Arch Resources Inc (ARCH) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Incorporated fourth-quarter 2013 earnings release conference call. Today's call 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. 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 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 we have posted in the Investors 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. Today, Arch reported fourth-quarter EBITDA of $38 million, which reflects the impact of rail issues and geologic challenges. As you know, our quarterly shipments in the PRB were negatively affected by weather and rail-carrier shortfalls that have continued into the first quarter. We do expect rail performance to improve over the course of 2014, as crews and power are added back to meet demand. That should allow us to make up the majority of our PRB shipments that were supposed to have moved during the fourth quarter.

More importantly, the rail constraints and favorable weather to date could have real implications for coal markets this year. US coal power-plant stockpiles fell more than 35 million tons in 2013, and the cold weather across much of the country in January likely accelerated this liquidation. Stockpiles that PRB serve customers are the lowest in the country, having fallen below the 60 day mark in December. Some of our customers have raised concerns about potential stockpile shortages if these trends continue.

Even more intriguing is what is happening in the natural gas markets. So far this winter, 1,600 Bcf has been drawn from natural gas storage. This represents a withdrawal rate that's 45% above the five-year average, and double the withdrawal rate during the 2012 winter that put a black cloud over the US thermal markets for the past two years. Electric generating capacity is feeling a bit stressed due to the pickup in demand. Fuel prices, particularly in the Northeast, have skyrocketed.

Of course, we share our customers' concerns about the potential lack of grid reliability and fuel diversity that current policies seem to be dictating. We believe no one in this country should have to choose between heat or electricity. With that said, we do know that spring and milder temperatures will come, but this spark of weather-related demand should help inject some momentum into the domestic thermal coal markets. We anticipate a much more balanced and dynamic market in 2014, with the PRB benefiting meaningfully.

In fact, spot prices for PRB are up more than 40% since early 2012. The same, however, can't be said for the metallurgical markets. We currently anticipate a challenging environment for the bulk of 2014. One promising sign is that demand remains reasonably strong. Unfortunately, global supplies outpace that demand, depressing prices. Longer term, we do see a bright future for US coal in the international markets, but we expect lower metallurgical export volumes in 2014.

At Arch, our fourth-quarter met volumes fell short of our expectations due to geologic challenges at Mountain Laurel. In his prepared remarks, Paul will discuss our current outlook for Mountain Laurel and why we should expect comparable level of output at the mine in 2014, versus last year, as we work through adverse conditions in the current panel.

For the full year 2013, Arch sold 6.8 million tons into the met markets at prices just under $90 per ton. And, despite the geologic challenges we have encountered at Mountain Laurel for the back half of the year, we estimate our cash cost on produced met volumes represented around $75 per ton in 2013, showcasing our ability to make strong margins despite ongoing weaknesses in the met space.

More importantly, in the Appalachian coking-coal portfolio is about to take a step up in quality and a step down in cost with the addition of Leer. The longwall began operating in December, and we are pleased with the ramp up thus far. We have invested over $400 million to bring on this mine, which will be the cornerstone of Arch's met coal output for years to come. In 2014, we expect the Leer mine to run at a 3-million-ton-a-year pace annualized, with roughly 70% of that output targeted for the coking coal market. About half of those tons are already committed in the market today.

For the full year 2014, we are targeting total met sales of around 8 million tons. That level reflects the impact of production reductions and cutbacks we made last year and matches the second-half 2013 run rate of 6 million tons, plus the addition of the longwall production at Leer. Certainly that level of met output is below our current capacity of around 10 million tons, but is also a prudent forecast in light of current market conditions.

Longer term, our ability to tap into the expected growth in seaborne metallurgical coal demand is a major focus for Arch. And, we expect the Leer mine to deliver a strong return on our investment given its good quality and strategic access to seaborne markets.

Another area that we're watching closely is the international thermal market, which could potentially move higher if export supplies are further constrained. In 2013, Arch shipped approximately 11.5 million tons overseas, down slightly from our record 2012, but still strong by historical comparison. As you know, our West Elk mine in Colorado is heavily focused on the export market, as 50% of the mine's output was sold into Europe, Latin America, and Asia in 2013.

That penetration has been helpful as it has helped to offset a soft demand for Colorado coal domestically. However, as economic price hedges roll off, we have elected to reduce output at West Elk to a run rate of roughly 4 million tons per year in order to preserve the reserve base, while retaining the flexibility at the mine to respond quickly when international prices move up further.

While we expect our export shipments to decline in 2014, we are making strong inroads into building our overseas network. Last year, we opened an office in China and grew our global customer base by 30. In the first half of 2014, we have lined up PRB goal to ship to the Gulf as European coal demand remains strong. The expansion of rail direct port capacity in Houston this summer should further facilitate this movement. Over time, the ability to direct PRB coals into the seaborne coal trade in a more significant way will be a key driver for our Company.

Finally, I'd like the to highlight Arch's major achievements in the Company's core value metrics. In 2013, we delivered another strong year for safety and environmental performance, having further improved upon our performances attained in 2012. In addition, several mines, West Elk, Coal Creek and Hazard, all reached major safety milestones last year. I'd like to applaud the efforts of our employees to maintain a strong commitment to safety and environmental excellence every single day.

While we saw continued improvement in some key pillars last year, we also experienced a decline in 2013 earnings due to a softer pricing environment, particularly on the metallurgical side. Currently, we are expecting similar headwinds for 2014. Our goal this year will be to tighten our belts to further reduce cash outflow and to increase operational efficiencies.

