Arch Resources Inc (ARCH) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Arch Coal Incorporated first-quarter 2014 earnings release conference. Just as a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Ms. Jennifer Beatty, Vice President of Investor Relations. Please go ahead, Ms. Beatty.

Good morning from St. Louis. Thank you 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 on ArchCoal.com.

On the call this morning, we have John Eaves, our 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, will be happy to take your questions. John?

Good morning, today Arch reported adjusted EBITDA of $28 million for the first quarter of 2014. As expected, our results were impacted by weak global metallurgical markets that have prevailed throughout much of the past year, as well as ongoing rail performance issues in the PRB. Paul will provide more detail on these issues in his prepared remarks.

As I believe nearly all of you would agree, current price levels are unsustainable for much of the 325 million tons of seaborne met production in operation today. Yet despite some of the supply corrections that have taken place, we expect metallurgical markets to remain soft throughout 2014. In order to successfully navigate these markets, we've elected to proactively scale back our metallurgical coal volumes still further this year. We're not the only producer electing to cut back production, as.

In fact, with the settlement of the second quarter met benchmark, announcements of production rationalization and idlings have grown from Australia, Canada, and the US. We expect more to follow. Of course, the seaborne market also needs to absorb incremental production capacity coming on in 2014, which may prevent a full recovery this year. But we're optimistic that the seeds of a correction are being sown.

Despite our reduction in metallurgical sales volumes for 2014, we continue to make strides in lowering our costs in Appalachia. Given our solid first-quarter cost performance in that region, we're reducing our full-year cost per ton outlook for Appalachia. Our ability to further drive down costs is a testament to our continued focus on strong cost control and operational efficiency at our mines.

Of course our long-term positive outlook on metallurgical markets remains intact, despite the softness in the near term. Several trends are driving this optimism. US steel utilization is trending above the five-year average, and auto sales are projected to reach nearly 16.5 million units in 2014, the highest level since 2006. So our main market for metallurgical coal demand is helping.

Additionally, Europe is stabilized, with crude steel production across the continent up more than 5% through February. China continues to grow at a slower pace, but on a bigger base, and [stemless] spending, should it materialize, could accelerate this growth. Moreover, growth in India and other emerging market economies is occurring, helping to offset slower growth in China.

All this suggests that world steel demand should be on track for 3% growth this year, and as the world absorbs the current oversupply, we expect that met markets will recover.

One market where recovery is evident is the domestic thermal market. US electric generation hit record levels in January and February, benefiting from a cold winter. In fact, we may see power demand increase in 2014 after three years of decline. More importantly, we expect coal consumption for power generation to grow by 25 million tons or so this year, compared to 2013 levels. Supporting this growth are strong weather-related demand, a pickup in the US economy, higher prices for natural gas, and needed contributions from other base-load fuels, such as nuclear and hydropower.

We expect coal stockpiles at generators to decline throughout 2014. Based on our internal estimates, US utility coal stockpiles could be below 110 million tons by the end of the summer burn season, or nearly 30% below the 10-year average. On a regional basis, PRB stocks are below normal, at around 45 days of burn at the end of March, and represent the lowest stockpile levels in the nation on a days-of-burn basis.

By contrast, stockpiles in Central App and western [bit] remain higher than the national average, but have moved down appreciably during the winter of 2014. Based on these observations, we would expect customers to reach into the market to rebuild their stockpiles as the year progresses, despite concerns about the availability of rail service for additional tons.

Of course, rail performance in the PRB has been problematic for already contracted tonnage, and has likely forced even more rapid stockpile liquidation. If you also consider the potential need to rebuild natural gas storage in anticipation of the following winter burn season, it becomes clear that we have some interesting dynamics heading into the peak coal burn season this summer.

In fact, our West Elk mine is benefiting from these positive domestic thermal market trends. Last quarter, we told you that we would likely scale back that mine to a 4 million-ton a year annual run rate, as the export market proved challenging.

Despite continued weakness in international thermal prices, the outlook for the domestic thermal market has improved. This pickup in the domestic demand should help offset weaker prices in the seaborne thermal market.

We're now running West Elk at a 5 million-ton plus pace, still below its capacity, but it's an improvement versus the fourth quarter. This positive development is the driving force behind our $2 per ton cost guidance reduction for the region in 2014.

Turning briefly to supply, our production forecast for Central App region is now below 115 million tons for 2014, a decline of nearly 35 million tons over the past two years. Even with some low-cost met coal likely migrating back into the thermal markets, we believe other coal regions, namely the PRB and Illinois Basin, will be called upon to replace eastern thermal coal. Interestingly, the domestic thermal market, which was meaningfully oversupplied just two years ago, has swung back to an undersupply situation.

In summary, Arch continues to execute on its plan. We're managing our costs and our capital, monetizing non-core assets and preserving liquidity. We have strategically positioned the Company to withstand the current market conditions and to capitalize on a recovery in both the thermal and met markets.

On that note, I will turn the call over to our COO Paul Lang, for a discussion of Arch's operating performance in the first quarter and an updated outlook. Paul.

Thank you, John. Starting off with the operational results, I'd like to spend a few minutes discussing both the challenges and opportunities we see in our business going forward. In the Powder River Basin, we continue to sell into an improving market and customers are actively replenishing their depleted stockpiles, at least to the extent that delivery is available.

