Arch Resources Inc (ARCH) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal Incorporated third-quarter 2014 earnings release conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Jennifer Beatty, Vice President of Investor Relations. Please go ahead.

Good morning from St. Louis. Thanks for joining us today.

Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual, future results to be materially different than those expressed in our forward-looking statements.

We do not undertake to update our forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our Press Release, a copy of which we have posted in the Investor Section of our website at archcoal.com.

On the call this morning we have John Eaves, Arch's President and CEO; Paul Lang, Arch's Executive Vice President and COO; and John Drexler, our Senior Vice President and CFO. John, Paul and John will begin the call with some brief formal remarks and thereafter will be happy to take your questions.

John?

Good morning. Today Arch released its full third-quarter financial results. We reported $72 million of adjusted EBITDA and generated positive free cash flow of nearly $60 million. We ended September with $1.3 billion in total liquidity, and held more than $1 billion of that liquidity in the form of cash.

Our results continue to demonstrate that we're successfully managing those variables under our control. Our performance also shows a modest uptick in domestic thermal coal demand. Shipment levels rose, pricing increased and cash costs declined in our Western operations, helping increase profitability in those segments in the third quarter. In fact, due to strong operating performance in the Bituminous Thermal segment, we are reducing our cash cost guidance again for 2014 and we're maintaining our annual cost guidance for the PRB in Appalachia implying lower cost in the fourth quarter.

Overall, we're pulling the right levers to navigate the current market environment. As we look ahead, our focus remains on prudently managing our sales in production levels, containing our cost and capital spend, optimizing our asset portfolio for an evolving coal landscape and preserving and enhancing our financial flexibility. Taking a longer-term view, we're confident we have low-cost, long-term and well- diversified assets that can generate cash even under the current market conditions and that can deliver strong profitability and shareholder returns as markets recover.

Turning now to thermal markets, we still expect domestic coal consumption to be up 10 million tons or so in 2014 and that's taking into account the coolest summer we've had in coal consuming regions in the past 30 years. Even with the disappointing summer burn, we continue to see real interest from our customers in layering in significant tonnage for multiple years. Paul will provide an update on our thermal book in his prepared remarks.

Looking ahead, the upcoming winter could provide further support for the domestic thermal market. Western coals remain competitively priced versus the forward natural price curve. Moreover, coal stockpiles at generators particularly those that are PRB served are low. We've seen customers who are concerned about rail delivery take coal plants off-line during the shoulder season in order to ensure that they have enough coal on hand to meet demand this winter.

Nationwide we believe the stockpiles will end the year below 135 million tons and are likely to be much lower than targeted levels in PRB served markets. Over the past two years, generators have liquidated roughly 50 million tons from their inventory, essentially eliminating a cushion to service demand spikes. At these levels stockpile levels are the lowest we've seen since 2006. This trend certainly could create a more dynamic market in 2015.

We expect rail service to improve because rail carriers are spending to add power and crews and are investing to increase fluidity. Customers will then be able to enter the market to replenish their stockpiles. We currently expect PRB demand to be up in 2015 and that's despite the potential impact from MATS. Longer-term, of course, the coal industry will be impacted by plant closures stemming from aggressive EPA regulations. We estimate that 60 gigawatts of coal generating capacity will likely retire by 2018.

Nearly one-third of those plants have already closed. In 2015, we anticipate approximately 20 gigawatts will close affecting up to 25 million tons of demand on a gross basis. But that's before we consider restocking these and the potential for generators to run their remaining coal plants harder to meet the demand that was serviced by those shuttered plants.

Thus we continue to see real opportunities for select coal regions with long-dated reserve lives that sit competitively on the cost curve such as the PRB. Turning to the International markets, we continue to seek long-term growth potential in the seaborne coal trade. In fact, India's coal imports have increased by nearly 20 million tons year to date which has more than offset a decline in China's' imports thus far in 2014. At the same time, global thermal prices have fallen to levels that price out all but the most competitive US coals including some of Arch's production.

