Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Arch Coal Inc (NYSE:ACI)

Q2 2014 Earnings Conference Call

July 29, 2014 11:00 AM ET

Executives

Jennifer Beatty – Investor Relations

John W. Eaves – President and Chief Executive Officer

Paul A. Lang – Chief Operating Officer and Executive Vice President

John T. Drexler – Chief Financial Officer and Senior Vice President

Analysts

Neil Mehta – Goldman Sachs & Co.

Mitesh Thakkar – FBR Capital markets

Lucas Pipes – Brean Capital

Brandon Blossman – Tudor, Pickering, Holt & Co. Securities

Caleb Dorfman – Simmons & Company

John Bridges – J.P. Morgan

Kuni Chen – UBS Securities LLC

Justine Fisher – Goldman Sachs

Brett Levy – Jefferies & Company

Operator

Good day, everyone. And welcome to the Arch Coal Incorporated Second Quarter 2014 Earnings Release Conference Call. Today’s call is being recorded. At this time I would like to turn the conference over to Jennifer Beatty, Vice President of Investor Relations. Please go ahead.

Jennifer Beatty

Thank you, good morning from St. Louis. Thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature address matters that are, to different degrees, uncertain.

These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.

I would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.

On the call this morning, we have John Eaves, Arch’s President and CEO; Paul Lang, Arch’s Executive Vice President and COO; and John Drexler, our Senior Vice President and CFO.

John, Paul and John will begin the call with some brief formal remarks, and thereafter, we’ll be happy to take your questions. John?

John W. Eaves

Good morning. Today Arch reported adjusted net loss of $0.46 per share in the second quarter and generated $65 million in EBITDA. These results reflect the ongoing impact of weak metallurgical coal markets and our success in adjusting our operations in response to these conditions.

Last week, we announced the idling of our Cumberland River complex. We regret the impact this will have on those affected, but the decision was necessary as continued soft metallurgical prices have rendered the complex uneconomic in today’s operating environment.

Going forward, we have chosen to concentrate our metallurgical production in our lowest cost, highest margin assets to further benefit our already low cost structure in Appalachia, and enhance the overall quality of our metallurgical product mix. This action will create a sustainable metallurgical coal platform that can earn strong cash margins even on our self market conditions. This action also positions Arch well to respond as markets rebound.

By preserving the valuable reserves at Cumberland River, we have retained the option to restart that mine when coking coal markets strengthen in the future. Of course, we believe that we are close to the bottom in the met markets today. Global production curtailments have accelerated in 2014, and by our account total nearly 20 million tons thus far.

These curtailments will help offset the growth in supply that is stemming from capital projects that were justified when prices were materially higher. As we look ahead, we expect a much more balanced market, with steel production growing, capital projects being delayed or canceled, and high-cost coking coal capacity shutting.

That being said, with no near term catalyst point to a material improvement, we have elected to reduce our sales expectations further in 2014. In the first half, we ship 3.3 million tons of met coal at mine prices around $82 per short ton, putting us on pace to ship 6.6 million tons of met coal this year at the mid point. While our met coal capacity lies well above our current sales levels, we simply don't want to push tons into an already saturated market at this time.

Turning now to domestic thermal markets, we expect coal consumption to be up by 20 millions tons or so over last year, and that’s with the cooler summer weather that's been playing out today. Current estimate suggest that cooling degree days it could be down as much as 5% versus last year, and 10% versus the five-year average. While these trends will impact power consumption and coal demand, we continue to see increased interest from our customers.

Western coal remains in the money compared with current natural gas prices and coal stockpiles at generators are on the low end in some cases, well below targeted levels. Nowhere is the increased demand for thermal coal more apparent in West Elk. Based on opportunities we are seeing in the marketplace and our sales to-date, we've elected to increase production at West Elk to the 6 million ton level.

This increase allows us to run the mine at close to its capacity, which is having a beneficial effect on that region's cost structure and raising our margins there meaningfully. We are also seeing more RFPs for our PRB coal, and continue to lock in future business in that region at higher prices than we've seen over the past several years.

At the same time, the lack of sustained summer heat, a slower-growing economy, waning natural gas prices and rail service issues are all likely weighing on PRB markets to some degree. While we are forecasting a gradual improvement in PRB rail service in the back half of the year and it has not been satisfactory to-date. This issue has led to some stockpile conservation measures at our customers.

Given current trends, it’s likely that we won't ship all our contracted coal this year, resulting in some rollover into 2015. We have tried to contemplate this impact in the cost ranges we provided for 2014. However, as transportation bottlenecks ease in both the East and the West, and we're confident that they will, we expect customers to reenter the market in a more significant way to supplement their inventories.

We are forecasting utility coal stockpiles to end the year at or below 50 days of supply, inventories in some regions, such as the PRB, dipping below normal levels. At the same time, we project that US coal production will fall below the billion tons for the second straight year in 2014, which should help further tightened up domestic and seaborne markets.