We will stay focused on managing our capital spending, costs, and commitments, and continue to look for ways to optimize our asset portfolio. In December, we successfully extended debt maturities until 2018 and further enhanced our financial flexibility. John Drexler will highlight those initiatives in his prepared remarks.

As we look ahead, it is important to remember that as coal markets recover, so will coal prices. This, in turn, will improve our financial performance and drive shareholder return. With actions we have taken in 2013 to enhance our liquidity position, we are confident in our ability to navigate through this market cycle and reshape Arch into a stronger, more competitive global resource provider.

With that, I will turn the call over to our COO, Paul Lang, for a discussion of Arch's recent operating performance and outlook for 2014. Paul?

Thanks. As John mentioned, I'd like to discuss our operating performance in 2013 and highlight areas of focus for 2014. In 2013, we meaningfully reduced our cost in the Powder River Basin, achieving a 5% reduction in unit cash costs on a year-over-year basis, despite a challenging fourth quarter. We benefited from several major process-improvement initiatives that reduced controllable costs, coupled with additional volume that allowed us to run Black Thunder more efficiently last year.

Going forward, while the demand outlook for the PRB is improving, we currently anticipate operating our mines in the region at a level on par with 2013, absent any rail-service issues. Given the supply and demand fundamentals that we see, we expect our customers to further liquidate their stockpiles during 2014, which could create tightness in the market over the next year.

In our bituminous thermal segment, a strong operating performance at the West Elk mine and the elimination of Canyon Fuel's impact, allowed us to meaningful reduce fourth-quarter unit cash costs versus the third quarter. Looking ahead, we anticipate a step up of costs in 2014, compared with the fourth quarter of 2013, as we expect West Elk to operate at reduced production levels.

In Appalachia, we reduced our cash costs by 4% in 2013, even though we cut our volumes by 20%. We have been actively realigning our portfolio in the region to concentrate production on our lowest-cost mines and to shift our output toward higher-margin metallurgical markets. As a result, metallurgical coal made up almost half of our tons sold in Appalachia last year, that's up 10% from 2012. Heading into 2014, we expect our metallurgical volumes to represent an even greater percentage of our sales mix in Appalachia, even while our costs trend lower.

At Mountain Laurel, we currently expect our output to be roughly in line or slightly below 2013 levels. As you know, the mining height in the Cedar Grove is thinner than in the Alma seam, where the mine transitioned from in 2012. In addition, the geologic issues in the current mining panel have slowed the advance rate of the longwall. Collectively, these items have reduced our output at the mine.

With that, though, we believe that we are currently in the heart of the adverse conditions now, and we would expect improvement as we progress through this panel and transition to a new one in the second half of 2014. It's encouraging that the quality of coal being mined at Mountain Laurel is in demand. Thus, we feel that managing through this environment is preferred path, versus cutting the panel short and not mining and selling the tons.

Offsetting this reduction of output at Mountain Laurel will be the addition of Leer, which is key to Arch's long-term strategy of becoming a larger player in the coking-coal market. Going forward, our metallurgical platform will be anchored by low-cost longwalls at Leer and Mountain Laurel. Complete complementing this space, we'll manage our mines, such as Beckley and Sentinel, which produce higher quality coals, and Cumberland River and Lone Mountain, which produce incremental high-vol V and PCI ton, in a fashion that allows us to respond quickly to changes in market fundamentals. This suite of metallurgical quality products will be produced at a highly competitive cost structure.

In addition, we continue to finalize permits and engineering on the other low-cost reserves in the Tygart Valley area, adjacent to Leer. These reserves can be developed over time should the market conditions warrant.

Overall, we believe that the metallurgical side of our business, combined with a strong PRB franchise, creates a compelling long-term value for shareholders. Our asset portfolio will provide a significant growth potential, as markets correct, and the balance needed to manage volatility, inherent in this industry.

Turning, now, to capital, we have reduced our capital-spending program in response to weak market conditions, even while successfully completing the Leer mine development. For 2014, we expect to further reduce capital spending by more than $100 million versus 2013. Within this spending level, we are still maintaining our existing operations, including land payments, for replenishment of reserve base.

Lastly, I want to touch on our sales commitments. On the metallurgical side, we are targeting higher sales volumes in 2014, due to incremental tons from Leer. Two years ago, 30% of our metallurgical sales were a blend of low-vol and high-vol A coals. This year, our percentage of high-quality coking coals will be closer to half of our sales mix.

To date, we have booked 3.5 million tons of our expected metallurgical sales for 2014, at an average price of $85 per ton, with another 700,000 tons that are committed but unpriced. While this is a step down from last year's $90-dollar-a-ton level, it's certainly within our expectations given the current market. As of now, we have roughly half of our 2014 metallurgical coal volumes left to place. Although the benchmark prices are lower at the moment, we have a cost structure that allows us to participate in the market. We also believe that the current prices are unsustainably low, which will induce significant capital cutbacks across the globe, and very little, if any, reinvestment in reserve replacement.

On the thermal side, we continue to sell into an improving market in the PRB and expect customers to enter the market to supplement their needs as they see their stockpile decline fairly rapidly. For 2014, we are roughly 85% committed, based on our current volume run rates, and currently have about half of our tons for 2015 -- committed for 2015 delivery. In addition, we anticipate that our sales portfolio in 2014 will be weighed down by lower realized prices on export sales. At the same time, these sales are allowing us to continue to cultivate important relationships in the global market and help us meet our minimum throughput requirements on port and rail contracts.

With that, I will turn the call over to John Drexler, Arch's CFO, to update our recent financing activities and current liquidity position. John?

