled and shuttered operations that we've closed this quarter.

It would be about five operations, John.

Are you going to be forced to do any catch-up reclamation on the mines you've shuttered or will that only happen after you've made decision to finally close them?

No, I think what, in fact, happens, it's a case-by-case basis. The mines we've slated to close permanently, we'll go through final reclamation. We have some mines that we will leave ventilated, pumped and we'll make the decision later on those. Probably the most significant costs are those related to the eastern surface mine, which we began reclamation on and that will continue really for the next 6 to 12 months.

John, as part of the mine closure and asset impairment charge that we've taken, we have taken the charge for the estimated reclamation costs that we see moving forward for those operations.

(Operator Instructions) Kuni Chen, CRT Capital Group.

On the met coal, is there any additional color that you could give us from what your marketing guys have been seeing over the last one to two weeks? It seems like things have been getting sloppier out there on the market so I'm just trying to get some additional color?

Certainly the uncertainty in Europe is a little bit concerning. Some of the marketing guys just got back. We're continuing to do transactions in Europe. It's more on a month-to-month basis versus quarterly or semi-annually. As I mentioned earlier, we see this more short-term in nature and we think the long-term fundamentals, the growth around the world in terms of infrastructure requirements, is going to drive additional met supply.

And we think the portfolio we're going to have post the Leer mine start-up is really going to be well positioned for the US and international markets. And we do think we've got a cost structure that's going to allow us to manage through this tough period, but the 7.5 million tons that we've guided to this for this year. We've got 7 million tons placed currently, so we don't have a lot of volume left for the balance of the year.

We're going to be selective and patient and get that done, and we're in the early stages of discussions for next year with some of our domestic customers already, so we'll see how that plays out. But if you look at our cost structure, not only for thermal production but for met production, we think we've got a real competitive advantage in the marketplace.

As a follow-up on the high volume B and PCI side, if we were to see further weakening in the benchmark price, at what level would the benchmark have to get to before you would start to meaningfully dial back your production on the high volume B side?

I think it's got to come off pretty hard before we would consider that. Obviously high volume B has taken a lot of the pressure. Again, we're pretty fortunate with our cost structure on the high volume B that we can manage through that. But given where benchmark prices are today, that 225, I think they'd have to come off pretty significantly for us to start looking into that.

Jim Rollyson, Raymond James.

John, you talked about exports for this year, you guys are in the nice position that you signed a lot of these contracts last year to get you the 12 million tons for this year. Obviously, international pricing right now is quite a bit weaker than everybody would like to see. I'm curious how you're thinking about 2013, if you've talked to anybody at this point or if it's just too early or given where prices are, it's just no one's really talking or biting yet, but just how you think about 2013 exports for you guys?

We are excited. If you look at our export volumes in the way they've grown, we're pleased with the progress we've made. As we look out to 2013, 2014, we've had some preliminary discussions with customers. Again, we think the long-term fundamentals of our business are sound, and you've heard me say before, Jim, that we think the US is in that transition zone of going from more of a swing supplier to a long-term strategic supplier in sea borne markets.

There's been independent consultants that have actually said that the sea borne trade is going from about 1 billion tons today to 2 billion tons by 2020, and at Arch we want to make sure that we're positioned to be able to participate in that. That's why, one, we're building out the Leer mine, two that we've been probably more proactive than others in the US in getting infrastructure to export that coal.

If you look over the next four or five years, we think that there will be capacity in place of 270 million, 275 million tons of capacity from the US into sea borne markets, and that is actually lower than some of the independent parties are forecasting. We don't worry too much about the short term because we've think we've got the longer-term fundamentals right. We think we've got the cost structure to manage around that, but I would tell you that we expect to build in 2013 on our 12 million tons of exports.

On the thermal side of that equation, you guys have historically talked frequently about the fact that NYMEX pricing isn't necessarily always the right answer, and you've tended to get a premium on that with the PRB contracts that you've done. Is there any semblance of that when you look at API 2-type pricing that you guys are negotiating on a thermal side that you maybe get a little premium to where that is? You seem to be out of the money for the next several months?

I think API is good directionally. Your physical agreements always tied right to API? No, they're not. It's something we watch, it gets us -- it's a transparent market, it gives us an opportunity to look at that. If we're going to go out and commit our coal for a period of time we wouldn't always do it at API. It's something we watch. We think it's helpful from a market perspective, but where they are right now, it doesn't make a whole lot of sense, but as you know, that can change very quickly. A year ago API prices were $120, $125 a ton.