As a result, in the first quarter, we sold some incremental tons for 2014 delivery, bringing us to around 90% committed for the year. We also selectively placed tons at attractive prices for outer years and have about half of our 2015 sales volume priced. Furthermore, as prices continue to tick up, we should still have more opportunity to capture upside over the course of the year.

[Prompt] year index prices for Powder River Basin coal are up nearly 20% from this time a year ago, and are up 30% from the loans that prevailed during 2012.

Our first-quarter results reflect an underlying improvement in PRB pricing. At the same time, our quarterly realizations were impacted by lower prices for export volumes, which should taper off as we progress through the year. Also offsetting the improvement in pricing to some degree was our elevated cost per ton relative to the first quarter of last year. Our costs were roughly in line with the fourth quarter of 2013, and reflect the ongoing impact of rail performance issues noted in our last call.

Based on our expectation that shipments will improve in the back half of the year, we're still forecasting the ability to achieve the cost guidance provided in February. In particular, our Black Thunder operation has been disproportionately affected by rail disruptions, as the mines customer base depends heavily on the Burlington Northern Santa Fe railroad.

Looking ahead, we expect train performance to improve in the basin during the back half of the year, and we're prepared to make up the lost volume. Customers clearly need the coal, and we expect our volumes to increase as we catch up on our contracted shipments.

In our bituminous thermal segment, we had a solid operating performance at West Elk in the first quarter, despite running at below capacity levels. As John mentioned, with improving outlook for the domestic thermal market, we've increased our production target in Colorado to match demand and lowered our 2014 cost guidance for the segment by $2 per ton.

On the pricing front, our first quarter realizations in the region were weighed down by lower net-backs on export shipments. However, for the balance of the year, we're forecasting a larger percentage of domestic business relative to exports, which should help improve pricing in the future. Longer term, we expect this region to benefit, as international prices move up over time, given the steady European demand that we see.

In Appalachia, we shipped 1.6 million tons of metallurgical coal in the first quarter at an average net back of around $84 per ton. Those volumes were modestly lower than expected due to shipping delays for our Canadian customers related to ice on the Great Lakes. In addition, we elected not to force incremental tons into an oversupplied coking-coal market.

At the same time, we successfully drove down our first-quarter cash costs in Appalachia by nearly $2 per ton when compared to the fourth quarter. This strong performance was primarily driven by the smooth startup of the Leer longwall. The mine's ramp has progressed as planned, and I'm pleased with our team's efforts to manage this successful launch.

Also during the first quarter, Mount Laurel's longwall progressed to better geologic conditions in its current panel, and we'd expect the mine to transition to a new panel in the third quarter. Combined, these operational improvements have allowed us to reduce our full-year cost per ton guidance in Appalachia.

Looking ahead, as we noted in the release, we've elected to reduce our metallurgical volume target for 2014. To date, we have 5 million tons of coking and PCI-type coal committed at an average price of $83.50 per ton. We have another 500,000 tons committed but unpriced.

Based upon the midpoint of our revised guidance range, we have roughly 80% of our targeted metallurgical volume committed. Even with our revised volume range, we've maintained a proportion of higher quality coking-coals at around 50%.

Lastly, I'd like to briefly highlight Arch's safety and environmental achievements this past quarter. We're off to a strong start in delivering on our core values with five operations. Our facilities the last three months operated without a single incident or environmental violation. Our Coal-Mac operation recently completed 2 million employees hours without a lost time incident at the end of March. The Leer mine has earned West Virginia's top honor to Greenland's award for its best-in-class environmental design and construction. I'm proud of our employees' dedication in maintaining a strong commitment to safety and environmental excellence.

Looking ahead, we'll continue to manage the things under our control and proactively respond to opportunities as they arise. With that, I'll turn the call over to John Drexler, Arch's CFO, to update us on the revised guidance and liquidity position. John.

Thank you, Paul, and good morning, everyone. Arch continues to make strides on executing its plan to manage through the downturn. John and Paul have already discussed our operational achievements and continued progress in reducing costs. I'd like to spend some time discussing our management of both liquidity and capital expenditures.

First on liquidity, we ended with $1.4 billion in liquidity, with over $1.1 billion of that in cash or highly liquid investments. With the successful refinancing actions we completed during 2013, we have no meaningful debt maturities until 2018, and we have no major financial maintenance covenants until June of 2015.

At that time, a relaxed senior secured leverage ratio covenant steps back in on the undrawn $250 million revolver. During the interim, we have only a minimum liquidity covenant of $550 million in place that is tied to any borrowings under the revolver. We believe our strong liquidity provides the ample flexibility necessary to execute our strategy over the next several years.

Turning now to CapEx, as, an important component of preserving our liquidity is prudently managing our capital expenditures, and we're doing just that. During the first quarter, our CapEx spending was $14 million. That was the lowest level of quarterly CapEx in more than a decade for our Company, but we expect higher levels of CapEx for the remainder of the year.

One of the drivers of this anticipated increase in capital spending is the third of five annual LBA payments in the South Hilight reserve in the PRB to be made in the second quarter. As a result of the LBA payment and our regularly scheduled semiannual interest payments on our unsecured bonds, we expect the second quarter to have the highest cash outflow of the year. That said, in the second half of 2014, we anticipate lower levels of cash flow use.