Thanks, Paul. As John mentioned in his prepared remarks, we took actions during the fourth quarter to further bolster our liquidity and extend debt maturities. These proactive steps will help us navigate the current market cycle by providing us greater flexibility. We now have more than $1.4 billion of liquidity, with $1.2 billion of that in cash, or highly liquid investments; no meaningful maturities of debt until 2018, after successfully refinancing our 2016 notes without increasing our interest costs; and significantly relaxed financial maintenance covenants.

We have suspended or eliminated most financial maintenance covenants that pertain to our $250 million revolver until June of 2015, when a relaxed, senior secured leverage ratio covenant steps back in. During the interim, only a minimum liquidity covenant remains in place. While our leverage is currently higher than our long-term target, we have implemented a very flexible capital structure, with a high level of pre-payable debt that will allow us to de-lever the balance sheet, as coal markets correct and our cash flows improve.

Turning, now, to our fourth-quarter and full-year results, I wanted to highlight a few special items included in our results today. First, we recorded a goodwill impairment charge of $265 million in the fourth quarter. Our accounting review and testing requirements indicated, at this time, that the remaining goodwill on our books was impaired due to the weakness in metallurgical coal markets. This one-time, non-cash charge has no impact on our cash flows or our liquidity.

During the quarter, we also recorded a $12 million charge related to a settlement of legal claims between the UMWA and Arch, stemming from the Patriot Coal bankruptcy. As part of the settlement, we will make a $6 million contribution to Patriot's [VVA] in both 2014 and 2015. This settlement concludes all disputes between the parties. In addition, with Patriot's emergence from bankruptcy in December, we completed the acquisition of the Guffey metallurgical coal reserves for $16 million. Capital spending for the fourth quarter totaled $74 million, with the Guffey acquisition.

For the full year, our revenues declined by over $750 million, reflecting the weak pricing environment, but our costs declined by nearly $500 million, thanks, in part, to a strong focus on controllable costs at our operations. Capital spending also came in on target, even with the opportunistic reserve purchase. CapEx totaled $297 million in 2013, which includes over $100 million for the completion of Leer. With that growth project now complete, our capital spend in 2014 will be significantly reduced.

Turning, now, to current expectations for full year 2014, we are forecasting the following guidance, most of which is reflected in our earnings release disseminated earlier today. In the Powder River Basin, we expect cash costs in the range of $10.70 to $11 per ton. The midpoint of this range is slightly higher than our 2013 actual results, and contemplates the impact of lingering rail issues, as well as potential increases in sales-sensitive costs.

In Appalachia, we expect cash costs of $63 to $67 per ton, a reduction of $2 per ton year over year. This range anticipates the impact of Leer's low-cost structure. In our bituminous thermal segment, we expect cash costs in the range of $25 to $28 per ton. This range anticipates lower output at West Elk during 2014.

In other financial guidance, we expect a reduction in capital spending in 2014 of at least $100 million. Our 2014 CapEx range is between $180 million and $200 million, which includes the third of five $60 million annual LBA payments for the South Hilight reserve. DD&A in the range of $430 million to $460 million. Total interest expense between $385 million and $395 million.

We note that our cash interest costs will be between $360 million and $370 million in 2014. The incremental expense is attributable to the Leer development transitioning to production and a subsequent reduction in the capitalization of interest. SG&A between $122 million and $130 million, representing a reduction versus 2013, due to our ongoing efforts to lower cost as well as the benefits of realigning our corporate function following the sale of Canyon Fuel. In addition, we expect to record a tax benefit for the year in the range of 30% to 50%.

Finally, I'd like to comment that as some of our previously hedged transactions in the international market roll over, we are taking a hard look at our minimum obligations with various port and rail operators. It simply may not be in Arch's best interest to ship the tons 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 confident in our export strategy and its ability to drive long-term value for our shareholders. However, in light of current market conditions, we expect that we could incur charges of approximately $10 million per quarter on these minimum obligation contracts in 2014.

While we continue to see challenges in the near term in metallurgical markets, thermal fundamentals continue to point to meaningful improvement over the course of 2014. Accordingly, we have taken proactive actions this past quarter and year that will position us to respond as markets recover. With that, we are ready to take questions. Operator, I will turn the call back over to you.

(Operator Instructions)

We'll take a question from Michael Dudas of Sterne Agee.

Good morning, gentlemen, Jennifer.

Good morning, Michael.

Regarding the Leer output, so at 3 million annual rate, are you still targeting end of Q1 for the full run rate? And, remind us again the amount of met versus thermal that comes out of that mine, and how that's going to be positioned contract wise relative to US and international markets?

Michael, this is Paul. So far, we've been pretty pleased. The start up ran pretty well on schedule, and the ramp up is also pretty well going on as we expected. We still think Leer is going to run at the kind of 3 million nominal ton rate, with about 70% of it being metallurgical.

My follow-up question would be relative to your improved outlook, it seems, in the US thermal market. Certainly, with the weather helping in the PRB, do you expect a meaningful turn in inventories greater than anticipated by March's end? And, I think, also, looking in the east, have you seen any indications of thermal pricing out of Appalachia picking up a little bit given some of the gas and some of the demands on electricity generation? Thank you.

Michael, this is John. I think if you look at the inventories overall for 2013, we ended at about 148, which is the lowest we've been in six or seven years, which we find encouraging. If you look at the PRB customers within that space, they were sub-60 days.

We think with the weather we continue to have, natural gas prices at elevated levels, that we'll see, by the end of January when we get real numbers, that number could be down in the low to mid-50s in terms of day supply for PRB customers. So, I think things are going in the right direction there. We've certainly seen a recent uptick in activity in the PRB. We've seen an improvement in pricing.