In closing, we are pleased that we are managing what we can control and proactively responding to current market conditions. The metallurgical market is challenging right now. We have positioned the company well to withstand this cyclical downturn and provide substantial upside as markets recover. As our second-quarter results demonstrate, we are taking aggressive steps to control cost and improve operational efficiencies. We are also focused on managing our liquidity position and reshaping our operating mine portfolio to a smaller but more sustainable low-cost platform.

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

Paul A. Lang

Thanks, John. On the operational front, we expanded our cash margin per ton in each of our regions during the second quarter as shipments improved, cost containment efforts were successfully implemented, and domestic thermal demand increased. Our unwavering focus on cost control across the operating platform is also the driving force behind our reduced cost guidance expectations in both the Appalachia and Bituminous Thermal segments for the full year.

Specifically in the second quarter, we reduced our cash costs in Appalachia by more than $3 per ton versus the first quarter by concentrating production in our lowest cost mines, such as Leer and executing on process improvement initiatives. In addition, stronger pricing on industrial and thermal shipments in the region raised our average realized price per ton.

Combined, these efforts drove a threefold increase in our cash margin per ton in Appalachia in the quarter just ended. In particular, our focus on process improvement in the recent years has allowed us to advance the overall efficiencies at our mines. As just one example, our Managed Rebuild Program has driven down the cost of rebuilding underground mining equipment which includes longwall components, continuous miners, and roof bolters.

So far this year, the campaign has reduced continuous minor rebuild cost almost 45% as compared to historical levels and helped us ensure maximum performance and life of the machinery. Looking ahead we expect our full year cash cost in Appalachia to decline by roughly $1 per ton at the mid-point versus our prior guidance.

However, we’re currently forecasting cash cost in the region to temporarily trend up in the third quarter, as both the Mountain Laurel and Leer mines have scheduled longwall moves during the period. The Leer longwall move will be completed Thursday, and our longwall move at Mountain Laurel is scheduled for later in the quarter.

In addition, we anticipate recording the impact of idling the Cumberland River complex during the third quarter, which is projected to add slightly more than $1 per ton to the region’s cost during the period. The impact has been embedded within our revised cost guidance range for the full year, though.

Turning briefly to the metallurgical side of the business, we shift 1.7 million tons of coking and PCI coal at an average price of $81 per ton in the second quarter was about half of the sales mix comprising low vol and high vol A coals. We also committed another 700,000 tons at an average blended price of $77 per ton this brings our total 2014 metallurgical sales commitments to 6.2 million tons.

As mentioned we’ve lowered the top end of our metallurgical volume range due to Cumberland River's idling, and we are now forecasting coking coal and PCI sales of 6.3 million to 6.9 million tons in 2014.

Turning to the Bituminous Thermal segment, we had a strong performance at our West Elk and Viper mines in the second quarter which allowed us to reduce our cost guidance by 250 per ton in the region for full year 2014.

In particular, West Elk is benefiting from increased domestic customer interest.

As John mentioned, we've elected to run that mine at a higher rate in the back half of 2014. As demand from industrial and utility accounts remain strong. In fact, we've committed more than 1 million tons of coal for 2014 delivery, at prices in the high 20s, helping expand our margins. We also continue to receive inquires from international customers who favor West Elk's quality. But we've chosen to reduce our exposure to the export market, as current net-backs do not provide sufficient return at prevailing seaborne prices.

We all well positioned however, to increase export shipments from our Colorado based mine, as International market fundamentals improve. In the Powder River Basin, we improved our first-quarter cost performance driven by a slight increase in rail shipments and the ongoing success of our cost containment efforts.

As John mentioned, we expect shipments to improve gradually through the back half of the year, which should have a beneficial impact on our cost structure. To-date in July however rail performance doesn’t met our expectations. Given this cautious view of the pace of the recovery in railroad service levels, we’ve elected to modestly reduce our cash costs per ton guidance range for the PRB to reflect the fluidity of the situation and the challenges it has imposed on us and our customers.

We are encouraged, however, by the continued interest from generators, who are trying to replenish their stockpiles this year and want to secure the anticipated deeds for future years. We have signed multiple term agreements with customers, some of which have extended through 2020.

During the quarter we committed around $6 million tons of coal and priced approximately 2 million tons of indexed volumes for 2014 deliveries. These new commitments include a combination of domestic and export sales with a product mix of roughly 70% Black Thunder and 30% Coal Creek, at an average blended price of $12.50 per ton.

For 2015, we locked in a significant portion of our future sales at attractive prices that are meaningfully above current realizations. To date, we have approximately 75% of our volume committed in 2015, based on current run rates. Lastly, I'd like to recognize our employees for another strong performance in our core values. We had six operations and facilities complete the last quarter without a single safety incident or environmental violation.