Balancing that fact, we've seen a pickup in demand domestically. As a whole we expect US exports to decline below 100 million tons in 2014 and we could see further declines in 2015 if markets remain at current levels. These reductions should help bring better balance to the Atlantic Basin market.

Lastly, we believe net markets are in the process of bottoming out. Benchmark prices have fallen below the cost for one-third or more of global producers and supply cuts are underway. Those cuts will help offset new supply that has come into the market over the last several years. At Arch, we have already rationalized a higher cost supply while building out higher grade and more cost competitive metallurgical coal platform. During the third quarter, we shipped 1.7 million tons of met coal at netback prices of $80 per short ton. To date, we have 6.7 million tons committed in met markets for 2014 which means we are effectively sold out.

We've also kicked off discussions with our North American customers for calendar year 2015 business. The domestic market remains a key market for Arch and the utilization at the US steel mills has held up reasonably well. Forecast suggests that North American steel output will grow again in 2015. We feel good about the demand we're seeing but remain cautious on prices. Arch has nearly 2 million tons put to bed for 2015 at reasonable prices and we'll look to provide a further update on our next call.

Internationally, met markets remain oversupplied in the near-term; however, we're encouraged to see that European steel output has increased this year. Europe is a large destination for US met suppliers. In fact, we're projecting that Arch's overall met exports will be up slightly in 2014 versus 2013 levels, but prices, as you know, have drifted down.

In closing, Arch remains nimble and able to respond to evolving market conditions. We have positioned the Company well to withstand this current downturn. At the same time, we're mindful that markets can turn around quicker than anticipated as evidenced by the Bituminous Thermal segment and want to ensure that we're ready to capitalize on those opportunities as they arise.

With that, I will now turn the call over to Paul Lang, Arch's COO, for discussion of our regional sales and operating performance.

Paul?

Thanks, John. On the operations front, our Western regions turned in another solid performance for the third quarter, achieving good cost control and solid margin expansion. In the Powder River Basin, our sales price per ton increased and our cash cost per ton decreased in the third quarter, benefiting from higher shipment levels.

As a result, our cash margin per ton expanded 24% during the period as compared to the second quarter. For full-year 2014, we remain on track to meet our cash cost guidance expectations in the Powder River Basin which implies a stronger cost performance in the fourth quarter. Repair and maintenance expense should be lower as we completed several major summer projects and we also expect rail service to improve incrementally during the period.

In general, the October rail performance has been below our expectation, but that's similar to how the third quarter began. We also expect some shipments to spill over into 2015, and we've already started work with select customers to address potential carryover tons in the broader context of securing additional supply for next year. Looking ahead, assuming ongoing recovery in rail service, we anticipate that our 2015 cash costs for the PRB will be comparable to this year.

We continue to be encouraged by the dynamics we see in the markets served by the Powder River Basin. There's ongoing interest from customers to secure multiyear contracts for coal, to fill our estimated burn needs as well as replenish stockpiles. During the third quarter, we committed and priced more than 15 million tons of PRB coal for 2015 delivery. Roughly 45% of those tons represented new business above $13 per ton, another 40% represented tons that priced off an index, while 15% pertained to carryover tons. To date we're fully committed for 2014 and have approximately 80% of our volume committed for next year based on current run rates.

Turning to Appalachia, our third-quarter costs trended up as expected due to scheduled longwall moves at both Mount Laurel and Leer. We also incurred wind-down expenses associated with idling Cumberland River. Excluding the impact of Cumberland River in our third-quarter results, our cash costs would've been $1.50 per ton lower for the segment. In the fourth quarter we're forecasting lower cash costs in Appalachia as we expect strong cost control across our operations. We also anticipate less of an impact from Cumberland River and have only one scheduled longwall move in December.

