Arch Resources Inc (ARCH) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal Incorporated first quarter 2013 earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Jennifer Beatty, Vice President of Investor Relations. Please, go ahead.

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 with the SEC, 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 John Eaves, Arch's President and CEO, 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 brief formal remarks and thereafter, we'll be happy to take your questions. John?

Good morning. During the first quarter Arch continued to demonstrate strong cost control and capital restraint which helped offset lighter volumes and realized prices. We generated $84 million of quarterly EBITDA and had negative free cash flow of just $11 million. Our success in controlling costs has allowed us to lower our full year cost guidance expectations in several regions.

What's more, we began to reduce our capital spending guidance for 2013 to insure that our cash out flows for the year remain aligned with our view of gradually recovering markets. While it's no secret that global coal markets have been weak over the last year or so we are encouraged by the correction that is unfolding. Surprisingly, perhaps, that correction appears to be occurring first in the domestic thermal market, with higher natural gas prices and cold Spring weather serving as catalyst.

How are the US thermal markets fixing themselves? After all, just a year ago, US thermal market conditions were quite challenging. In the first quarter 2012, power demand was down 4%. Coal consumption was down 20% and coal production was more or less flat. That situation lead to a record coal stockpile bills by May. Fast forward a year and power demand is up more than 3% through March. Even more importantly, coal consumption is up over 10% while coal production is down 10%.

These trends are helping to correct the significant stockpile overhang at power producers. If the current pace holds, we would expect coal stockpiles to end the year below 145 million tons. That would be lower than the five year average nationally and a level not seen since December 2007.

This correction would set the stage for a much more balanced and dynamic domestic thermal market in 2014. We're already seeing evidence that stockpiles are correcting. Our customers are no longer calling us to defer tons as they did a year ago. We've seen an uptick in spot buying activity and RFPs as natural gas prices have risen. A year ago, natural gas prices were below $2 per million BTU, now they're 115% higher at $4.25. That bodes well for our POB in Western Bituminous coals.

Days of burn at POB serve generators are nearing the five year average and we would expect summer weather to help those stockpiles move down even further. But, not every coal region is feeling the benefit of higher natural gas prices. In fact, those prices would have to move solidly above $4.50 and stay there to make Central App coal economic on the dispatch curve. That is why thermal production in the region is coming off meaningfully. We're projecting total Central App production to fall to 130 million tons in 2013.

Of course, when generators do reach out again for Central App coal we believe they will find most of the coal has migrated offshore or been idle. This could make for a very interesting market environment in the future for the lowest cost surviving thermal coal mines in that region. While the US thermal markets appear to be on the mend, international thermal markets are in the process of bottoming out.

US coal export volumes were strong through the first quarter but we would expect exports to taper off in subsequent quarters unless we see an upward movement in ARA rates. At Arch, our first quarter export volumes of 2.7 million tons were roughly flat year-over-year. Our met exports were up versus a year ago and our thermal exports were down. That trend is likely to be consistent with the US coal industry overall.

Even with anticipated decline in thermal exports we are projecting exports industry wide to remain above 100 million tons in 2013. This represents a step down from 2012 levels but is still very high by historical standards. And, we expect exports to continue their upward trend in the future years as port capacity in this country is built or expanded.

What driving this bullish forecast? Well, 300 gigawatts of new coal fired generation is coming online around the world over the next five years and those plants will need to secure new available coal supply from somewhere. With a rise in cost in traditional coal export nations and infrastructure challenges in others we think the US can step in and play a more prominent role in the seaborne coal trade.

We are confident this shifting dynamic in the seaborne market will have positive implications for Arch. This isn't going to happen overnight. There will be ebbs and flows, in fact seaborne prices are now at levels where net backs simply do not work for most US coals including Arch. At the same time, we believe global prices are very low today which is prompting some supply curtailments.

As global economic growth reasserts itself, we would expect prices to move up accordingly. Turning now to global met markets we're seeing mixed signs. On a positive note, growth in North and South America is evident. Utilization rates at US steel mills have remained in the mid to high 70% range, strength in the auto, energy, and construction sectors is driving these trends.

Recent forecasts have raised auto sale expectations in the US to 15.5 million vehicles, up over a million units from last year. We believe higher US steel output could translate into increased buying activity from our met customers in the second half of the year. In Asia, we're forecasting a pick up in metallurgical coal demand in the second half of the year.

The World Steel Association expects global steel use will rise 3% in 2013 and another 3% in 2014. The BRIC countries, particularly China, are the main drivers and account for 60% of the projected growth. In Europe, however, steel markets are weak. Steel use in EU was down 9% in 2012 but may be down only modestly in 2013. Eastern Europe is fairing much better.

While we would like to see growth out of Europe stabilization is a good thing as well. We continue to see buying activity from our European met customers particularly for the High-Vol B coal but prices remain weak. Lastly, I'd like to highlight our ongoing initiatives to expand Arch's presence in the Asia Pacific market. As you know, we're already a strong and growing exporter in the Atlantic Basin, but we're making real strides to raise our profile in the large consuming regions of Asia.