I think, to your question on Central App, certainly natural gas prices, this morning, were up $5.15, $5.20. I think if you look at that, compared to Central App coal, you would think that Central App coal could compete, but I think without sustained pricing of $5 to $5.25 on the natural gas space, I think it's going to be difficult for Central App to compete. We really haven't seen a whole lot of activity in Central App to date. If you look at those inventories, they're still well above where they need to be.

So I would tell you, we had production out of Central App in 2013 at about 128 million tons. Our internal forecasts are showing that at about 113 million or 114 million for 2014, and our forecasts for natural gas are somewhere in that [$3.50] range. So, we continue to see pressure on Central App thermal coal as we move forward.

We'll move next to Lucas Pipes of Brean Capital. Your line is open.

Good morning, everybody.

Good morning, Lucas.

I first wanted to touch base on the met coal side. If I go back to 12 months ago, I think you were guiding to 8 to 9 million tons, and then over the course of the year, things changed a little bit. Could you remind us what exactly took place there and why this year, you think, you could beat your guidance?

Lucas, this is Paul. I'll start us out. We're forecasting met volumes of 7.5 to 8.5 million tons for the year, which I think reflects the production cutbacks we made in 2013.

I think the best way to look at our volume guidance is take the run rate for the back half of 2013, which was about 6 million tons, include the step down at Mountain Laurel and add back in the Leer longwall impact. Certainly, this is below our capacity, and that's a little bit of an argument, but currently we probably have met capacity of around 9.5 to 10 million tons. I think it's prudent that we forecasted where we did given the market conditions.

This is John. When you think about 2013, 2012, we closed a number of mines, about eight or nine coal mines. A lot of that was thermal production, but there was met production in that as well. And, it had cost structure that we didn't think made sense, and as we looked at the market this year, we think that midpoint of 8 million tons is the right level, given what we see, what we've committed domestically, and really, where our costs are. So, we are going to continue to monitor the international market.

I don't think it's any real secret with benchmark pricing first quarter at $143, you've seen spot prices drop below that. So, the anticipation for second quarter could be another step down in the benchmark pricing. We want to make sure we have got our portfolio positioned where we can generate positive cash margins in this difficult market. At the same time, be positioned when the market does move in the right direction that we can respond and capitalize on that. So, we do think we've got the Company well positioned in that regard.

That's very helpful. Just a quick follow up. In terms of the quality of met coal that you have committed, would you say that's kind of your average type of blend, or is that more towards the higher side?

I think it's pretty well split between our higher blend and our lower blend. It's somewhere right around 50% of both blends.

Thank you. And then, just lastly, in terms of your covenants, could you remind us -- you did refinancing in December. Could you remind us where you stand, what is coming up there? And then, maybe also give us an overview of your letters of credit and where they stand against any sort of covenants that you may have?

Lucas, this is John Drexler. Yes, we were very pleased with the refinancing we were able to do in December, really focused on two major areas. We wanted to enhance our liquidity, we wanted to extend debt maturities, and we were able to achieve that.

Your question, specifically, is related to financial maintenance covenants. As a reminder, when we look at our $1.4 billion of liquidity, the only component of the liquidity that is exposed to financial maintenance covenants, and the only component of our debt structure, is the revolving credit facility. It's a $250 million facility that is undrawn. We have a minimum liquidity requirement of $550 million.

There are no other major financial maintenance covenants until June of 2015 when a senior secured leverage ratio steps back in. It's relaxed leverage ratio. So, we feel good where we stand with that.

In relation to your question on letters of credit, we have about $115 million -- $100-plus million dollars of LCs. We have an AR-securitization facility as well. Those letters of credit are drawn against that AR-securitization facility. So, we feel real good about how we bolstered the liquidity for the Company, extended maturities, and only have a very small portion of our debt structure exposed to financial maintenance covenants.

We'll take our next question from Paul Forward of Stifel.

Thanks. Good morning.

Good morning, Paul.

Just following up on that last question on the -- well, it's obviously very much a buyers market for coal assets in the US in 2014. Having done the refinancing and pushed out the debt maturities and so on, do you feel that you're not likely to be all that active as a seller of assets in 2014, that you're really not as under any sort of need to raise liquidity this year? Or, what are you thinking as far as any potential kind of further slimming down of the portfolio this year?

Paul, this is John. Certainly, John Drexler and his team has done a great job in enhancing our liquidity to ensure that the Company's well positioned. I think, really, our strategy has been consistent over the last couple years that we've said, if we have assets that aren't strategic to executing our long-term plan, that somebody else values more than we value ourself, that we'd consider monetizing those assets.

That opportunity presented itself in 2013 with the Canyon Fuel monetization, and we think that was a very good transaction for the Company and allowed us to put $400-plus million dollars on the balance sheet. As we go forward, you're right, we're not compelled to do anything. We continue to look at our portfolio to make sure that we've got the right assets in place.

If you look at what we've done, in terms of our diversity exposure to the thermal market, exposure to the met market, access in terms of infrastructure to access the global demand, we do think we're well placed, and so we're not in a position to have to do anything. Again, if somebody comes in and wants to talk about some assets that we don't think are particularly critical to executing our long-term plan, we'd consider that. We do think, in terms of our liquidity and our portfolio, we're in very good shape, currently.

Great. And, a Paul Lang question here, on Mountain Laurel, just wanted to ask about over the next kind of two or three years at Mountain Laurel, how much longer do you see, now, that the longwall will keep operating before you transition to a rim-and-pillar operation? And, as you look past the current kind of problematic geology, is there potential for that geology to recur as the longwall proceeds into other panels?