Thus we're on track to meet our cost guidance in Appalachia for the full year, which implies a stronger fourth quarter. Looking ahead, we expect cash costs in Appalachia for 2015 to stay flat or trend down slightly versus 2014. We should benefit from a full year of production at the Leer mine as well as the positive impact of idling the higher cost Cumberland River complex.

Turning briefly to our Appalachian sales profile, John provided you with an update on our 2015 metalurgic business discussion. As indicated we're pleased with the demand that we're seeing at the domestic and Atlantic Basins but clearly recognize the broader coke and coal market remains at depressed pricing levels. However, when the pricing environment begins to improve, we've maintained significant leverage given the low cost structure of our metallurgical platform. On the thermal side, we continue to see weak market conditions. We've reduced our participation in the export market given the current netbacks and simultaneously continue to succeed in placing coal in the domestic industrial business.

We've also limited our exposures to Appalachian thermal by closing our divesting assets. We now have a thermal platform concentrated at our low-cost Coal-Mac complex which is cash-flow positive even under current market conditions. Turning to the bituminous thermal segment, the sales prices increased and the cost per ton decreased expanding cash margins in the quarter. During the period, our operations continue to deliver solid performances allowing us to reduce our cost guidance by $1.00 per ton for that segment in 2014.

In particular, West Elk ran well in the third quarter due to increased domestic and International customer demand. We now expect to run that operation above 6 million tons for 2014. We also committed Colorado Coal for 2014 and 2015 delivery at nearly $30 per ton in the third quarter, helping lock in continued solid margins for that segment. Lastly, turning to our capital plan, we recently reduced our capital spending target by $10 million and now expect to end the year at approximately $165 million at the midpoint of our guidance including land additions.

That estimate is down $25 million since our initial budget was set at the beginning of this year. We continue to see the benefit of transferring equipment from idled operations as well as process improvement initiatives that have improved maintenance cycle times and extended equipment lives. Looking ahead, we'll continue to assess market conditions when evaluating our long-term capital allocation strategy.

As always, we'll take a disciplined approach to spending capital. Over the next several years, we believe we can successfully run the Business at lower capital levels. Post-2016, our South Highlight LBA payment in the PRB will also end. Our ability to manage capital as well as reduce costs is helping preserve our liquidity as we manage through this current market environment.

With that, I'll turn the call over to John Drexler, Arch's CFO, to provide an update on our liquidity position and guidance.

John?

Thanks, Paul. As John discussed, we're focusing on four key areas for the organization as a whole. Both John and Paul have discussed managing our sales and production, reducing cost and capital spend and further optimizing our asset portfolio. In my prepared remarks, I'd like to highlight our achievements in regards to cash flow and liquidity management, topics that have been front of mind for investors these days.

In the third quarter, we increased our cash position by $60 million to end September with nearly $1.1 billion in cash. Our total liquidity position reached $1.3 billion taking into account the undrawn portion of our credit facilities. As we end 2014, we expect our cash position to remain around $1 billion with total liquidity of more than $1.2 billion. We expect to successfully preserve our cash position in the fourth quarter, largely driven by our focus on strong cost control and prudent capital expenditures.

As you know, we entered 2014 with $1.16 billion in cash and short-term investments. Through a combination of strong cost control, prudent capital management, monetization of small, non-core assets in Appalachia, along with other cash management efforts, we expect to contain cash outflows to under $200 million for 2014. Looking ahead to 2015, with a thermal portfolio that is heavily committed at higher realized prices than in 2014, and with a met portfolio that already has 1.7 million tons committed at reasonable prices and that remains cash positive even in today's challenging market, we currently believe any cash outflow for next year will be comparable to this year excluding proceeds from asset sales.

As a reminder, 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 $250 million revolver. Today, we have only a minimum liquidity covenant of $550 million in place, tied only to any borrowings under that revolver. And we have no meaningful debt maturities until mid-2018. Thus, we have positioned the Company with more than sufficient liquidity to manage through current market conditions.