We will continue to make necessary investments in our business, but we remain as focused as ever on capital discipline. That's why we're modestly reducing our CapEx guidance for the full year, and we will continue to look for ways to prudently manage our liquidity as we progress through 2014.

Turning to our quarterly results, I wanted to briefly touch on a couple of items that had offsetting impacts on our results. Consistent with our strategy to realign our asset portfolio, we divested non-strategic assets in Appalachia during the first quarter, including the Hazard thermal mining complex in Kentucky and the ADDCAR equipment subsidiary, for total consideration of $46 million. We received $27 million of those proceeds in cash in the first quarter, with the remainder to be paid by the end of the year.

From a book perspective, we recorded net gains on those two asset disposals of $13.8 million, reflected in the other operating income line. Largely offsetting those gains, we incurred a charge of $12.5 million in the first quarter related to minimum obligations on various port and rail commitments.

Given the prevailing weak prices in the seaborne market for both thermal and metallurgical coal, we believe it is appropriate to incur these costs rather than move coal into oversupplied markets. Absent improvement in those markets, we would expect to incur comparable charges for the remainder of 2014; however, over the long term, we believe that we'll create substantial value for shareholders through increased participation in the seaborne coal train.

Turning now to our current expectations for full-year 2014, most of which was outlined in our earnings release issued earlier today. We continue to expect cash costs in the range of $10.70 to $11 per ton in the PRB. This range contemplates gradual improvements in shipments over the course of the year, as well as the impact of rail issues. In Appalachia, supported by the smooth ramp-up of our Leer operation and improving geology at Mountain Laurel, we now expect cash costs of $63 to $66 per ton, a reduction of $0.50 per ton from our previous range.

In our bituminous thermal segment, supported by higher shipments than previously anticipated due to a strengthening of the domestic thermal market, we now expect cash costs in the range of $23 to $26 per ton, representing a reduction of $2 per ton at the midpoint.

In other financial guidance, we expect our 2014 CapEx range to be between $180 million and $190 million, which includes a $60 million LBA payment for the South Hilight reserve, as discussed. This range is a modest reduction from our previous expectation. DD&A in the range of $420 million to $450 million, total interest expense between $382 million and $392 million. We note that our cash interest expense will be between $360 million and $370 million for 2014. SG&A between $122 million and $128 million, representing a reduction from our previous guidance, as we continue to drive down our overhead costs.

In addition, we expect to record a tax benefit for the year in the range of 20% to 40%, representing a reduction from last quarter due to an increase in our valuation allowance. The valuation allowance is a non-cash charge that will reduce our expected tax benefit over the course of the year for a portion of our deferred tax assets.

In summary, we are well positioned to manage through the current market and create substantial value as markets improve. We have strong liquidity fortifying the balance sheet and the right assets in place to capture meaningful upside as markets turn.

With that we are ready to take questions. Operator, I'll turn the call back over to you.

(Operator Instructions)

Up first from FBR Capital Markets, we'll go to Mitesh Thakkar.

Good morning, everyone.

Good morning, Mitesh.

My first question is on this PRB logistics issue, what feedback are you getting from utilities on this whole issue? And when do you think it gets resolved? What gives you comfort that you will be able to catch up the volumes in the second half?

Yes, this is, John. Paul and I have met with the railroads on a number of occasions, and I think they got behind on their crews, their power. They had a lot of congestion in the middle part of the country, particularly in Chicago, and then the weather hit has really put them behind. We expected certainly better performance first quarter than we saw.

I would tell you that we should see progressively better performance as we move through the year, but it's going to be back-end loaded, so probably see some in the second quarter, but really third and fourth quarter is when we see the performance picking up. And I think if you read what some of the utilities are saying in the press, they have complained pretty loudly. And I think some of the customers have gotten themselves in a pretty bad spot in terms of their inventories, down in some cases to probably single digits in terms of days burned. ¶ So we do expect it to improve. It's something that is not going to happen overnight. It has had a tremendous impact on Arch Coal. If you look back over the last two quarters, we've been impacted between 4 and 5 million [tons] between the fourth quarter and first quarter, so certainly been impactful. We're looking forward to better performance and would expect to see that, particularly in the back half of the year.

Paul, you got anything to add to that?

Yes, Mitesh to give you little more color on the subject, if you look at Q1, BN ran about 76% of their scheduled shipments and UP ran about 89% of our shipments. You look at that volume, it was pretty impactful in Q1. We would -- tend to probably hit us worse than others is for the quarter, we were 65% BN serve customers and 35% UP.

Going forward, the reason why I think we should not have any issue of making it up is, if you look at the mine, the capacity of the load outs and the infrastructure, we've run much higher volumes than this, so I really don't think it's going to be an issue for the mine to make up the volume. I think it's all going to go back to the railroads. As John said, I think it's more of a back-half story.

Okay, and is this a temporary fix, or we should continue to see improvement and [stick] for time? Because the next question comes as utilities replenishes inventories that will be a bigger call on the PRB versus what the current rates are.