We opened a business office in Singapore in 2011 and will soon be expanding into China. We're building upon existing customer relationships and developing new ones in key countries such as China, India, Korea, and Japan for both our met and thermal coals. Arch's metallurgical exports were up nearly 15% in the first quarter of 2013 versus last year and our exports in Asia are growing as well.

We're also working stateside to secure port capacity to facilitate the movement of our coals in the seaborne trade. Recently Arch's joint port development in the project in Washington State, the Millennium Bulk Terminal, signed an agreement with local labor to handle construction of the port. This agreement is the first formal agreement with organized labor for any proposed Northwest coal terminal project and represents another positive milestone for the project.

In summary, Arch is managing what it can control. We can't predict when prices will improve but we are seeing signs that markets are correcting and we're ready to capitalize as the cycle turns. With that, I will turn the call over to our COO, Paul Lang, for a discussion of Arch's sales and operating performance. Paul?

Thanks, John. This morning, I'd like to highlight how we're effectively managing our sales and costs during this market downturn. Despite the challenging market environment we're controlling what we can across the organization. We're confident that our efforts are positioning Arch to deliver value for shareholders over the full market cycle.

The first quarter of 2013, our consolidated cash cost declined 13% on a total dollar basis and 7% on a per ton basis versus the fourth quarter of 2012. The operations managed these cost reductions even as our sales volumes decline 6%. Our solid progress on cost containment in the Powder River Basin and Appalachia has allowed us to lower the cash cost expectations for these two regions for the full year. In our largest volume region, the Powder River Basin, first quarter cash cost per ton were down 8% even with a 4% quarter-over-quarter drop in sales volume.

We achieved these cost reductions across several major expense categories including lower maintenance and repair costs, reduced contract labor expense, and employee overtime, and savings on ports and supplies in the carrying costs that inventoried through various initiatives. Our goal is to run our operations in the most efficient manner and that include the combination of strong cost containment efforts and incremental sales where appropriate.

As you know, due to weak market conditions we're operating at a much reduced level in the Powder River Basin. At the same time, we've determined that it's in the long term best interest of our company and shareholders to maintain minimum production levels in the region in order to preserve a workable cost structure. As a result we're always active in the market placing tons to some degree just as we were in the first quarter.

Going forward, the demand outlook for the Powder River Basin is improving as natural gas prices have moved higher. We believe excess stock coal stockpiles in the region will be liquidated as we progress through the year. However, at this time, we do not plan to redeploy our idled equipment which includes two draglines and eight truck shovel spread until we see a much stronger and sustained recovery in the domestic coal market.

In Appalachia, our first quarter metallurgical volumes were up slightly year-over-year while our thermal volumes declined as a result of our mine closures last year. More than 50% of the volume shift in the quarter from this region were metallurgical coal which is consistent with our strategy to focus on higher margin business. Yet our cash costs were $3 per ton lower than in the fourth quarter. We achieved these cost reductions by lowering inventory and idle property costs and by reducing other consumable categories.

These cost improvements helped offset lower realized pricing in metallurgical sales. During the quarter, we shipped 1.7 million tons of Coking coal at an average price of $87 per ton. Those volumes were light due to limited shipments to our Canadian customers who cannot accept contracted coal when the Great Lakes are frozen. Our first quarter shipments also reflected a higher percentage of PCI and High-Vol coal in the sales.

In the coming quarters, we expect higher sales volumes and higher pricing as our product mix improves. For the year, we still expect metallurgical sales between eight and nine million tons. That range includes anticipated volumes from the new Leer Mine and accounts for the impact of our decision in 2012 to idle some higher cost metallurgical operations.

Currently, we have more than six million tons of metallurgical coal committed to date at an average price of $91 per ton and we're confident about placing our remaining tons in the market. We're seeing an uptick in demand for lower quality Coking coals and now expect 60% to 65% of our overall product mix to be PCI and High-Vol B in 2013.

Overall, our buying in Appalachia ran well in Q1 and we're continuing to aggressively pursue opportunities to drive cost out of the system to further enhance our margins. One such opportunity is the Leer Longwall mine. We've made considerable progress on the development of the operation in the first quarter. We're nearly fully staffed at the mine and benefiting from experienced employees transferring from other locations within the company.

The main line conveyor belt is in operation and we're in the process of taking final delivery for the longwall system. Lear's preparation plan has been running well and we've been loading trains on a regular basis for test shipments throughout the world. Development work by continuous miners is proceeding in the first longwall panel and we're finding the geologic conditions to be favorable.

In a nutshell, we remain on track with the anticipated start up of the longwall around the first of October. In the Western Bituminous region, our cash cost per ton came in at the low end of our guidance range for 2013. Costs were up versus the regions exceptional fourth quarter performance but were consistent with our previous expectations.

Realized pricing in the Western Bituminous region declined quarter-over-quarter mainly due to the roll off of international hedges. We continue to field solid interest from the domestic industrial sector and we see real demand for the international market for this type of high BTU low sulfur coal. Turning briefly to capital spending, we continue to exercise restraint in the trough of this market cycle and spent just $55 million on capital in the first quarter.