We also believe that we have the financial flexibility to opportunistically enhance our liquidity while also prudently managing our debt maturity schedule. Certainly we'd all like to see coal markets improve sooner rather than later, but we've also adequately prepared the Company in case the recovery is delayed. As Paul discussed, we continue to make progress in reducing capital spending without underinvesting in our portfolio.

During the third quarter, we spent $23 million on CapEx. After adjusting for the LBA payment made in the second quarter, our year to date CapEx spending totaled $59 million which represents a meaningful reduction from this time last year. And while we currently are forecasting a modest step up in the fourth quarter, our full-year guidance shows that we've been managing our business effectively at lower capital levels. Looking ahead in 2015, we also believe we can keep our capital spending at comparable levels to 2014.

Turning now to our updated expectations for full-year 2014, most of which were outlined in our earnings release today. Despite near-term challenges related to rail transport constraints in the PRB, we expect cash costs in the range of $10.80 to $11.10 per ton. This range anticipates further improvement in rail performance during the fourth quarter. In Appalachia, our third-quarter cash costs were above the full-year range as expected.

For the full year however, we remain on track to achieve our previous guidance of $62.50 to $64.50 per ton. We are once again reducing our cash cost per ton guidance in our Bituminous Thermal segment given our strong operational performance. We now expect cash costs in the range of $20.50 to $21.50 per ton, a reduction of $1 per ton at the midpoint from our previous guidance range.

In other financial guidance, we expect our 2014 CapEx range now to be between $160 million and $170 million. Included in that range was our $60 million LBA payment for the South Highlight reserve as discussed.

DD&A in the range of $410 million to $430 million, total interest expense between $382 million and $386 million, we note that our cash interest expense will be between $360 million and $370 million for 2014. We continue to be successful in finding ways to reduce administrative costs. We now expect SG&A expenses between $117 million and $121 million, representing a reduction from our previous guidance of $2 million, and a tax benefit for the year in the range of 20% to 40%.

As we look ahead, we will continue to find ways to eliminate costs across our platform, find ways to effectively optimize our assets, control CapEx spending, and manage our liquidity. More importantly, we are confident that we have positioned the Company with a sustainable low-cost platform of large scalable operating complexes that generate positive cash flow in these weak market environments and that will create substantial value as coal markets inevitably rebound.

Thanks to the actions taken over the last several years to enhance the Company's financial flexibility, Arch is well-capitalized and well-positioned to weather the current market downturn and to take advantage of opportunities when market conditions improve.

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

Certainly.

(Operator Instructions)

Michael Dudas, Sterne Agee.

Good morning, everybody.

Good morning, Michael.

Good morning, Michael.

Well, John in your prepared remarks you talked about inventory rebuild potential utilization opportunities given the MATS closures, et cetera. How dependent do you see that on improved rail? I guess on a scale of one to ten with one been really bad, where do you see it now and what your expectation, given your customer discussions, where that might be as moving to 2015 even beyond 2016?

Michael, let me start out and Paul can jump in here. I would say that we have seen some incremental improvements in the railroad you can see from second quarter to third quarter we saw a couple million tons improvement in our volume. We would expect to continue to see that gradual improvement as we move through the fourth quarter. If you remember in our second-quarter call, we were talking about the rough start that we had to the third quarter in July, we've seen that in October as well, we would expect hopefully over the balance of this quarter to see some improvement and to see another step up in volume.

Certainly these improvements have not been as quickly as we would've liked to have seen but we are seeing those gradual improvements and would expect to see that as we move into 2015, we're reading everything that everybody else is about the delayed improvements in the railroad. But, with our conversations, with all the railroads, particularly the Western railroads, we're confident with the progress they're making in terms of capital spend they are bringing crews on that optionally takes time to bring power on, they're trying to improve their philosophy but it just takes time.