Well, I would tell you they're adding crews and they're adding thousands of new crew members, and they're bringing on a lot of power. So I would tell you they're gearing up for the long-term Mitesh, and they're committed to fixing this business. BN has been pretty aggressive in the basin the last couple of years, and I don't think they have any regrets in terms of what they've done market share-wise. This caught them off guard with what's happened in the Bakken, the weather, the congestion in the Chicago area have all compounded on their issues. But I truly believe they're committed to fixing this problem.

Great. Thank you very much.

Thank you.

Thank you Mitesh.

Up next, we'll hear from Brandon Blossman of Tudor, Pickering, Holt & Company.

Good morning, guys.

Good morning.

Paul, looking at (inaudible), Leer looked like it did pretty incredibly this quarter. Can you comment on what this quarter looked like at Leer versus what you think it will do for the rest of the year? And how that syncs with your plans for met production this year?

I tell you, Brandon, you don't want to get too optimistic, but Leer, I've got to say pretty well hit the marks pretty well for the last year. The guys have continued to execute on a plan, and it's come along pretty well where we thought it would be. I think we're still in a ramp-up phase. We're still believing that as you look down the road, this is a great asset and a great quality. And everything we've seen seems to show that it's right online with where we thought it'd be.

Brandon, this is John. It's a real credit to Paul and his operating team on how well they've ramped up Leer and the performance, not only on the volume and cost, but the quality, the receptivity we've seen from a customer base. And at the same time, making the improvements that we've made at Mount Laurel. I think if you look at those two operations, they're really going to be the foundation of our met supply moving forward. So we're feeling pretty good about where we are with both of those operations right now.

And John, you touched on customer acceptance, marketing, I assume is going well for that coal?

Yes, I think we've been pleasantly surprised. We thought there'd be a little bit longer of an introduction period, but overall, I'm very pleased with where the marketing team has positioned the mine.

Okay. Good, good news. Thank you.

Thank you.

Hearing next from Brean Capital's Lucas Pipes.

Good morning, Lucas.

Good morning, everybody.

Good morning.

My first question is on the met coal production cuts. How should we think about those? Are those running to a lighter schedule? Are you closing some high cost mines? Is it shifting to thermal? If you could provide us some color around what exactly is going on there.

Yes, Lucas, this is Paul. I'll start off and see if John has anything to add. We reduced our metallurgical volume guidance to 6.3 million to 7.3 million tons, which leaves us about is 1.3 million tons to hit our bid point. Sitting here today, we're about 80% committed. If you look at the reductions that we made, somewhere around 1 million or 1.2 million, it relates roughly to taking back production out of Cumberland River, Sentinel and Beckley. That's predominantly by cutting back on shift schedule overtime and that sort of thing, while the rest of it, the other half probably rolled into -- went out of the metallurgical market and went into the industrial and thermal accounts.

But the industrial and thermal accounts, I think the bottom line is, our portfolio has a pretty broad range of costs and qualities. And as John said, they're anchored by the two longwall mines. Our plan isn't real complicated. We're going to run the two low cost, high quality longwall mines full out, and we're going to use our other mines up and down to scalable fashion, or as a fly wheel to meet the market as it comes up.

I think on the flip side, when the market does come back, we will have the opportunity to ramp these mines back up rather quickly. As you think about it, you never say you've baked all the downside in, but I think we're to the point where we're hoping there's more upside now than downside by this change in our guidance.

That is very helpful. Thank you for all that information. And then in terms of the cost guidance out east, as a follow-up, you sold some, what I believe to be mostly thermal coal assets. Is that part of the reason why the cost guidance came down? Maybe if you could -- and then you reduced met coal guidance, so also if you could provide parameters around maybe a step function in terms of the eastern cost guidance.

Yes, I'll jump in with Paul, follow on. This really has been coming for the last year or two. We closed about eight coal mines last year; a lot of those were higher cost mines, if we didn't think worked long term with our plans. We've continued to refine our cost structure in the east. I think a lot of it has been driven by the mines we've taken off, but we also benefited from bringing Leer on. It had a positive impact on our cost.

We would expect to continue to see that as we moved out, but clearly, what we've done in the east is transition more to focus on met supply, with not only a wide variety of qualities, but a good cost structure. At the same time, we've moved away from our higher cost thermal operations, and we're really left with Coal-Mac, which is the flagship in the east, with good quality, good cost, and any other thermal we're doing in the east is more by-products that we have under contract.

We do think we're well positioned. We think we're one of the low-cost producers in the eastern United States, and it's something we think we can maintain going forward. And as Paul alluded to earlier, we've done a lot of this with the ability, once we see the market improve to bring those operations back fairly quickly with very little capital. And we think that's a pretty unique position to be in, particularly in the east. ¶ Paul, you got anything add?

Yes, I think the only thing I'd add is as we entered into our guidance last quarter, we knew about the sale of Hazard, so it was baked in.

Okay.

And as you look at the other mines, they pretty well run as anticipated or a little bit better. The fact is we did cut some production on the met side, which was on the higher end of the cost curve, so all those things baked into our guidance number.

Excellent, thank you. And then maybe one last question on the western side. In the PRB, have you noticed a shift in terms of the contracting strategy from utilities? Are they willing to maybe sign up a little bit more longer-term deals, or is your sense more maybe that they just tried to plug the hole this year if there's some [spot] shipment?