For full year 2013, we now project total Capital Expenditures between $300 million and $330 million compared with our previous estimate of $330 million to $360 million. We're tightening our belts while continuing to invest in high margin enhancing projects such as the Leer mine. Let me close by congratulating our employees for another strong performance in safety and environmental stewardship.

Even in the midst of the current market environment our dedicated operations personnel have remained committed to doing their part to uphold our core values every day. I'll now turn the call over to John Drexler, Arch's CFO, to provide an update on our financial results and liquidity position. John?

Thank you, Paul. I'd like to first talk about our balance sheet and strong liquidity position. As a result of the financing transactions completed in 2012, we have over $1.3 billion of available liquidity. The vast majority of that, nearly $1 billion, is in the form of cash and other short-term investments.

We have other sources of borrowing capacity as well. Namely, an accounts receivable securitization program and an undrawn revolving credit facility. Thus, we are very comfortable with the liquidity we have in place and remain well positioned to manage through the challenging market environment. Let me also recap our financial maintenance covenants.

These covenants relate to our revolving credit facility which was amended last November. As previously announced we have two covenants that apply to the revolver through the end of 2015. These covenants were designed to allow us to meet them during the market downturn. The first covenant is a minimum liquidity requirement of $450 million. As we just discussed, we have strong liquidity totaling $1.3 billion.

The second covenant is a net senior secured leverage ratio. It is calculated as secured debt which is essentially the term loan net of cash divided by the trailing 12 months of EBITDA. Based on our expectations, we are comfortably in compliance with both of these covenants throughout all of 2013 and beyond.

Turning now to the first quarter results, our quarterly EBITDA was impacted by an $11 million charge, or $0.03 per share, to account for liquidated damages on our export logistics contracts. Absent the charge EBITDA would have been $95 million. These charges were incurred as the market for international opportunities fell below what is economical to ship.

As a result we have recorded a charge in the first quarter related to those minimum throughput requirements. We believe that it is in Arch's and the markets best interest to not ship the tons into an over-supplied global market at this time. While the direction of global demand and pricing trends will dictate whether we meet our minimum obligations in subsequent quarters, we remain quite confident in our export strategy and its ability to drive long term value for our shareholders.

Next, I wanted to address our cash flow needs for the quarter -- or for the year. As we anticipated, we had a modest cash out flow in the first quarter and expect to have negative free cash flow for the full year. Due to timing, we expect to have additional cash out flows in the second quarter including the second of five annual payments for the South Hilight LBA of $61 million and scheduled semi-annual interest payments of roughly $110 million.

As we have outlined we remain highly focused on cost containment and reduction efforts. We are also working on minimizing our free cash out flow to the extent possible with ongoing capital discipline efforts and strict working capital management as demonstrated by our first quarter results. Turning to expectations for full year 2013, we have provided updated guidance in our earnings release.

I'd like to highlight just a few changes here. Our success in containing costs has allowed us to reduce our cost expectations in two key operating Basins. In the Powder River Basin, we expect to have cash costs in the range of $10.65 to $11.15 per ton representing a reduction of $0.23 per ton from our previous guidance.

In Appalachia, we expect cash costs of $66 to $71 per ton, a reduction of $1 per ton at the top end of the previous range. In addition, we now expect DD&A in the range of $500 million to $530 million and CapEx between $300 million and $330 million representing a reduction of $30 million versus our previous expectations. Given our current outlook and the impact of percentage depletion we continue to expect a tax benefit in the range of 30% to 50%.

In short, we continue to execute on what we can control, from a position of ample liquidity. We are confident that Arch is well positioned to weather this downturn and to create substantial shareholder value as markets improve. With that, we are ready to take questions. Operator, I will turn the call back over to you.

Thank you.

(Operator Instructions)

Shneur Gershuni, UBS.

Hi, good morning, everyone.

Good morning.

My first question, I was wondering if we can talk about the market for a second on a pricing perspective. You're moving along with Leer, wondering if you've done any test sales? How its being accepted in the market in terms of qualities and so forth, as an A, a B, and Low-Vol? And, maybe, if also if you can expand on your comments on the PRB? You mentioned shrinking inventories, and so fourth, as to when you would expect the utilities to come in and look at 2014 contracting?

Yes, let me make a few comments then Paul can jump in. Certainly, we're seeing a little pressure on the met prices in terms of the quality coals that are out there and we've seen the demand improve for High-Vol B, PCI. We think given our cost structure that we think we're very well positioned to continue to participate in that market and generate attractive cash margins.

As we buildout Leer, we think that project, with its cost structure, its quality coal, is going to be a comparable project to the Mount Laurel project. We think it's well positioned. We expect to continue to build that out. We think the quality coal is going to see a good market not only in the US markets but in the Atlantic market as well as the Asian market.

In terms of the PRB inventories, I would tell you that we think we're drawing inventories as we speak. We've got a bonus with the March weather. If you look at natural gas prices, they were about $4.27 this morning. We think at those levels the PRB as well as the Western Bituminous regions do very, very well on a dispatch basis.