Yes, Paul, Mountain Laurel, obviously with the change from the element of the Cedar Grove, took a step down of production. In this particular panel, we're in the third panel of a three-panel district. And, I think we talked at the last call, we encountered -- we had a parting that was swelling out on us. That continued to get worse as we got into the high-cover portion of the panel. Fortunately, we're kind of in the worst part of this district, and we feel like we're starting to come out of it.

As far as reserves down the road, I think, as we've said in the past, you have to kind of reset your view of Mountain Laurel, that it's more in that 2-to-2.5 million ton of an operation. We think the longwall has got, at least, beyond our five-year planning period.

We'll move next to Curt Woodworth of Nomura.

Good morning.

Good morning, Curt.

I was wondering if you could elaborate a little bit on some of the rail constraints that you guys saw in the PRB, and do you think that would be an issue in terms of restricting volume recovery in the first part of this year?

This is Paul. In the fourth quarter, we saw pretty dramatic decline in the Powder River Basin due to rail issues. I think the railroad has been pretty public about it. They had service issues due to the weather and volume in other businesses, and it probably cost us 2.5 to 3 million tons. As John said, the majority of that will be made up in 2014.

I don't think this is kind of a new normal for the basin. Over the years, I think we've all see ebbs and flows of rail service. I think the railroads are taking steps to get back to where they were. I looked at the numbers for January, compared to the fourth quarter, and we got one carrier that's up from 24.5 trains a day to 25.5. And, the other one's up from 29.7 to 32.6. So, the basin, as a whole, is up about 7%. That's not the entire gap we lost in the fourth quarter, but clearly that's a good step in the right direction.

Okay. Thanks. And then, just a quick question on Leer. For the million tons you have committed, can you tell us what the pricing looks like on that?

Curt, I think, because we continue to be in negotiations with our customers, we're a little hesitant to do that. I would tell you that we found very good reception domestically, as well as internationally, for that product, and given the cost structure and the quality, we feel real good about where we're headed. But, just a little bit reluctant to throw out a number, right now, until we've kind of gotten through the negotiating period.

We'll move next to David Gagliano of Barclays.

Thanks for taking my questions. On the 53 million tons of 2015 PRB volumes that are now committed and priced, can you just break down the timing of when those volumes were priced and committed?

David, I don't think I have that in front of me.

Dave, we continue to layer-in business, that's something we've been active in doing. We had those opportunities during the quarter to do that. I think, if you look back over the last couple weeks, we have seen a step up in PRB pricing. And again, we continue to participate in that business. So, I think you have to figure, as we move out, given this environment we're in with declining inventories, high natural gas prices, that we are seeing improving PRB prices for 2014 and 2015.

Okay. On the export thermal volumes and the throughput issues, I'm just wondering, what's the volume tied to those minimum throughput exports? And, are those volumes included in the full-year sales-volume expectations, the 124 to 134? And also, when do those minimum throughput requirements wind down? Does this continue into 2015?

Those agreements, and there's at least probably a dozen of them in there, they're kind of all across the board as far as term, volumes, and that. I think they range anything from a 1-year duration to a 10-year duration.

Dave, this is John. When we entered into those agreements, obviously we look at demand growth over the next 5 to 10 years, and we think the biggest part of that's going to be in the global marketplace. And, we wanted to make sure that the Company was well positioned to take advantage of that as we saw that demand evolve. In doing that, we know that there's going to be ebbs and flows in the international market, and we happen to be in a pretty difficult environment in terms of international sales. But, if you look back over the last couple years, we have exported about 25 million tons over the last 24 months, revenue approaching $2 billion, and we couldn't have done that without entering in these type of agreements.

So, as Paul said, we'll continue to evaluate the international opportunities with the domestic opportunities. And, it very well may be the case in 2014, as we're seeing the PRB continue to improve, that we make the decision to sell coal domestically and go ahead and pay the LDs. Those are decisions that we'll make as we move forward. Paul and his team did a great job in mitigating our LD exposure in 2013. If you think about where we started out in 2013 and where we ended up, there was a material improvement in the management of those LDs.

We'll take our next question from Mitesh Thakkar of FBR Capital Markets. Your line is open.

Good morning, everybody.

Good morning.

Hello, Mitesh.

My first question is for John. John, you have done a great job extending maturities and putting liquidity on the balance sheet over the last two years or so. When you look at 2014, what are some of your key priorities and -- as far as balance sheet is concerned?

As we look at 2014, I think, and we've discussed this in our prepared remarks, we're very much going to be focused on what we can control. We're going to be continuing to focus on cost control, managing the liquidity, and reducing CapEx. So as we sit here today, we put in place very flexible debt structure, but one that clearly is going to withstand the downturn here. But as markets improve, as we move forward, as earnings and cash flow improve, we have an ability to de-lever.

As we sit here today, do we think we see that here on the near term horizon? No, we're going to be somewhat hunkered down as we manage through this. But, we feel that we've put the balance sheet in the position to manage that well. But equally important, if not more important, as the market does improve, as our cash flows improve, as we go from a position of having protective liquidity on the balance sheet to having excess liquidity, we can put that to work and de-lever. We think that's a very valuable proposition for the Company and its stakeholders.

Okay. Great. Thank you. Just, Paul, again, on the PRB cost, just a little bit of color here. When you look at the slight increase versus 2013, you mentioned in your prepared remarks that there is a (inaudible) component which you are assuming might go higher because of the pricing recovery. Can you kind of tell us how much of that component is on the overall increase?