I think in general, we're still seeing a lot of caution on the part of utilities for taking out term. We have signed some multi-year deals, and we were pleasantly surprised with the prices. But I can't say it's a real change of trend.

But we would expect to see some opportunities as we start to head into the summer season in utilities, thinking about not only their burn for this summer, but over the next couple of years. As we see that demand increase, at the same time, we're seeing price improvement as well. So we think we're in a very good position to be able to capitalize on a demand in price improvement over the coming quarters.

Up next we'll go to Michael Dudas of Sterne Agee.

Good morning, gentlemen, Jennifer.

Good morning, Michael.

John, in your comments regarding the port and rail charges, does that indicate that you think the global international dynamics are going to get worse before they get better? Is that what we could read into it?

I think based on what we recorded in the first quarter, that $12.5 million, and then the discussion, Michael, that absent major changes in the market dynamics, that we would expect to record something similar over the remaining quarters of the year, I think it's an indication of where we see the current markets as they stand today. I think it's something that evolves over the course of the year. We're going to work real hard to mitigate that.

If we do see improvement in the international markets and we're able to get more coal into those markets, we can find ways to reduce that as we move forward. So I think it's just a viewpoint of where the current state of those international markets are. I don't think long-term, it changes our view of where we think those markets will go, but it's where it currently sits today.

Yes, Michael this is John. I think John is right. We look at the long-term markets continuing to be bullish. We still see 200 gigawatts of new coal-fire generation being constructed over the next 36 to 48 months. That's coming online, going to need 500 million to 600 million tons of supply that's not there today, with a portion of that coming on this calendar year. So as you know, we've been pretty proactive in the past in going out and getting port infrastructure, rail agreements in place to be able to participate in that marketplace. And quite frankly, over the last two years, we've exported about 25 million tons and generated about $2 billion in revenue that we probably couldn't have done without these agreements.

But in the short term, John's right; we don't see anything on the met side really getting materially better this calendar year. The API prices are such right now that when you do the netbacks, they just don't work very well. So it's something we monitor, but I think given the opportunities we see in the domestic market this year, at least right now, we'll probably opt to capitalize on those and continue to pay the LDs, given where we are today. But that could change next week given one event in one of these other producing regions.

That makes sense, fair enough. My follow-up is inventory levels. How do your inventories look relative to what they would typically be this time of year, and with some of your larger customers, do you get a sense that they are above or below that 45-day average mentioned in your prepared remarks?

Certainly, that 45 day is lower than historical norms of 50 to 55 days. We finished the year with about 148 million tons countrywide. We think we've continued to pull those numbers down. I think they were at about 132 at the end of January.

If you run the forecast for February and March, we think they'd continue to pull inventories down. You could be in that 120 range or so. As I indicated in my opening remarks, we think with a normalized weather pattern this summer, you could have utilities at 110 million tons by the end of the summer season, which is as low as we've seen them in a long time, Michael.

So, we think this summer, as you look at natural gas inventories and the build that's going to be required between now and in the fall season where coal inventories are and some utilities being pretty open that they're in pretty tough shape. We think we're setting ourself up for a pretty dynamic season this summer.

Up next from Goldman Sachs we'll go to Neil Mehta.

Good morning.

Good morning, Neil.

What opportunities exist for non-core asset sales? We saw a number of transactions over the last couple of months that you guys were able to execute. Are there other opportunities in your portfolio?

Neil, it's something that we're always looking at. What we have said is that if we have assets that are not core to our long-term strategic plan and somebody would come in and provide more value on those particular assets, and we see ourself that we would consider monetizing those, I think that's occurred over the last six to nine months with Canyon Fuels and then Hazard and ADDCAR.

Are there others? I think that's possible. It's something that we're always evaluating our portfolio. We're buyers and sellers of assets. I think it just depends on where we are.

We're fortunate that with our liquidity position that we don't have to do anything, and unless we can get the appropriate values, I think we're pretty comfortable where we are. We do think that our focus on continued build-out in the met market to serve the demand growth we see there, maximizing our PRB position and in our position in the bituminous segment is pretty unique here in the US. And with our cost structure and our exposure to thermal and met, we like the way we are positioned today.

But, again, if somebody comes in and has some interest in some of our assets that are really not required to execute that strategy and will pay us full value, we'd have to consider.

Makes sense. And then, I know it's always hard to put a finger on this number, but in terms of the oversupply in the global met market right now, is 15 million to 20 million metric tons still the right number in your mind? Or has that number changed over the last couple of quarters?

Neil, I think it depends on what forecast you look at. I've said 15 million to 20 million in the past. I would say today it's probably in that 15 million to 20 million, 25 million range, plus or minus. We are encouraged over the last week or so, about some of the rationalization that we're hearing about, not only in Australia, US, and Canada, just call it 5 million to 10 million tons. We think that's encouraging. We think that 3% growth in steel demand is encouraging, and we think this thing is going to balance itself out.

And we think -- we're not forecasting any material improvement in the met markets this year, but what could potentially accelerate that is if you start seeing more and more people pulling production off. And we think at the second-quarter benchmark of 120, the fact that the Australian dollar has moved back up to $0.93, $0.94, those guys are probably looking at where they might trim some of the production.