We came into the year with 185 million tons of inventory. We think we continue to pull those down. Our internal forecast has those inventories falling below 145 million tons by the end of the year. That's with normalized weather and gas prices, actually, even a little bit lower than we're seeing today.

So, we do think we're in pretty good shape in terms of the regions we participate in and competitiveness with natural gas. I think you could see some buying activity as we get these inventories down towards the back half of the year, but it's certainly a great set up for 2014 in terms of PRB thermal markets. So, with that I'll let Paul opine on the test results we're seeing for Leer. He just got back from Asia and I think has some pretty up-to-date information. Paul?

Good morning, Shneur. I guess in general, we sent large scale test shipments to Europe and Asia as well as [fertalized] samples to steel mills in South America. I've got to tell you, we're seeing strong interest in the coal in Asia due to its high CSR and volatile content.

And, what's interesting, is we're seeing a lot of interest in China due to its GNY indices, which the Chinese classifies Fat coal, and I think those who are familiar with the Chinese market, Fat coal is in a little bit of short supply. And, I'm happy to say we've also signed a term agreement for the coal in Asia. So, we're seeing pretty good acceptance of the coal and a lot of interest in taking tests. So, overall I feel really good where we're at with Leer.

Are you essentially saying that it's pricing like A or even a Low-Vol into the Chinese market?

No, it's definitely a High-Vol, but they are finding good interest in this coal because, as I say, they call it a Fat coal.

And, I would say that we're seeing a nice premium in the domestic market for the testing that we have going on for Leer versus the High-Vol B.

Okay, cool. One last clarification question. You made a comment before in the prepared remarks about the covenants and so forth. If I recall last year, you'd recorded a gain on settlements and so forth. If I remember correctly does that also apply as a positive EBITDA adjustment when you're calculating a maintenance covenant test?

Yes, Shneur, it's John Drexler. As the EBITDA is recorded and as we reported that that EBITDA that you're describing is included in the various covenant calculations that we have for our financial maintenance covenants.

So, basically it's operating EBITDA as we all think about it plus that settlement basically?

That's correct.

Perfect. All right, thank you, very much guys.

Thank you.

Brandon Blossman, Tudor, Pickering, Holt & Company.

Hi guys. Paul, quick question on pricing. On the Appalachia price, in Q1 looks a little light on realizations versus the full year of hedges, particularly for the PRB, but also for Western Bit. Is there any color you can provide around that?

I think Western Bit, starting with that, obviously got impacted by some of the roll off of the international hedges. And, I will say we are seeing strong interest in the industrial sector and I think you see that in the contracts that we locked in for 2014. In the Powder River Basin, I think it is interesting the last couple, say, last six to eight weeks, we've seen a lot of new interest in spot purchases in the back half of the year. And, I think you'll see some pricing react as a result of that.

Okay, that sounds very positive. And, to follow-up on that, on '14 it looks like there was some small incremental tons done in PRB, if my math is right, around $13 that looks like materially above the forward strip. Is there -- are you seeing a disconnect between financial and paper trades and what you think physical market will be for '14?

Yes, I think there is some of that. And, also as we mentioned last time, we've been able to leverage some of our 2013 sales for 2014.

So, a step up for prices relative?

Yes.

Alright, thanks guys.

Thank you, Brandon.

Holly Stewart, Howard Weil.

Good morning, gentlemen.

Good morning, Holly.

First question, I think the release points out a, quote, significant opportunities to place additional met tons. Can you just provide a little bit of color maybe outside of Leer on what you're seeing in the market?

Yes, let me jump in here, Holly, and then Paul can add whatever he sees fit. We are encouraged by what we're seeing in the US markets. If you look at capacity factors they have moved up to the high 70% range. As I said in my opening comments, if you just look at auto production, up over 1 million units versus last year, we've got US steel production at about 94 million tons. We haven't seen those levels since 2007.

Based on the shipments that we've seen year-to-date we would expect a lot of our customers to come into the market and potentially buy the back half of the year. Clearly, we're seeing some pressure in Europe but I would tell you that in Eastern Europe we're seeing our demand with our particular customer base remain strong. We don't like the pricing, but as you saw we sold about 2.2 million tons during the quarter at about $87 million. I mean, we don't like the pricing but we do have a cost structure that allows us to generate good cash margins.

So, we do think globally, right now, there's a correction going on. If you look at the $172 benchmark, we still think there's a reasonable percentage of suppliers in the world markets that don't have cost structures that allow them to get a return, somewhere between 25% and 35%, so we think there's a correction going on. We hear as well a lot of the spot activity, people out selling coal at $20 below the benchmark.

We don't think there's meaningful volumes tied to those transactions. It could be inventory. It could be transactions that go through the end of the first quarter. But, we think over time that there's a true correction going on in the global markets that Arch is going to be ready to be able to take advantage of. But, clearly, where we sit today at 75% of our coal sold on the met market we feel pretty confident about moving the balance of that.