We just want to make sure we're managing this company that we're in a position to be able to respond when those markets move hard, because if you look over the last couple of years and the change in coal flow and you look at the South Africans, the Russians, even the Columbians, they're really chasing more of the Asian growth. And what it's done is it's freed up tremendous opportunities for us in the Atlantic market and even the South American market.

Although we don't like the prices right now, we haven't been discouraged by the demand that we're seeing in those markets. So we feel good longer term about where we're headed in the sea borne markets.

David Katz, JPMorgan.

I'm not sure if I heard it, but I was hoping, could you tell the amount of met coal that you guys shipped in first quarter and second quarter?

We shipped 1.6 million tons in the first quarter, and 1.9 million tons in the second quarter. It's a 7.5 million ton rate. We need to ship about 2 million tons a quarter back half. We think that's very, very achievable.

Looking forward, I take all your points on Europe and on China and the rest of the market, but if for some reason we were out a year and met coal demand was markedly less robust than it is now, how would that alter your plans?

As we said, we're market driven and we have a cost structure to compete in tough markets, but we will make a decision to pull back. 7.5 million tons is well below our productive capacity of met coal. So we think it's only prudent to be patient, not force those tons in the market so if we get into next year and the market softens, we'll make a decision to pull those tons back. We want to preserve those for the future, because as I've said earlier, we think we've got the long-term fundamentals right.

Would that have any knock-on effects on your thermal production?

It's something, again, we're not just on the met side. We're always evaluating the opportunities on the thermal side as well. If you look at our cash cost in Appalachia, it's in pretty good shape, so there again, even in the thermal market we can manage and make money in tough markets and really make a lot of money as markets are improving. If we see demand really come off, inventories build, we have made decisions in the past and we will in the future to pull production back if the market's not there.

Brett Levy, Jefferies.

You talked about getting up to, I believe, 70% of 2013 committed. Can you give a little more color about the pricing and talk a little bit perhaps about what basins were more a portion of that 70%? The follow-up would be to give some color on what you've done for 2014?

You can see by our chart in our press release where we are on our pricing for 2013. In the PRB right now, with what we have committed, we're in that mid $14 range. Western Bituminous region, we're in that $39-plus range. In central App on the steam side we're at about $64 and then in Illinois we're about $44. As we look at our commitments right now, those are weighted average pricing, and as we move out forward and book more business, that will determine how those numbers look.

But right now, as I indicated on one of the earlier questions, we are encouraged by the demand that we're seeing on the PRB for 2013, 2014. We're drawing down inventories pretty significantly right now. Even a little bit of opportunity in central App, nothing of late for 2013 yet, but feeling pretty good about that.

And then as we think about our Western Bituminous region, inventories domestically there are a little bit high but we're encouraged by the growth and demand we're seeing for our Colorado and Utah coals and the cost structure we have out there allows us to be pretty competitive in those markets. I think the rest of it will play out over the back half of the year, but we're cautiously optimistic on what we're seeing from a demand perspective as we move into 2013.

And then on 2014?

The PRB opportunities that we're seeing for next year, for '14 as well, maybe some even into '15, those are typically one- to three-year opportunities. Like I said, nothing in central App yet from a thermal perspective. Most of our met business is done either annually, semi-annually or quarterly, or even down to monthly, so that's the way we look at it. The Western Bituminous stuff, as we play more and more in the international market we'll become shorter term in nature.

(Operator Instructions)

Chris Haberlin, Davenport.

Just a housekeeping question and I'm sorry if I missed it earlier, did you provide the realizations on the 1.9 million tons of met you did in Q2?

It's about $120 a ton for second quarter. We had sold, quarter-over-quarter, about 700,000 tons in the met market. We now have about 7 million tons committed for the year. And about a 0.5 million tons to place in the third and fourth quarter.

Brian Yu, Citi.

With PRB contracting, Arch has historically been more spot market-oriented and not so much a reaction to the disproportional volume reduction you've taken this year but more because of the increase balance leverage, would you be a bit more eager to lock in for calendar volumes?