So in a 325 million ton market, it wouldn't take a whole lot to balance this thing pretty quick. If you think about the last three or four down cycles we've been through, the one thing we know is we will correct and sometimes over correct and the markets respond. The goal of this management team is to make sure this organization is ready when it turns to capitalize on those opportunities.

Makes sense. Last question, I wanted as a follow up to a previous question on PRB and the rail issues, is it your view that the second quarter of the rail congestion service issues could persist, but as you get to 3Q, 4Q, so the second half of the year, those will largely resolve?

I think that's absolutely correct. We would hope to see some improvement second quarter, because it's not a real high bar, but certainly in the third and fourth quarter, we would expect materially improved performance, and that's what Paul and I have been told on more than one occasion from the railroad.

We'll go next to Curt Woodworth of Nomura.

Hello, good morning.

Good morning, Curt.

John, how do you think the coal plant retirements are affecting utility buying decisions today, depending on different services like [EVAir] with Mackenzie, there's roughly 20 million to 50 million tons of PRB exposed. Do you guys have the view on what the net exposure is or what your net exposure is to those plants?

We lock at that pretty hard, and we think we have a fairly good understanding. If you look at the forecast between now and 2018, we've got about 60 gigawatts closing, and to date, we've seen about 17 to 18 of those close. Those are probably the smallest, most inefficient plants. So as we continue to move through these closures over the next couple of years, it's going to get more and more painful.

If you look at 2013 consumption rates based on that 60 gigawatts, it's about 85 million tons. We think the PRB gets impacted, but not greatly. If you look at our mix within that 85 million tons, we're impacted about 8 million to 10 million tons, a good part of that in the PRB and that's coal going to some of these plants that will close.

I think what you've got to focus on, though is the surviving plants, there's about 260 gigawatts of plants that we feel like will survive in the regulatory environment we see today. And that's -- those plants have last year have been running in the low 60s. If you just assume those particular plants go back to where we were in 2007 of about 70%, 72%, that's incrementally about 100-plus million tons of demand that we don't see in the market today.

So an improving economy, we think that that generation could be some of the most economical generation that you see. And when you look at what we went through this past winter, and you saw the extreme power prices, the grid reliability issues, two of our largest customers indicated they were running about 90% of the coal plants that are forecasted to close over the next year.

So I think it caused them to question some of these decisions. Do we see it changing some of the [mets] decision? Probably not, but what it will play into hopefully, is as they consider additional regulations going forward, they will take some of that into account.

Okay. That's helpful. And then as a follow-up in terms of when utilities are going to start to get more aggressive in terms of doing term business, I think of the last data set from EIA of days of burn in the PRB was about 48 days. And probably goes a little bit lower this summer, but then the rails, as they improve in the shoulder season of the fall, probably corrects.

Do you -- what level in terms of days of burn do you think that the utilities start to get more concerned about their stock levels? And what do you think their targeted days of burn level is they'd like to be at by the end of the year?

Well, I'll let Paul jump in here, but I think they're concerned today. And I think the reluctance has been that they're concerned they're not getting the tons they're contracted for, so why go out and compound problem? But as we move through the shoulder season here, and they start thinking about summer burn, and a typical draw summer from May to August, historically, over the last five years we've drawn 22 million tons. If you take another 22 million tons out of our inventories, you assume a small build over the next month or two, you get in dire straits. So I think utilities are going to have to consider pretty shortly, coming out for the summer season as well as multi-years in terms of buying coal particularly, or PRB coals.

Yes, I think the only thing I'd add is I think that average is a little bit deceiving on inventory. There's some real horror stories on certain stations that are just -- they're not on the ground, but they're getting pretty nervous about being able to operate, so the service level is impacted pretty unevenly across some of these utilities. And I think they got to a comfort level the last couple of years because of rail service. I think a few of them are rethinking that strategy.

Up next we'll go to Meredith Bandy of BMO Capital Markets.

Hello, good morning everyone.

Good morning.

Just wanted to follow up on Paul's comments earlier about the ability to bring back met in a better market. What would you consider a better market? What improvement would you look for before you'd consider that? And then what would be your needs in terms of capital and timing to bring back production?

Well, Meredith, this is John. Certainly something better than a 120 benchmark.

Okay.

And I think that I'm hesitant to say any more. I think we've bottomed out, but I think we've bottomed out. I think given where people's cross structure are and the fact that you've got a large percentage of suppliers in the world markets that have a cost structure that don't work, something's got to change. And I think you're starting to see the early part of that with some of these cutbacks.

I don't know that we have a magic number out there, but clearly as Paul indicated, we set ourself up in a manner that allows us to respond pretty quickly. I think we would want to be comfortable that we see more of a sustained improvement in those market conditions and not just something short term. That goes for met; that goes for thermal. We're not going to bring volume back on for a quarter or two improvement. We want to see something that's more multi-year.

And right now, we're starting to see some positive signs on the thermal side, particularly for PRB. We want to be patient and make sure that that market is sustainable. Other than the production cutbacks on the met side, we're really not seeing a whole lot that would cause us to change our recent decisions. It's something that we'll monitor and let the market be the guide.