I think the only thing I would add, Holly, is that we're seeing a slightly greater demand for the lower quality Coking coal. This could be a combination of steel makers adjusting their blends due to cost and it could be just the higher price of natural gas pushing the use of PCI coals. But, we are seeing definitely a pick up in lower quality metallurgical coals.

Perfect. And then, just maybe based on what you've seen to date and your expectations for the second half of the year pick up, would there be a change in your customer mix?

Yes, I think for the back half of the year, what we expect to see is about 35% of our product Low-Vol and High-Vol A, and the balance, or 65%, will be High-Vol B and PCI.

Great, thanks guys.

Curt Woodworth, Nomura.

Hi good morning, I just had a question on -- I know that the liquidity position is pretty good where you stand right now. But, obviously, you are facing a fairly large maturity evolve in the out years and if we don't get a more substantial recovery in met, I'm just wondering what are the options you have to look at in terms of either asset monetization or things you can do to raise some cash? And, have you looked at potential monetization of the 700 million tons of reserves you have in the Illinois Basin, because it seems like there would be a fair amount of interest on that reserve base right now?

Hi, Curt, I'll start with a response here, this is John Drexler. I think as we sit here today and we look at our liquidity and we look at our expectations for the remainder of the year, we've indicated we expect to see some negative cash out flow over the course of the year. You can look at the components of what we're focused on, on controlling CapEx, we're continuing to bring that down, now at a mid point of $315 million. We have interest expense and that all is cash out flow after EBITDA. So, we don't provide EBITDA guidance but there's a lot of it out there.

But, as you look at it we are going to have modest cash outflows. As we end the year we continue to believe, based on our expectation, we're going to have ample liquidity to continue to weather whatever the market is throwing at us. However, there are other alternatives that we do have that we'll continue to look at and evaluate. And, I'll turn the call over, or that question over to John to provide some additional commentary.

Yes, Curt, as we continue to look to the future, if we continue to see soft markets in 2014, I think we will have the Leer project fully capitalized at the end of this year. We won't have any more growth capital associated with that. We do have the LBA payment and maintenance capital. And, Paul can speak to the maintenance capital expectations for 2014.

But, we think there are some things we can pull back if we continue to see pressure in the market. We do think, as I mentioned earlier, with the quality coal, the cost structure we see at Leer, we want to continue to buildout that project. We did close three high cost met mines last year that we didn't think worked in the market, about 2 million tons.

If we continue to see pressure in the met markets moving forward, we would probably be likely to pull off some higher cost, lower quality coals in terms of met supply. But, clearly, the Leer project is going to be a major participant in the US and World Markets. So, Paul you may want to opine on the 2014 capital.

I think I mentioned last quarter we're looking at a normalized maintenance capital of about $210 million to $220 million. And, obviously we were very successful in 2013 with equipment transfers from closed operations that helped keep that down. And, on top of that we have the land and reserve additions including the LBAs that come up to about $80 million.

So, it puts total CapEx at about the $300 million range is what I talked about last quarter. We continue to evaluate this and while we aren't ready to provide any further hard numbers we're clearly looking at decreasing this given the market conditions. Sitting here today a 5% or 10% reduction off that ballpark estimate is probably not out of the question.

Okay, great. And then, just second question on the PRB cost. Obviously, very good performance there. How much do you think of that reduction would be more permanent in nature as opposed to obviously when volumes come back and some of the other variable costs pick back up? Is there any way, any rule of thumb you can give to think about that?

Our costs were $0.93 below Q4. And, as we guided in October we knew we were going to have higher maintenance expense at the end of 2012, so in some way we're starting from a higher base. Even with that, the mine did a great job in the first quarter. We were able to benefit from a number of cost containment efforts. And, we did a really good job on maintenance and repair and lowering parts and supplies. And, I guess I was comfortable enough with the success we've had that we lowered our cost guidance for the Basin for the full year.

Okay, thanks.

Brian Yu, Citi.

Great, thank you. My first question is -- it's a follow-up on an earlier about realized pricing. I think you said that the realized prices were weaker because of committed priced tons, market base, and export. Would you be able to break out roughly what percentage would fall into those three buckets for the PRB and Western Bit?

No, we don't break it out to that level of granularity.

All right. And then, my second question is just on the throughput that you were -- you had to record a charge in Q1. Can you help us understand what the floor level is and what's built into your guidance at the moment in terms of being able to meet those targets?

I guess start with -- we exported about 2.7 million tons in Q1 from all of our regions. I think as part of expanding our port capacity over the last several years we entered into what I would call standard agreements and some of those included minimum volume requirements. We obviously believe the seaborne market will continue to grow and have put in place agreements so we can participate.

Even in this downturn, as John said, we think exports out of the US will be over 100 million tons in 2013. And, if you look back, had we not locked in this capacity, we would not have been able to export about 14 million tons in 2012. And, that 14 million tons equated to about $1.2 billion of revenue. In the first quarter we recorded about a $10.5 million charge related to throughput fees under our existing agreements.