Yes, Mitesh, give you a little bit of color. As I said in my opening remarks, you have kind of to look back where we came from, a 5% decrease in cost in the Powder River Basin equated to almost $60 million of cash-cost savings this last year. The range we gave for 2014 of $10.70 to $11 is slightly higher than the midpoint of last year, but I think it also contemplates some of the lingering rail issues continuing through the first quarter as well as potential sales sensitive.

You look at that increase in just our contracted price versus last year, frankly, you could argue we're pretty close to flat when you take out sales sensitive. All that being said, I expect the cost in the PRB to be lumpy because of the rail service in the first quarter. Mitesh, we remain committed to controlling costs, particularly in the PRB, and that, as John said, is one of our main focuses for 2014.

Our next question comes from Meredith Bandy of BMO Capital Markets. Your line is open.

Thanks for taking my question. First is just obviously you've done a great job in controlling the CapEx. I was wondering if you could tell us how long you think the $180 million to $200 million sort of level is sustainable? And, what is the current capacity, assuming no major CapEx above that?

Meredith, this is Paul. As you said, we're forecasting between $180 million and $200 million, and that includes land reserves. This is down $100 million from last year. Going forward, we are not going to have as much of a benefit as we've had the last two years from idle equipment, which we still have this year, particularly in the east.

I think as kind of a rough rule of thumb for you, I think a number of somewhere between $1 and $1.5 on maintenance CapEx is probably a pretty good target for us. But I will say, if you had asked me this question three years ago, I would have given you a higher answer. Frankly, we've gotten better at running the Company on lower CapEx, and if the market stays where it's at or gets worse, I think we could adjust down and will.

Meredith, this is John, just a follow on to that, to give kudos to Paul and his team, we've done a lot of good things in terms of capital management and cost management. I think a lot of these things have been driven through process-improvement initiatives, and not one-time hits that we think, once the market gets better, those go away. I really think Paul and his team have put together cost initiatives that will be with us for a long time. As we see the markets improve, we would expect to maintain those margins pretty well.

And then, just on the first part, if you don't have a great deal more CapEx, what would you say is the capacity of Arch? Is it close to where we are today? Is there a little bit of upside to that capacity?

Well, I certainly think that we've got capacity in the Powder River Basin, which we've indicated, with very little, if any, capital, it's just time and the decision to do that. We have also been very open that we have no plans to do that until we see a sustained improvement in pricing. And, we're certainly pleased with the direction we're seeing in pricing right now, but not willing to make that commitment. We're pretty comfortable with the run rates that we're forecasting for 2014.

In terms of the east, we indicated that we have the ability to do some more met if we saw the met market improve. I'm not sure I see that at least over the next quarter or two. Would that take a little capital, it probably could take some, but I think we could move that volume up in a reasonable manner if we saw a sustained improvement in the met markets.

Our next question comes from Caleb Dorfman of Simmons & Company. Your line is open.

Good morning.

Good morning.

Paul, just going back to the issue of PRB costs, could you sort of give us a bridge for the costs in Q4? How much of it was attributable to the normal seasonal decline issue and how much of it was attributable to, I guess, the drop off issue to rail issues? And, could you expand on the maintenance issue? How much of the increase in cost was driven by that? And, is that going to be a continuing issue looking into 2014 and beyond?

Caleb, I think if you go back to our guidance in Q4, we obviously thought there was going to be a minor step up in maintenance expense, and what we didn't count on was the rail impact. I think if you add back that 2.5 or 3 million tons to our numbers in a reasonable incremental cost for that, I think our -- we would have hit pretty well dead-on guidance for the quarter. As far as the impact to the fourth quarter, very little that I would attribute to, what I'd call a surprise, or maintenance issues.

What type of maintenance impacts do you think you'll have in 2014 and 2015? Or, is this just typical seasonal maintenance that you needed to get in?

These were scheduled maintenance outages in the PRB, so I wouldn't quantify those or characterize those as surprises.

Take our next question from Brian Yu of Citi.

Great. Thanks. First question, I just want to go back to what David asked earlier. The $10 million in transportation LDs, would you have the associated tonnage, and then perhaps a split, east versus west?

We don't break that out, Brian. We tried to give you a little guidance there in terms of how to model it, and like I indicated, we plan to do everything we can to mitigate that. And, we'll continue to evaluate those opportunities internationally, versus what we have domestically, and make the right business decision.

Second question, just on the met coal cost structure, you said in the prepared remarks, average in the mid-$70s in 2013. What's baked into your expectations for 2014?

We really wanted to give you an indication, given some of the challenges that we had, particularly in Mountain Laurel in the fourth quarter, our ability to manage our cost in difficult market conditions and create cash margin in this environment. Really haven't given any indications for 2014, other than our guidance for the east, and you can see we had a step down of about $2, midpoint of $65, which is a blend of our thermal and our met. And, we feel pretty good about that at this early stage in the game, and we'll continue trying to manage that, but we feel good about a $65 midpoint as we move into the 2014 season.

Our next question comes from Jim Rollyson of Raymond James. Your line is open.

Good morning, everyone.

Good morning, Jim.

John, maybe a big-picture question -- you guys usually are good prognosticators. On the met business, you pretty much indicated short term still pretty tough. What do you think it takes to get things turned around? Clearly, everyone's talked about how over-supplied the market is, and we know some of the new projects coming on between Leer and BMX and some others. And then, it looks like steel demand is going to be up in the 3%-plus range again. Just kind of curious what you think it takes to start getting prices headed in the right direction?