Meredith, the only thing I'd add is it's -- since we have a range of costs, we have a range of ability to bring back production on with price. Most of the changes or all of the changes we've made on the met side are pretty easy to reverse, and particularly in this market, people and over time, everybody's cut back, and I think it'd be relatively easy to scale back up. If you compare this to say, what we did on the thermal side on some of the stuff over the last year, if this production is out there, and it's easy to bring back on.

Okay. Thank you. And then not to beat a dead horse to death, but the port and rail charges, is that all from Ridley or is there something else?

That's pretty much spread between port, rail, and barge.

It's pretty well spread East Coast, West Coast.

Yes.

Gulf.

Okay. All right. Thank you. That's helpful.

We'll go next to David Gagliano of Barclays.

Thank you for taking my questions. Back on to the met story for just a minute, it looks to me like you still have an embedded increase in your volumes for Q2 to Q4 to hit the midpoint versus the Q1 number of roughly 8%.

Q1, David, was down predominantly because of the lake season. Our first quarter, particularly with Canadian customers, tends to be our lowest.

Okay. That's helpful. My question is if you still have that $1.3 million left on price uncommitted, I think, $1.3 million. If things stay the way they are, how much of that should we expect will actually be produced and sold?

I think we're very comfortable with it. We see a market, given where we are with the cost structure, we would expect that to be placed in the market primarily internationally, but we feel pretty confident at this juncture that we will get -- we will sell those [comps].

Okay, ad then on the PRB side, just one question, when did you sell the 10.8 million tons roughly, or 10.8 million tons for 2014 delivery at around $12.25 per ton? And was that all 8800-BTU coal?

David, that was through the quarter. I think what's a little deceiving on the efforts on the pricing is that embedded in that is some export that clearly weighed that down. You can pick the number, but it probably weighed our average domestic down $0.30 to $0.50. So I think we continue to layer in sales and the prices continue to rise. So I think we're feeling more and more optimistic about the PRB.

Due to time constraints and the number of participants queued, we do and that you limit yourselves to one question. We'll move next to Brian Yu of Citi.

Great, thank you. On the metallurgical coal markets, and we're seeing various prices. You've got the settlement, there's Atlantic, and then there's Pacific. For the tons that are left to open, which particular market or price point should we be looking at for you to place those tons in?

My sense is the vast majority will go into Europe, although, I think we will still see a percentage go into Asia.

Up next from JPMorgan, we'll go to John Bridges.

Good morning, everybody.

Good morning, John.

Just wanted to dig a little bit more into met coal. Presumably, the tons which you are dropping weren't contributed to earnings. I'm just wondering, taking that out, and I realize it's a very complicated, mixed-up calculation, but would this be a loss of positive cash flow? Or would those tons have been operating at negative cash flow recently, as you were anticipating some better pricing, just keeping [alive]?

Obviously, John, we took them out because we thought they were net negative.

Net negative tons, so we should expect to see some overall improvement by taking those out?

Yes. That's correct, John. When you step down from the previous benchmark to where we were, that certainly impacted our margins, and as we've been saying on previous calls, that we would always be looking at refining our met volumes. That's what we did, and we don't want to be out there losing cash on some of these met tons.

We'll go next to Kuni Chen of UBS.

Just a quick question on the overall M&A environment. Obviously, there's a good deal of assets out there for sale in the Central App region. I'm sure revenue you've had a chance to take a look at them. Just wondered if you can give us some thoughts on the -- on how these assets look, where they on the cost curve, and just your overall impressions. I would say that there has been a little bit more traffic over the last couple months in properties on the market, particularly on the met side. As I indicated earlier, we're always buyers and sellers of assets. Everything that we've seen thus far, I think would tend to be on the higher cost side. We worked very hard to put together what we think is a low-cost portfolio of met products that will serve the US and the global markets very well, and certainly, we'd be hesitant to add anything that would impair that. So you're right. There are some assets on the market out there, but I don't know that we've seen anything particularly appealing at this point.

We'll move to Simmons & Company's Caleb Dorfman.

Thank you for taking the question. Going back to the PRB contracting side, how are you thinking about rolling in the contract on the remaining 50% of tonnage that you have uncommitted [through] 2015. Are you comfortable entering 2015 partially uncommitted, because you think prices are going to continue to rise throughout the years?

Caleb, this is Paul. I don't think we believe we're going to be able to hit the market perfect. We'll continue to layer them in, but heading into '15 where we're at, I'm very comfortable because we're clearly seeing a rising market.

Luke McFarlane of Macquarie, your line is open. Please go ahead.

My one question is really about -- we talk about non-core asset sales in the east and whatnot. Have you ever thought about doing something in the PRB, whether it's reserves or some of those idle (inaudible) you've got over there, actually trying to sell off any of that?

We've not looked at anything really in the PRB. We've been approached on some creative things that we've talked about and studied, but as far as equipment sales, longer term, we still feel very comfortable where we're at in the PRB. We have a lot of unused capacity that we think ultimately will be brought back online the when market improves.

Yes, when we look at demand growth over the next three to five years, the impact that [mass] is having on coal plant closures, we think the primary beneficiary will be PRB. And we want to make sure that we have the ability to scale that operation up, as we see those opportunities present themselves.

Up next from Stifel, we'll hear from Paul Forward.

Thank you.

Good morning, Paul.