So I would tell you we expect to see some more improvement in the fourth quarter and that to continue as we move into 2015. Will it be fully resolved in 2015? I think the jury is still out, Paul you got anything to add to that?

I would just point out the railroads has picked up about 5% from Q2 to Q3 that was actually a little bit more than I would have thought. As I mentioned earlier, we're not off to a great start, not dissimilar to what we were in July but, we don't need 5% improvements every quarter. I would like to see it, but what we need is kind of a sustained, incremental 1%, 2%, 3% improvement to get to where we need to be.

My follow-up would be, thank you for those answers, my follow-up, John or Paul, regarding your met coal positioning. Can you remind us what historically the mix is between International, domestic and obviously with the new Leer product and the successful response to that product in the market, is that anticipated to change more domestic versus International as we get through this contracting stage in 2015? And how upbeat are you that you can achieve that with some of the better utilization we're seeing in the US versus elsewhere?

You know, Michael we certainly are pleased with the tonnage we put to bed and we got approximately two million tons already committed for 2015 and at reasonable pricing as you've seen. So, we feel good about that, we've always had a real focus on our domestic markets. We'll continue to do that. I think it just depends on the opportunities we see. In terms of 2014, I think we've got about 35%, 40% of our volumes will be domestic and the balance will be International.

So, I think it just depends on what opportunities we see. But we are pleased with the demand we've seen domestically, the capacity factors have hung in there in that mid-70s range, we would expect that to continue. With our second biggest market being Europe we've also been relatively pleased with the demand that we've seen there. Now, not real happy with the pricing, but certainly the demand in the US and Europe continues to be there.

Excellent appreciate your thoughts, thank you.

Thank you, Michael.

Mitesh Thakkar, FBR.

Good morning, gentlemen.

Good morning, Mitesh.

Good. First question just on the cost side. Paul, can you talk a little bit about the Appalachian cost? I know third quarter was a little bit of an anomaly because of the longwall moves. How should we think, you mentioned the 2015 the cost should be flattish. With the Leer running full shouldn't it be lower and not so much as flattish?

Hello, Mitesh, we're really happy with the start up of Leer it continues to perform well. Frankly it's hitting right in expectations. As we look at this year, the costs have had a little bit of headwind with Mount Laurel and it's been offset in fact by Leer and we've also had the issue of idling Cumberland River. As we head into next year, I think we are expecting kind of what I would call the first full normal year at Leer. And the cost in general, I think we want to be conservative but we see them trending down in central Appalachia.

Okay, great so it should be lower, right? Maybe a little bit?

Yes.

We've got a budget meeting later this year -- later this week and hopefully get some updates on those numbers and certainly look forward to providing more update in January on our call. But as Paul said, we couldn't be more pleased with the performance thus far of Leer and would expect having a full year of production next year is pretty exciting, quite frankly.

Great. And just to follow up on the Bituminous Thermal side, your Bituminous Thermal position for 2015 look's a little bit more open compared to the PRB, I mean is it intentional? Or has the demand just started to pick up because I see that you guys have done a great job on the margin side both on the Bituminous Thermal side. How should we think about 2015 contracting because the open position looks a little bit more than what it is on the PRB side?

You know, Mitesh as we headed into this time last year as you recall we were quite a bit more open and the guys have done a great job in contracting West Elk and sitting here with that segment we're in pretty good shape. I think this quarter is going to be interesting.

We still expect the mine to actually have some export volumes next year because you have to remember West Elk still is a superior product to both New Castle and API too. So, it is still playing a little bit into the export market.

Mitesh I would also say that even with the recent falloff in natural gas prices we continue to feel pretty confident on West Elk's ability to compete here domestically. As Paul said we continue to build out our International book as well. So, again, as we get through the budgeting process, I think we'll have a little bit more clarity on what 2015 looks like.

Thank you very much, guys and good luck.