I think it depends on the opportunities. We came into '12 with about 85% of our thermal coal committed, so we thought we were in pretty good shape. We did not anticipate the market to come back to us like it has. But as I mentioned earlier, we certainly are encouraged by the PRB shipments we've seen over the last couple of weeks. The opportunities to sell coal in 2013 and 2014, again it depends on the market demand.

We're going to continue to be market-driven. I think you saw our improvement in cost quarter-over-quarter, which allows us to be a little more patient because as we look at the long-term fundamentals of our business, we don't want to force tons in the market now when we think they're going to be improving in future years. It's something that we continue to participate in markets, layer in business where we see opportunities, but at the same time retain opportunities for some uptick in the market.

Curt Woodworth, Nomura.

I wonder if you can comment on where you see the spot price for high volume B and high volume A right now?

I'd rather not talk about what we're seeing right now. You can see what the implied price was for the 700,000 tons quarter-over-quarter. It's about $81, $82. Given the fact that we're having discussions with our customers now about future business, I'd rather stay away from that. The business that we've booked during the second quarter was in that $81 to $82 mark which was, most of that is the high volume B, obviously.

David Gagliano, Barclays.

I wanted to come back to the PRB. Given your bullish views on the outlook, I wonder if you can explain a little bit more why you were willing to commit 8 million tons below cash cost during the quarter. Secondly, related question, it looks like you're growing your PRB volumes by 6%, second half versus first half. Obviously things are recovering, but do you think the market is strong enough to absorb that kind of growth considering the inventory situation?

David, the 8 million tons that we placed for next year, yes, it was $11, right at our cash cost for Black Thunder. But again, don't forget it was a blend of 8800, 8400, and as we said, we're always going to be layering in business, we're not capable of always catching the top of the market and we have to run our mines.

In terms of the back half of this year, we're seeing improvements in shipments. We're not actually participating in any open market activity right now, but we are seeing our customer base look for higher volumes as we move through the back half of the year, and obviously we're going to respond to that.

In terms of future markets, given where we see inventories coming down, where we see gas prices right now, we feel pretty good about PRB being competitive in the marketplace in 2013 and 2014. Especially given the fact the number of bid requests we're seeing for future years is encouraging. So again, we'll respond to those on a case-by-case basis, but we're cautiously encouraged by what we're seeing in those future years.

Paul Forward, Stifel Nicolaus.

I think Paul Lang you had mentioned that reclamation benefit that showed up in the second quarter and there could be a reduction in that number in the second half. Could you quantify that a little bit for us as to what that might looks like, both second quarter and second half of the year?

As I mentioned earlier, we had idled three drag lines from production or taken three drag lines out of production. What we have done was actually take one of those drag lines and offset contractor costs on normal reclamation with one of our machines, which utilized it as well as kept -- was a good use of our people and equipment during the slow period.

As we move back into this part of the -- or the back half of the year, we've completed a lot of that reclamation so we won't be able to cover that cost quite as easily, but also at the same time, we're exacting the volumes to pick up. There's going to be a little bit a balancing between the two as we go forward.

Lucas Pipes, Brean Murray, Carret and Company.

One quick follow-up question on the cost side. We heard at your analyst day that there was a potential for up to $1.25 per ton to be saved to fixed cost absorption and given today's cut of $0.50 per ton, would you say there's essentially another $0.75? And essentially how should we model the cost side going forward, especially if we consider that POB inventories might be back to normal by year-end?

I think the guidance we gave pretty well puts us where we think we are in that $11.25 to $11.75 right now.

And in terms of next year, in terms of volumes coming up?

I think it's premature to talk about 2013.

Lance Ettus, Tuohy Brothers Investment Bank.

Just a question on PRB, it looks like you guys are picking production back up, but at least the market prices really haven't rebounded as much as you would have expected given the pull back in production the first half, and the rise of gas prices over three bucks. How do you guys plan to see any inflection point as far as inventories that would lead to market prices rising, and are you able to get prices that aren't necessarily reflected in the financial markets?

As we look at what's going on in the PRB right now, we have seen shipments pick up pretty significantly over the last couple of weeks. We're actually responding more to our customers. We're not out playing in the market right now. We do think if gas prices continue to stay in this level there's going to be more opportunities in 2013, 2014, and we think at good pricing.

But really everything you see in terms of increases the back half of the year is more driven by our customer demand and what we see them wanting. We're not bringing on a lot of additional production at this point to be in the marketplace, and we're not going to do that until we see more sustained demand moving forward. And hopefully we'll see that in 2013, 2014.