Yes, let me break it up into two parts. I think short term, if you think about what we're seeing in the market today, Jim, you've got the Australian dollar continuing to weaken. It's about $0.87 or so in the last day or two. You've had about 30 million tons of incremental volume come on in 2013, primarily out of Australia on the met side. You've probably got a little bit coming out this year, call it 5 to 10 million. So, those volumes have to get absorbed in the market.

Back to your point of demand growth, we are seeing about 3%-plus growth this year. We think those tons will get absorbed. But when you look longer term, we're continuing to forecast steel consumption growth, but a lot of those projects, particularly in Australia, have dropped off the drawing board. So, we think this thing balances out and actually could go into an under-supply pretty quickly.

So, what needs to happen in the short term? I think you need to probably have some more volume come out of the market. We see about 30 million tons, plus or minus, of oversupply in the seaborne met market right now. Given that level and a 300-plus million-ton market, it wouldn't take that much to rebalance it. But, as we move into the year, people probably had met volumes drop off at the end of 2013. They are seeing some challenges, at least for the next quarter or two, in the benchmark. People could make the decision to go ahead and pull that production off.

What we've tried to do at Arch is to manage our portfolio from a quality and a cost standpoint. That 7.5-to-8 million ton range we think is a good point for us right now. We can continue to generate cash margins, and we are bullish long term on the met markets. And, that's why we have invested in Leer.

If you think about our capital allocation, it's really the only capital, growth capital we spent at the Company over the last couple years. We're excited to get that on. We do look favorably on the long-term market, but certainly in the short term, we've got to manage that. So, we think we're prepared to do that.

Thanks for that color. That's all for me.

We'll move next to Evan Kurtz of Morgan Stanley. Your line is open.

Hi, good morning, guys.

Good morning.

Just hoping to dig in a little bit deeper on your ability to kind of ramp up tons in the PRB if the market begins to recover. Can you maybe just provide some color on how much is -- you could gain just from going to fuller shifts, maybe working some overtime, versus actually having to invest and bring more equipment onto the site?

Evan, this is Paul. We probably have the highest amount of excess capacity, the higher quality in the basin. You look back two or three years, that productive capacity we had in 2011 and 2010 is still in place. We did not cannibalize it. The past 20 months we adjusted the mine's production to meet the market. I'd argue, probably 2012, we went a little bit too far. 2013, we hit kind of a sweet spot of production, and Black Thunder was able to run pretty efficiently even with the rail infrastructure.

I'd also add that I don't think beyond that there's a huge amount of excess capacity in the basin. I think there are people that could work a little more overtime or run a few more shifts, but as I continue to say, as we noted last one of our conference calls, the PRB is changing from what it was 10 years ago when I was there. You've got pre-strip, you've got a huge amount of the ratio increase, and bringing back some of this idle equipment is not difficult, but it's not something we can do overnight.

I think, from our perspective, to bring on any more equipment, it would take a different market than what we're seeing right now. If prices recover or pick up this year, I think you are going to see a little bit of that as far as terms of incremental production. I just don't think, in the end, it's as big as people think it is.

Okay. And, just the high end of your range, is that kind of where you think you could get to without bringing equipment back, that's just running forward with what you have there now?

Right now, we're looking at, as I said, kind of basically a run rate not that far off last year, when adjusted for rail. It's our intent not to be much different from 2013 to 2014.

Got you. Then, maybe one follow up on costs. If I took the tonnage for this quarter -- they kind of align pretty well with the first quarter of 2013, and costs were kind of in the mid-10s at that point. Is the rest explained from maintenance, could we get maybe a little bit more color about why the costs ticked up a little bit here in the fourth quarter?

As I think I said earlier, we had plans, and I think you saw it in our guidance, we had expected costs to go up in Q4. Some of these were long-term planned maintenance deals, and we went ahead and did them, despite the shortfall in production -- shortfall in sales. As I said, I think if you add back the volume, you put us almost dead back to where we gave guidance.

We'll take our next question from Lance Ettus of Tuohy Brothers.

I just had a question on your potential to -- with the kind of rise in demand for PRB, the potential to increase production there, versus last year, without a material increase in CapEx? I guess what's your slack capacity?

I think, Lance, we kind of hit that question pretty hard last -- I think one or two back. As I said, we still have the equipment in place from when we were running high volumes in 2010 and 2011. It's not turning it on overnight, but it's out there, and we can do it without much effort.

Okay. Thank you.

Our next question comes from Timna Tanners from Bank of America.

Yes, hi, good morning, everyone.

Good morning.

I guess I really just wanted to understand, sorry to do this clarification questions -- we've been through a lot here. When you talk about the minimum obligation risk of $10 million a quarter, what does that imply for any potential volume hit?

I really don't think it implies any hit on volume. I think it's a matter of making the business decision of whether it makes more sense to participate in the global market or sell in the domestic market and pay the LDs.

I think we're in a little bit better position, even than we were last year, particularly with the PRB, with the rising domestic price, we're better off possibly just selling in the domestic market and paying LDs.

Timna, our guidance ranges contemplate, from a volume perspective, the impact of those LDs in there as well.

And again, we will continue to focus on mitigation on these LDs. If you look at the success we had in 2013, there's no reason to think that we won't have some type of success in 2014 in managing those, so --

Got you, so you can revert those [10s] to the market. Thanks. You've talked a lot about the weather hurting rails and in the Q4 environment, gosh, we've had really bad weather into Q1, so is it -- sorry if I'm a little obtuse here. We're expecting that those can continue into the first quarter or what weather impact can you characterize for us?