Thank you, Mitesh.

Brandon Blossman, Tudor, Pickering, Holt.

Good morning, gentlemen, Jennifer.

Morning, Brendan.

Good morning, Brendan.

Paul I think you mentioned PRB costs potentially flat year over year, 2015 to 2014. Is that a mine plan benefit? Is it just continued kind of cost savings some mix of the two or just an increase in expectations of production?

Brendan, I'm going to tell you it is a little bit of all of the above. Frankly the guys have done a great job this year on the cost control. I think the real thing that's lost in this rail issue is, the rail service has been up and down which has brought a lot of inefficiency across the whole supply chain.

The guys have done a great job of managing it. One of the things we're hoping as we head into next year is as the rails begin to improve slightly, you'll see that variability drop and it will bring some more efficiency to the mines. I guess the simple answer is all of the above, but we feel like we're in a pretty good place at the operation right now.

Thanks, that's helpful. And then, longer-term also PRB and this is kind of backing into an implied question about which guys are thinking on Seaborne thermal prices longer-term. How do you think about PRB export potential today? How much are you allocating to that effort over the next year or so?

Brendan, this is John. Certainly, the short term thermal markets are not attractive and we've pulled back from those quite a bit. We've got some limited volume in those markets because quite frankly long-term, we believe that's where the demand growth is and we continue to spend time on those markets.

We have actually got offices in Singapore, Beijing and London because we think long-term that market is important to us. If you look at the demand growth in the new coal-fired generation that's being constructed around the world, a lot of that is in Asia and we want to make sure that we're set up to build to respond to that growth. We still have an agreement in place for shipments through Ridley although we are not doing much of that right now. We continue to work on our millennium bulk terminal and we're in early stages of the environmental impact study.

We think that will play out over the next year. We will have a draft EIS to discuss that, but over time we're reasonably confident we'll get that capacity in. And if you think about the implications of that long-term demand growth that we see it is certainly important. So we continue to pursue those but quite frankly with the domestic market that we've seen this year we chosen to stay in this market because the realizations were so much better.

But we're not ignoring International markets. We do think this year exports will dip below 100 million tons but longer-term, we see that as a growing market for Arch Coal.

Thank you very much.

Caleb Dorfman, Simmons & Company.

Good morning.

Good morning, Caleb.

I think you mentioned all of your operations are currently free cash flow positive. Is that sort of indication that Arch's cutting is completely over and maybe we can expect similar volumes in each segment next year? And if that's the case, who or does anyone need to still cut met production?

I'll start off that answer, Caleb and just say, I think what you've seen over the last two or three years is that we've responded appropriately to the market. Sitting here today we've got our portfolio down to a pretty strong set of operations that are cash flow positive. And the markets move up, markets move down, we'll address that.

Caleb certainly we think we're positioned well. You can see that by our Eastern costs we had a slight uptick this quarter because of longwall move into the Cumberland River. But as Paul indicated, once we complete the budgeting process for 2015, we expect flattish or even declining costs in the East and we think that's fairly unique.

Not to say that if for some reason the market deteriorated more we wouldn't address that, but we do think we're positioned well. There has been about 25 million tons of cuts announced in the market. Australia, Canada and the US. We don't think you've seen much of an impact from that yet. We think as you move into 2015 you will see more of that.

We think that, combined with a little demand growth of even 2% will allow this market to balance and correct over time. As we've seen in past markets, particularly on the met side, they tend to over correct. And what we want to try to do at Arch's is make sure we've got our portfolio in place, that we can capitalize when the overcorrection occurs. And we think that's where we are today.

If you look at our products, whether it's met or thermal, we think we're as well-positioned as anybody in this space, particularly in US.

That's helpful. Then a question for John Drexler on the balance sheet. Your unsecured notes are trading sub 50 right now, I know that some of your peers have been in similar situations in the past and have used that potentially to deleverage. Do you see any opportunity to potentially do anything with your unsecured notes?