Simply, as we said, it wasn't economical to ship and instead we paid liquidated damages. And, as you can imagine most of these charges were related to thermal sales given the current market. I guess in the end we see these exports growing and understand that potentially there will be an ongoing cost associated with these options. We continue to review these agreements and see how the market plays out. But, there could be additional payments in line with Q1 but I think it's really too early to speculate.

Let me just make a few comments. Clearly, as we look at world markets, we're bullish long term. We've identified a little over 300 gigawatts of new coal fired generation that are coming on over the next four or five years. They're going to need, on the order, of about 900 million tons of new supply. So, you're talking about replicating the US coal industry over the next four or five years and Arch wants to be a major participant in that market.

So, as Paul indicated earlier, we couldn't ship the 14 million tons, or realize that kind of revenue, in 2012 without these type agreements. So, as I mentioned in my opening comments, there's going to be ebbs and flows in this market. But, we believe the long term demand growth warrants our involvement and we couldn't be involved in a meaningful way without these type of agreements.

Brian, one last closing comment on that charge. It's flowing through other. It's not included as part of our cost guidance that we provided.

Lucas Pipes, Bran Capital.

Good morning, everyone.

Good morning, Lucas.

My first question is on the PRB. So, it looks like we've finally turned the corner on the thermal coal market. How do you see this market playing out over the course of the year? It looks like inventories are poised to come down further. When do you expect, maybe, production to come back with the level of price that you think is necessary to incentivize producers to do that?

Well, we're in great shape right now. If you look at our volume ranges at the mid point we're about 95% committed. We have no plans to bring any additional production back on. As Paul indicated earlier we've get two draglines idle, a number of truck shovel spreads sitting there. And, we're comfortable with where we are until we see sustained pricing.

I think with natural gas prices where they are today, the coal inventory draws we're seeing and would expect to see through the Summer, you could see some more buying activity in the third and fourth quarter. Again, we had left ourselves some opportunities with some of our current volume to play in that market.

But, until we see sustained improvements in the market, we don't plan to bring anything back on. As we look to 2014 though, it could be a very exciting market given what we see right now with natural gas prices, inventories coming down, supply pressure particularly in the East, I mean, we saw about 36 million tons come out of Central App from 2012 to 2013. We would expect another 20 million tons or so to come out this year.

So, we think the primary beneficiary of that is the PRB coal. So, we want to make sure that we're well positioned. Paul and his team did a great job in managing the costs quarter-over-quarter and that's really our focus right now is managing our cost and maximizing the equipment fleet that we have in place.

That's great. And, in terms of 2014 contracts, would you wait until the second half of the year to look at locking up some additional volumes? So, how do you approach that?

Yes, I think right now, I think we've locked in about 60% of our volume for 2014 based on the 2014 run rate. And, I think we're in pretty good shape and really we're standing back and judging the market and trying to be patient.

That's very helpful. Thank you all, very much.

Thank you.

Paul Forward, Stifel.

Thanks. I just want to ask about Black Thunder. Last four quarters here -- or last three quarters you've been about a 99 million ton per year rate. You talked about having two idle draglines and some truck shovel spreads idle. Just curious if the market gets back to where you think it ought to be, and gets to the point that you can deploy all of that equipment, what sort of additional capacity do you think Black Thunder could have in a normalized operating environment?

Paul, we have the infrastructure, the idle capacity to bring back meaningful production if we wanted. Having said that though, I think there's logical production increments. And, each of those have different timing and costs associated that make any supply response what I'd call non-linear. I guess simply, it's not the Basin I left eight years ago when production -- a production spicket could be turned pretty easily. I think the production increments now are a little tougher, a little longer to bring back.

All right, so -- well, I guess turning over to Central App, Mountain Laurel was impacted in the quarter from a longwall move. But, the last -- over the last year, its been operating about, from what I could see, about 2.6 million on the underground side, 2.6 million tons per year. And, from my understanding, that's below what you think capacity is.

I was just curious, are you operating Mountain Laurel at a lower than capacity rate in part due to just the weak market and really it's, call it at a 3.5 million-ton per year operation? Or do we need to think about Mountain Laurel as being something below 3 million tons going forward?

I guess to begin with, Paul, I will say there's still a lot of appetite out there for Mountain Laurel coal. It's a very popular coal body not only in the US and Europe but also in Asia. Having said that though, if you recall, we transitioned from the Alma to the Cedar Grove last year and when we did that we had said there was going to be a step change in both production and cost. And, really what you're seeing is just simply that change. The mine continues to run well, it's essentially running at capacity and things are going fairly good there.

All right, thanks a lot.

Thanks, Paul. Operator?

(Operator Instructions)

Caleb Dorfman, Simmons & Company.

Thanks for taking the question and good morning.

Good morning.

I guess, first off, obviously you showed some restraint in shipping exports into thermal side. What do you think you need to have to see some rebound in export thermal pricing?

Well, I mean, we continue to monitor those markets and as Paul indicated a lot of that was thermal coal. I mean you can see where API prices are in Europe right now, they're in the low to mid $80s. Those don't work for the US, they certainly don't work for Arch. We typically benchmark ourself off the West Coast to the Indonesian 5,000 KCAL coal. If you look at those products right now they're pricing in the low $60s.