Richard Garchitorena, Credit Suisse.

Just wanted to touch on the ICL synergies for 2013. I know in the past you've talked about the bulk of the synergies on the marketing -- or on the sales side, sorry, being realized. With the rationalization in mind at the thermal level, where do you see that going for 2013?

Yes, we had guided to about $110 million, $120 million of synergies and I would tell you that on the G&A side, on the operating side that we were seeing those continue. We hadn't been able to capture all of those on the marketing side because a lot of that value was in the blending.

In terms of how that relates to what we closed, I think it's probably improved on that some, because we're actually taking some capital from those closed operations and moving it to other locations. As we indicated, we think there will be $30 million to $40 million of capital savings in the coming years by that decision to close some of those operations, so we're still on target to get those synergies.

I think the blending synergies are a little bit behind because of the softness in the market but as we see that improve, as we see Leer mine come on and the ability to blend more of those products at our port facilities, hopefully our synergies will be conservative.

As you look at the way we laid out synergies, I think we're still in very good shape because if you think back to how the three buckets were laid out, none of those had to do with those thermal operations that we closed down.

David Beard, IBERIA.

Maybe just to look at your bonds. Are you able to repurchase any bonds in the open market and if so, would that be a use of a portion of your cash?

The bonds are traded publicly, so at any point in time they are available for anyone to purchase. As we look at where we are right now, preserving and managing liquidities is an acute focus for us. However, as we move forward and as we start to see markets improve, we'll evaluate all of the opportunities and uses of cash and clearly deleveraging will continue to be a focus here for us as we are in a position where we're fairly highly levered as we move forward. We'll continue to focus on that as we move forward.

Justine Fisher, Goldman Sachs.

My question is on your strategy for contracting for the rest of the year, and it pertains to how much coal you want to have priced, let's say, at the time of your third quarter earnings call in October, because it seems that you might either have the possibility to sell the coal, sell more coal into the market but if it's at $11 a ton or $11.50 do you want to sell that coal? Or do you decide to cut production more in 2013, which could have a bad effect on your cost but at least allow you to not sell more coal at that price level.

How do you guys think about the benchmarks that you're setting and when you make that kind of decision? Would you hold off and leave a smaller amount unpriced -- a smaller amount priced, 70% to 75%, and then wait to price more of that in anticipation of a better market or would you make those sorts of decisions in the October/November time frame?

We're not married to any particular percentage. We want to continue to evaluate the market. We'll look at a case-by-case basis. The guys are starting the budgeting/planning process over the next couple of weeks. I think more clarity will come to that by the time we get to the October call. We are encouraged by what we're seeing with the draw-down in inventories, the shipment pick up.

But as I said earlier, we're in no way ready to bring on a bunch of production and chase a market right now. We need to see a more sustained market that provides us opportunities to get a return. We're not going to always catch the top of these markets, but we're going to layer in as we see that market improving and that will continue to be our strategy as a company. Fortunately, we have a good cost structure that allows us to do that.

Wayne Atwell, Global Hunter.

I apologize if you've given this out, but what's the capacity of the mines you've closed permanently, and are they union and are you likely to close any more mines in the future in the near future?

Those mines, there was five mines in total. It was about 3 million tons of annualized production. They were non-union operations. In terms of additional closures, right now we have no plans to do that, but again that will determine on what we see in the marketplace. We want to make sure that we're managing our costs tightly. Managing our capital. The guys have done a great job in that regard and we think that continues to allow us to be competitive in tough markets and position us when the markets improve that we can make a lot of money.

That concludes today's question-and-answer session. At this time I'd hike to turn over to Mr. John Eaves for any closing remarks.

Thanks, Joyce. We certainly appreciate you being with us today. As I mentioned earlier, the quarter has been a busy one. We've restructured our debt, we've production, we've been very busy in positioning this company from a cost standpoint, from a capital standpoint to get through this challenging period and come out on the other side a much stronger company.

We think our portfolio is diverse We think our cost structures is a competitive advantage, and, and we do think we have a long-term fundamentals of our business right, and we're going to manage to that. So we look forward to updating you on our third-quarter call. So thank you for your interest, and look forward to future conversations.

And that concludes today's conference. Thank you for your participation.