Caleb, we're looking and watching and evaluating the market closely and we worked hard to position the Company to have comfortable liquidity and significant runway. We've accomplish that, and it's prepared us for riding out through this market cycle. We did that by being responsive and proactive to trends that we saw in the market. We'll continue to monitor the markets and if opportunities present themselves to take steps to further manage liquidity, if we feel that's necessary, we can do that.

Clearly, with what we've seen in the trading levels with some of those bonds it's something that we look at. But we sit here today cash liquidity continues to be important. We'll continue to evaluate all opportunities and as we've demonstrated, continue to be prudent in how we manage the capital structure.

Is there anything in indentures that would prevent you from buying back some of notes?

We've got a complex capital structure, we've got a clear understanding of each instrument within the capital structure and the related flexibility and constraints. We would have opportunities, if we so chose, in various forms to look at those bonds. As we move forward we would have to step through the capital structure carefully to do so.

Thank you.

Lucas Pipes, Brean Capital.

Good morning, everybody.

Morning, Lucas.

I just wanted to follow-up on US met coal volumes for 2015? I know it's a little bit early, but first could you maybe give us a sense of where you stand in terms of negotiations with the domestic steel makers and what sort of pricing indications your initially receiving here at this time?

Obviously as John mentioned, we started the year with about two million tons committed which as we entered that last year we entered into a two-year agreement and we all kind of questioned it but in retrospect we feel very good about it right now. We're right in the heart of the domestic contracting season. I think we're -- we feel pretty good about where we're at, we're also pretty realistic about where the prices are.

That work should be finished up, I'd say in the next four to six weeks, I think on the next call obviously there'll be a lot more clarity before we head into the International sales season.

Switching gears a little bit, some of your peers indicated that in 2015 there's potential for a pretty significant kind of restocking for the PRB. The way you look at things, where would you expect 2015 PRB demand to shake out year over year versus 2014?

I think 2015 is going to be interesting and the PRB. You got the usual market dynamics, natural gas, the economy, weather, nuclear. I think what's new this year is kind of the added dimension of the rail performance, the low inventories at our customers and throw into that, MATS compliance.

There's a lot of moving parts out there. And I think if we were to sit here and call it today when you net all this up, I would call it roughly 20 million tons of increased demand that probably needing that is somewhere around 9 million or 10 million tons of demand that will be lost to MATS compliance. So net net we're looking at about a 10 million-tonish increase in demand in the PRB.

Great I appreciate the color thank you.

John Bridges, JPMorgan.

Thanks morning, everybody. John, I was wondering following up from some any other questions about pull-backs and exports. Would that exposure to some take or pays next year?

You know, John it could. As you've seen this year we're on pace for about $40 million of LDs. Again we're in the planning, budgeting stage for next year, but I think it's safe to say some of those will carry into 2015. It's a little bit early to kind of give you guidance on them. But clearly we've got varying terms and lengths on rail agreements, port agreements, that will carry into 2015. When we update you in January we'll give you an indication of where we'll be for the year.

Directionally, it sounds like it's going to be higher?

Right now, I'm a little bit hesitant to say. I think Paul and his team have done a phenomenal job in mitigating these things and you can see where we started this year and where we are right now. We've brought them down pretty significantly. We would expect to be able to continue to do that as we move into 2015. So, I'm a little hesitant to say anything today because they might be able to mitigate something between now and our January call. So I'm going to try to give you as accurate a number as I can.

Okay. And then you keep on working on your costs. Could you characterize the progress you have been making?

It sounds as if you've been surprising yourself a little bit with the costs you been achieving or what you can -- which innings of the game you think you're in now?

You know, John I got to tell you I'm very proud of the people and what they've accomplished and I guess if you're going to be surprised we've been surprised the right way. You kind of go around the operation, the PRB, as I have mentioned earlier with all of the inconsistencies in rail service and all the things they've been dealing with, they've really done a good job of just -- nothing outlandish but just your good, basic cost control, very good emphasis on process improvement.