But, if you look back over the last 12 to 15 months, the Indonesian prices were $80 to $90, API pricing was $120 to $125. Clearly at those numbers, the pricing works for Arch. So, it's something that we're always monitoring. Those markets can move pretty hard, pretty fast and it's something that we just continually monitor.

Do you think it's more of a supply response with production coming offline or more of a pick up in demand you need to see those prices appreciate to the point where exports make financial sense for Arch again?

I think it's going to be a combination of supply coming off line and demand bouncing back. I don't think it's any one answer.

Yes, if you look back to 2012, I mean in the US, it was about 80 million tons that came off. As we look to the global met markets we've seen about 35 million, 36 million come off so we think there's a correction going on. We think, as I mentioned earlier, there's a large percentage of suppliers in the met market that don't have a cost structure that can compete at $172.

We also think there's a reasonable percentage in the Hunter Valley in Australia at the recent settlement price of $95 that can't make money as well. So, we think that this correction is going to be happening over the next couple quarters. And, the people that are positioned from a cost standpoint, a quality standpoint, whether it's thermal, met, transportation options and infrastructure are going to be well positioned to take advantage of what we think is an improving market.

Chris Haberlin, Davenport & Company.

John you mentioned that 25% to 35% of the sea wall market was under water at $172. So, I guess it's reasonable to assume that that number is pushing 50% with the current spot price probably $20 below the Q2 benchmark. With that in mind, how do you see a benchmark pricing playing out over the next six weeks when we should have an agreement for Q3, just given the low prices in the spot market today?

Well, as I mentioned earlier, I think the spot market activity, we're not seeing a whole lot of volume with that. So, we hope that's people that are clearing out inventories that have some agreements maybe that they're protected by through the end of the year -- or the end of the first quarter, I'm sorry. But, we don't think that this is sustainable so we think this correction has to occur.

I mean, whether we stay flat or so for a quarter or two, that's possible. But, again, it would be hard to envision a meaningful step down from the $172. Clearly at $165 people were struggling, even after you had the $172 benchmark, you had at least 1 million tons come off between Canada and the US. So, people clearly continue to struggle with those price levels and I just think over time, that you have to see some kind of improvement in the benchmark pricing.

And then, shifting to the PRB, can you just talk about what the impact the latent capacity in the PRB might have on the ability of prices to recover? And, I think Paul had said that he doesn't see the supply response in the PRB as being linear due to a change in timing and cost associated with the ramp versus what it had been in the past. What has changed and how do you see that impacting pricing right now?

Well, I think it's some of the basic things that happens to most mines. Ratios are catching up with people, the amount of pre-strip that's out there has now increased. So, the ability to respond is not as clean as it used to be. And, a good example of -- when I started in the Basin in the late '90s, there was very little pre-strip activity for the draglines.

Now, that's a major part of most of the mines in the Basin. So, to get draglines back in operation means firing up truck shovels, so it's a faster -- or excuse me, a slower response time. And, as I said I think some of this is now a step function in increments of production.

Richard Garchitorena, Credit Suisse.

Good morning. First question back to the met. Looks like you priced 2 million tons during the quarter. Can you tell us what quality that was that you signed during the quarter and what remaining -- the remaining tons you have, two different mines, what quality is that coal?

Well I think we said first quarter about 70% of our product mix was High-Vol B PCI. We've seen strong demand on the PCI market. So, we've been able to take some of our higher quality coals from some of our locations and put them in the PCI market. As Paul indicated, as we move through the year, we think about 65/35, 65% being high Vol B PCI and the balance being Low-Vol, High-Vol A.

Some of our higher quality coals didn't get shipped during the first quarter because it's tied to the lake season. And, we should see that materialize as we move past April. So, we would expect an uptick in our pricing as we move forward.

Great, that's very helpful. And then, the other question, you talked a little bit about the progress being made with the unions at the Millennium Bulk Terminal. Can you give us an update in terms of where you are in the process right now and an updated timeline if possible?

Yes, I mean they just signed up with a contractor. We are getting ready to start the EIS process, we think that will be a long process. We are still continuing to be positive on that. If you look at the polling in the State of Washington, it indicates it about 2 to 1 in favor of coal export facilities in the State. So, we think this is something that makes sense for the industry, it makes sense for Arch. We're going to continue this process and we think over the next four to five years, that we could be transloading coal through MBT.

Andre Benjamin, Goldman Sachs.

Hi, good morning.

Good morning.

Was hoping to ask a little bit of a higher level question and see if you could provide some insight into what your domestic utility customers are saying about the outlook for investing capital to install pollution controls to comply with MATS? I know the rules are a few years away but this isn't being made today. So, any color you can give on what percentage of your customers are scrub versus made the decision to scrub or still needed to scrub and any regional color would be helpful.

Let me first say, Andre, that we do recognize that MATS is coming on. We think all the coal fired generation closures are tied to MATS. We think that will happen over the next five years. We think there's about 30% of the coal units that will close during that time frame. But, when you look at the capacity factors of those and you just look back to 2012 burn, it's about 6% to 7%.