If you recall, the issue with PRB was a real early storm in early October that stalled up the trains for about a week in the PRB. So, the rail impact was more the weather in Wyoming than it was on the East Coast. As I mentioned earlier, we, in fact, have seen an uptick in service of about net 7% versus the fourth quarter. So, not happy that we're not all the way back to where we were, but clearly the railroads have made good progress.

Yes, and if you look at our cost forecast for 2014, we've got some of that lingering effect of the railroad in there. Some of that's sales sensitive, but some of that's railroad performance, and we do expect it to get better over 2014, but it's not going to happen overnight.

(Operator Instructions)

We'll take our next question from Neil Mehta of Goldman Sachs.

Good morning. Thank you for taking the question.

Good morning, Neil.

As you think about the potential for asset sales, as you think about the different regions that you operate in, where do you think potential sales are possible, and where do you view -- what do you view as strictly core, and therefore, challenging to actually monetize assets?

Neil, this is John. I don't really want to identify any particular assets. What I will tell you, strategically, is it's pretty clear the direction we're going. We continue to maximize our PRB position. We think the fact that we're one of the highest Btu shippers out there, we continue to make a lot of progress on our costs, we continue to work on port capacity of the West Coast that we're well positioned there.

We did monetize our Utah assets last year. We retained the West Elk mine in Colorado. The reason being that it had a cost structure and a quality that had a much wider market reach than we saw with some of the previous products. So, we do think that we can generate nice cash margins in that region.

And then, when you come east, obviously we put a lot of focus on the met markets, where we've been spending our growth capital. And, we think that the growth that we see in steel consumption over the next 5 to 8 years is real, and we want to participate in that. So, if you look at our PRB, our met position, are kind of our two anchors.

And then, if you look at Western bit, certainly that's a region we think we can be very successful in, and we are taking more and more of that product in the international markets. Currently, with the softness in the international markets, it's a little bit challenging, but we think long term, we'll be fine.

When you think about, when we get to a point where we've de-levered our balance sheet and the growth opportunities, I think there's two areas that we see. One would be continued build out of our met supply. If you look at the reserve base that we have just in the Tygart Valley up there where Leer is, we've got about 170 million tons up there that similar quality, similar cost, and additional longwall, additional CMs that we could build out as we see the met market evolve. We also can expand our PRB position.

And then, we're sitting on about 700 million tons in Illinois, which has low cost, fully permitted, ready to go, good quality, but given the volumes coming out of Illinois right now, we don't think it's prudent to bring that production on. So, not only are we well positioned with what we have today, I think, organically, we're well positioned, in terms of growth, once we get our balance sheet de-levered and we see the markets evolve.

We'll take our next question from Brett Levy of Jefferies. Your line is open.

Hello, guys. Right now, the Powder River Basin 8,800 is at $12.20 today, $13.94 a year out, $14.95 two years out -- is it fair adjusted for your coal quality to say that anything you're booking for 2014, 2015 and 2016 from this point would be above those levels?

Brett, I'll tell you, I was surprised at the movement in PRB prices the last couple of weeks. I'd tell you, just since the beginning of the year, we're up about $0.40 to $0.60. I think there is a little bit of a disconnect between the indexes and physical, and mostly because the indexes are just not being traded too heavily. At this time, I feel pretty good about where we are in our contracting, and I think we're selling into a rising market.

We'll take our next question from Justine Fisher of Goldman Sachs.

Good morning.

Good morning.

You guys have a relatively open position for PRB tonnage for 2014. I think that in typical years it's usually more committed now for that year when you guys report 4Q results in January. So, is that because Arch is holding out on committing tonnage, or is that because utilities have come to you for the 2015 time frame, i.e., the $13.78 per ton that you booked, but not necessarily for 2014?

Justine, this is Paul. I think -- I'll have to look back at the numbers. I think we're actually a little more heavily committed than we traditionally are for 2014 and 2015, the one and two year out. It's pretty well the strategy that we laid out last year of de-risking some of our portfolio. I could check that but I believe that is correct.

We've been active in the market, and I suspect that Paul is right. We continue to participate as we've seen the market move up, and I think if we look back, we're probably in better position for 2014 and 2015 than we've been in for a lot of years.

We'll take our next question from Dave Katz of JPMorgan. Your line is open.

Hi. I was hoping we could just come back to the bituminous thermal cost. I think you've said that cash cost guidance for 2014 is $25 to $28 per ton. I was curious if that compares directly to the $20.65 that you saw in 4Q 2013?

Yes, Q4 was the first clean quarter without Canyon Fuel in it. But, It also contemplates taking West Elk from kind of a nominal 6-million ton range down to a 4-million ton range.

Our final question comes from David Lipschitz of CLSA.

Hi, guys.

Good morning, Dave.

And Jen. Question for you on back to the Western bituminous -- you talked about West Elk. What other mines are there that you did -- is that 2.3 million tons or something like that, is that out of inventory that you're selling?

You've got to remember, that segment also includes Viper now, since we sold Canyon Fuel, Dave.

At this time, I would like to return the call to John Eaves, CEO, for concluding remarks.

I'd like to thank you, this morning, for your interest. The management team has been focused on the things that we can control. We had a busy 2013. We enhanced our liquidity. We monetized our Canyon Fuel assets. We continue to improve on our cost structure. We improved on our capital structure and managed our sales growth.

In this difficult market, that's what the management team will continue to focus on. We feel good about where the Company is positioned. We feel good about our exposure to the thermal market, the improving PRB environment, and the ability to manage our costs in a difficult met market and make cash margins. We do thank you for your interest and look forward to updating you during the April call. Good day.

This concludes our conference call for today. You may now disconnect your lines. And, everyone, have a great day.