The real star this year has been our Bituminous Thermal segments and that's both the West Elk mine and the Viper mine. People forget about Viper but both of those operations have done a great job lowering their costs, and frankly, they've been great across the board in terms of safety and productivity. It's a good story. Then in the East, of course, the start up of Leer has been as good as we could have hoped. It continues to hit our numbers. As we talked of the past we had a little bit of trouble at Mount Laurel. That pretty well settled out in the third quarter. In general, John, there's nothing really super dynamic about the stuff, it's just good, basic hard work by the team.

Okay thanks a lot and good luck for the rest of the year.

Thank you, John.

Justine Fisher, Goldman Sachs.

Good morning.

Good morning.

Good morning, Justine.

My first question is about that the liquidity cushion. You guys have obviously built up an excellent one and the fact that it will stay $1 billion of cash through the end of the year is great. I know that there has been some talk in the market as to whether Arch may want to add to that liquidity position by potentially taking out its 20/20 bonds?

Seems to me the liquidity lasts -- at least for the next three years and what the Company does not need is more interest expense. My question to you is that still something you would consider to be able to extend the liquidity runway, let's say four, five, six years? Does the runway in your view need to be that long such that you would take the step to take out the bonds that have the most restrictive convents?

Justine, this is John Drexler, as we indicated earlier we'll continue to look at the coal markets and trends in those markets very closely. We'll continue as we have been to monitor our liquidity and how we're able to manage that liquidity through these markets. There's a number of potential opportunities we believe to gain meaningful further flexibility in our ability to manage, not just our liquidity but our capital structure.

We've talked about those. And so, I think right now as we're looking at things, we feel comfortable with the liquidity that we have on our books. We're going to continue to look at the markets as we move forward and as we've done if we feel it's prudent and appropriate, we will take steps necessary to enhance liquidity moving forward.

We don't disagree, we don't like all of the debt and the related interest expense on the books. But we feel it's necessary right now to protect the balance sheet. And we'll continue to evaluate that as we move forward and markets as they continue to evolve.

Okay thanks and my follow-up is actually on the issue of future LBA. You mentioned earlier that your current LBAs, your LBA payments end in 2016. If I look in the 10-K there some comments about the Black Thunder reserve life and how current production sustainable through 2020 and then output will significantly decline after that.

If there are some leases in the area that the Company may bid on, if I calculate the reserve life, it's a lot longer than 2020. But I'm just wondering what exactly would drive that output and would Arch need to bid on additional LBA's nearby in order to extend the Black Thunder Reserve life at the current production rates?

That's a long question.

Sorry. It's the last question I'm going to ask you, a long one I apologize.

So, let's start with the beginning. The West highlight LBA we have two payments left; one in 2015, one 2016. And in the K, we talk about in order to sustain current production level that we need future leases. Obviously we have a lot longer reserve life if the production level decreased or was brought down a little bit. So I think we have some flexibility on these LBAs.

Black Thunder is fortunate that there's quite a few opportunities around the operation. There is currently three LBAs out there. So as we head into 2016 I think we're going to be very cautious on what we do. There's a lot of options and we're going to take it a step at a time. I have to be frank, LBAs are about the last thing I worry about right now.

All right thank you very much.

I will now turn the conference call back over to John Eaves for any closing remarks.

I want to thank you for your interest. I also want to take a moment and thank the men and women of Arch Coal for their focus during the third quarter. We continue to focus on the things that we can control. Cash, capital, sales production and liquidity.

I think as we finalize our planning for 2015 you'll continue to see how effectively we can manage those four areas. So we look forward to updating you in January on the fourth quarter and our outlook for 2015. Thank you.

And this concludes today's program, you may now disconnect at any time and have a wonderful day.