So, in terms of capacity, it's not as meaningful as you'd think. It's probably about 58 million to 60 million tons. We think after talking to our customer base, and if you listen to some of our big customers they've been very clear they want a balanced portfolio of fuels. They want coal, they want natural gas, they want renewables, and they want nukes. And, we think that's proven.

We think by 2017 that about 80% of the coal fleet will be scrubbed. We think once those investments have been made that they aren't likely to close those units. We think the other 20% are some of the largest, most modern plants that are out there. So, we think going forward the surviving fleets we have it about 270 gigawatts, 275 gigawatts can run pretty hard.

If you look at those particular units in 2012, they ran at 60% of their capacity factor. We think they can run much higher. If you just go back to 2010, 2011, they were running at about 73% of their capacity factor. If you just assume that, incrementally it's 100 million tons plus of additional coal demand that's not there today.

So, we're cautiously optimistic moving forward that the surviving fleets can run at pretty significant capacity factors. And, we think in an improving economy that those are going to be pretty economically priced generation units here in the US. So, we're assuming that 40 gigs, 45 gigs fall off between now and 2018 and that's driven primarily by MATS.

Great, that's helpful. And then, I guess -- I apologize if I missed this, but if you can give some color on what was price versus unpriced in terms of your met coal quality? I'm sorry, more accurately how much of what's unpriced is say your lower quality High-Vol B quality versus Low-Vol and High-Vol A?

I think if we look at the balance as I indicated, Andre, first quarter 70% of our mix was High-Vol B PCI. We've got about, call it, 2 million, 2.5 million tons left to put in the market. We will see some of our higher quality coal ship once the lake season opens. We still have got some of the high quality coal to put in the market.

But, given the demand increases we've seen for lower quality coals whether it's High-Vol B or PCI, we would expect the balance of the year to be about 65/35. And, overall for the year, about 65/35. So, that can always change, depending on the customer demands but that's the way we see it for the balance of the year.

Timna Tanners, Bank of America Merrill Lynch.

Yes, thanks, good morning.

Good morning.

Certainly, just wanted to follow-up the comment on if markets are weaker in metallurgical coal you would consider cutting more. But, my concern on the met coal market has been that there really haven't been the cuts we would have anticipated given the surprisingly low levels of pricing, as you point out, with many of the global producers under water. So, can you just tell us a little bit more color on what it would take for you to contemplate a decision to cut further capacity? Thanks.

Certainly we can't control what our competitors do. We can only control where we are. I think we're fortunate if you look at our cost structure, $67 in the first quarter, and that does have our met production in that number. So, we think we're probably better positioned than most particularly in the United States, to make pretty good cash margins even in a tough market.

I would tell you that if we saw any material step down from the benchmark prices right now that Paul and I would be having those type conversations about how we move forward with some of our higher cost met coals. But, clearly we do think that we're probably better positioned than a lot of people from a cost standpoint, from a quality standpoint, and from a infrastructure standpoint to get those coals into the global markets.

That's helpful. And, just as a follow-up, if I could, on the rail side are you seeing discounting anymore? Do you think that could resurface or what's the status of rail discounts and facilitation of the exports?

No question I think the railroads are understanding the issues of the global markets and they are coming to the table. And, I think they are particularly interested on the East Coast, particularly with the metallurgical sales. So, I feel fairly good about what the railroads have done the last couple months.

(Operator Instructions)

Dave Martin, Deutsche Bank.

Thank you. I had just one quick follow-up, if I may, coming back to the port and logistics charges. I assume that there's a few contracts possibly related to this. Are these types of contracts generally annual contracts or could you give us a sense of what a duration range would be on these contracts?

Dave, they're all over the board. Anywhere from short-term to multi-year so it's a pretty difficult question to answer.

Okay, that's what I was curious about, thanks.

Dave Gagliano, Barclays.

Hi.

Good morning, Dave.

Good morning. Just back to Dave's question. Is there a way to give us a sense of how much coal you actually have to export on a quarterly basis to avoid the minimum throughput fees? And, are these mostly just a flat charge or is it on a per ton basis?

Dave, it would be difficult to break that out. It typically is on more of a flat charge. I think it just depends on how we see the markets evolve. But, as Paul indicated earlier, it's mostly tied to the thermal markets. Certainly less impact full on our met coal supply.

Okay, and then as a follow-up, just -- I was wondering if you could just confirm the forward sales in the quarter the PRB. Was it 8 million tons for 2013 delivery at about $10.50 per ton?

Yes. It was about 10.50 for a ton for about 8 million tons during the quarter for 2013. And then, we had linked some smaller sales to 2014 as well.

That does conclude today's question-and-answer session. Mr. Eaves, at this time I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, very much. This management team is going to continue with laser focus on cost control, capital, sales commitments, liquidity. We think we've positioned the company very well. We're starting to see some positive signs in the market. We certainly appreciate your interest in Arch. We think we do have the company positioned for the next up cycle and look forward to updating you on our next call in July. Thank you, very much.

This does conclude today's presentation. Thank you for your participation.