On the -- you'd mentioned that with the reduced guidance in met coal this year, it sounded like about 500,000 or 600,000 tons of that was formerly met coal going back into the utility or industrial markets. Just wondering if you could talk about what the prospects of more -- or is there more of that potentially to come? And what kind of pricing improvement needs to happen in the utility market to allow you to consider rotating more of that met coal into a thermal coal market that seems to need the tons right now?

I'll start off and see if John wants to add. But it's a little bit of a hard question to answer, Paul, because if you think about it, some of these industrial accounts are local. We have a mine like Lone Mountain, which fits very easily in the PCI market [R]. It has a very good book of business around of industrial accounts.

So you get caught up in the syntax, whether it's PCI or industrial. So at this point in time, the industrial accounts, because of logistics, are paying a higher netback than the PCI market. So I think you're going to have to see a little bit of a fair step up in the price before you see it's going back too hard into that.

We'll go to David Lipschitz of CLSA.

Good morning.

Good morning, David.

I don't know if you gave any numbers on what you expect exports this year in terms of compared to last year?

We haven't, David. We do think that exports will come off. Last year they were, call it, $115 million, year before about $125 million. We'll have to see for the balance of the year, that they've held up reasonably well, but at this point, we think they could be in the low triple digits, but time will tell.

Certainly, at API prices right now, the numbers don't work when you back them out to the mine. The prices that we see off the West Coast certainly don't work very well right now. We do think it's important to continue to cultivate long-term customer relationships, because we do see long-term demand being strong in the international community. So we continue to do some of that, but I think time will tell. But I wouldn't be surprised to see exports still top plus $100 million for the year.

Brett Levy of Jefferies has our next question.

In terms of the new volume you've put on at prices in the PRB, is it above that $13.76 average or are you still struggling? And then can you talk about a little bit about 2016? Have people started to talk to you a little bit about that, and is that price yet again above the average that you've been seeing for 2015?

2015 prices have come in, as I noted earlier, we've been relatively pleased with what's coming in. As you look out, you're seeing a pretty good step up year over year, and we're going to continue to layer them in, but you're not seeing also a lot of utilities trying to head out to '16 yet. I think we're being cautious, at the same time, we're going to continue to layer in business.

Goldman Sach's Justine Fisher has our next question.

Hi, good morning.

Good morning.

A question for me is more of the longer-term issue of cash burn. So if, let's say we see prices rise, but still not enough to turn the Company cash-flow positive. I've been really impressed by the CapEx cuts, and the progress there is really good, but I'm wondering if there's anything else that Arch can do. I know asset sales are on the table, as you said earlier, from time to time. But is there anything else that the Company is considering doing to help stem cash burn, aside from just whittling it down if prices don't increase enough to get the cash flow where it needs to be, let's say a year from now, if the Company is still burning cash then?

Justine, this is John Drexler. I think we look at what we've done over the last couple of years to protect the balance sheet, and we've been very happy with what we've been able to achieve. And we're very happy with the current liquidity that we have on the balance sheet. Quite frankly, it's put us in a good position as we continued to weather the markets.

We've acknowledged that we're going to be cash flow negative this year, and I think we're executing on all the plans that we've indicated we would execute on. To your point, continuing to whittle down at the things that we can control managing and reducing our costs. We continue to be successful on that front. We'll continue to look for ways to move that down, to prudently managing our capital.

I think we've done an outstanding job without under-investing in the Company as well. We'll continue to look at ways there, and we've monetized non-core pieces of our business for appropriate value. As John said earlier, there's nothing here at this point that gives us pause that puts us in a position that we think we need to do anything desperate. We don't have to do anything from the standpoint of fire sailing assets, doing things like that.

As we look forward, we think there's still plenty of tools and levers to be able to pull to manage our liquidity. It's a very large focus for us as for us as we move forward. And quite frankly, we do think -- we're seeing significant improvement on the thermal side of the markets, and we think that met's at the bottom of the markets. And given the asset portfolio that we've put together, we're going to do very well continuing to manage through this downturn, create substantial value as the markets do turn.

Due to the time constraints and other Company commitments, we will take our final question today from Dave Katz of JPMorgan.

Good morning, you brought bituminous thermal costs down in your guidance by I think it was $2 per ton because of the extra tons you expect from Western Elk. Then further, you layered in the small amount of thermal as a result of lowering the met volumes, yet it appeared that your total thermal tonnage guidance remained the same. We were just curious what that extra Western Elk and Central APP thermal tonnage [planted]?

It was spread across pretty well all the basins, but there is a small chunk of it we think that's going to be impacted in the PRB. And the rest of it's just spread predominantly in the east.

And at this time, I would like to turn the call over to John Eaves for closing remarks.

Certainly want to thank you for your interest in Arch Coal. The management team continues to focus on the things that we can control: capital costs, sales commitments, and liquidity. We do feel like our asset base is diversified and unique. We think it's got tremendous earning power, once we see an improving market. We're starting to see that on the thermal side. We think we've hit the bottom on the met and should see improvements in the coming quarters.

We think we've positioned the Company very well. We really appreciate your interest in Arch Coal, and we look forward to updating you on our July call. Thank you.

And that does conclude today's conference. Again, we thank you all for joining us.