In addition, both Mount Laurel and Leer reached 365 days without any lost time incidents. I'm proud of the hard work, focus and dedication that our employees exhibit every single day to accomplish our safety and environmental stewardship goals.

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

John T. Drexler

Thanks Paul. Despite the ongoing challenges in the marketplace. Arch is successfully executing a plan that has positioned and continues to position the company well to manage through the downturn. John and Paul have already discussed our operational achievements and continued focus on reducing cost. I’ll spend some time discussing our management of both liquidity and capital expenditures.

As we discussed during our first quarter call, we expected the second quarter to have the heaviest cash outflow for the year, as we made the third of five annual $60 million LBA payments on the South Hilight reserve in the PRB. That capital expenditure, combined with over $100 million in cash payments for our scheduled semiannual interest payments on all of our unsecured bonds, led to the anticipated higher levels of cash outflow in the quarter just ended.

Looking ahead with an excepted stronger operational performance during the remainder of 2014 combined with lower levels of CapEx, we anticipate meaningfully lower levels of cash flow use in the back half of the year. Moreover, we continue to have abundant financial flexibility. We ended the quarter with $1.25 billion of liquidity with $1 billion of that in cash for highly liquid investments.

We have no major financial maintenance covenants until June of 2015. At that time, a relaxed senior secured leverage ratio covenants 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 only to borrowings under the revolver. And we have no meaningful maturities of debt until mid-2018.

We have positioned the company on solid financial footing to provide the flexibility necessary to execute our strategy over the next several years. On the capital front, we continue to prudently manage our capital spending. After adjusting for our second-quarter LBA payment, CapEx spending was just $21 million during the second quarter.

Through June excluding the LBA payment spending was $36 million representing a meaningful reduction from this time last year. While we expect modest increases in the back half of the year, we have been very aggressive in managing our capital needs. Moreover, if coal markets continue to remain weak, we believe that we can sustain our annual capital expenditures around the current guidance levels for several years since we are not running equipment as hard, we have redeployed idled equipment into other operations and reduced current maintenance needs.

We are achieving success in the process improvement initiatives that Paul discussed. And we have no plans for major development projects at this stage of the market cycle. One item to note in our quarterly results. As we continue to manage through challenged export markets, we incurred charges of $11 million in the second quarter, and other operating income on the income statement, related to minimum obligations on various port and rail commitments.

Year to date, we have now incurred charges totaling $23 million. Given the prevailing weak prices in seaborne markets for both thermal and metallurgical coal, we believe that incurring these costs rather than moving coal into oversupplied markets is the right strategy. We will continue to work to mitigate these costs, but absent improvement in those markets, we would expect to incur comparable charges in the second half of 2014. Over the long term, we believe our investments to access the seaborne coal trade will create substantial value for all our stakeholders.

Turning now to our updated expectations for full year 2014, most of which were outlined in our earnings release today. With the ongoing challenges related to shipping in the PRB, we expect cash costs in the range of $10.80 to a $11.10 per ton, representing an increase of $0.10 per ton from our previous guidance. This range contemplates gradual improvement in rail performance over the back half of the year.

In Appalachia, we are reducing our cash cost per ton range. With the successful ongoing ramp-up of the Leer longwall offset by the cost of idling higher-cost production at Cumberland River, we now expect cash costs of $62.50 to $64.50 per ton, a reduction of $1 per ton from our previous range. We are also reducing our cash cost per ton guidance in our bituminous thermal segment. We now expect cash costs in the range of $21 to $23 per ton, a reduction of $2.50 per ton at the midpoint from our previous guidance, as a result of continued strong market interest, combined with excellent operational cost control at our complexes there.

In other financial guidance, we expect our 2014 CapEx range to be between $170 million and $180 million, which includes the $60 million LBA payment for the South Hilight reserves, as discussed. DD&A in the range of $410 million to $430 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 $118 million and $124 million, representing a reduction from our previous guidance as we continue to drive down our overhead costs. And a tax benefit for the year in the range of 20% to 40%.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Neil Mehta from Goldman Sachs. Please go ahead.

Neil Mehta – Goldman Sachs & Co.

Hi, good morning.

John W. Eaves

Good morning, Neil.

John T. Drexler

Good morning, Neil.

Neil Mehta – Goldman Sachs & Co.

Congrats on a great quarter here. As you talk about the rail situation in the PRB, can you give us a little bit more color in terms of what the pace of a recovery is likely to be? And what gives you confidence that this is a temporary logistics issue, as opposed to a structural issue that we might be dealing with for long time?

Paul A. Lang

Neil, I’ll start off with it and see if John wants to add. Yes, starting the Powder River Basin this quarter is effectively the meltdown on rail service to give you a little bit of color – the joint line performance deteriorated Q2 as compared to Q1. The trains per day I think were off all foremost 4% to 54.5 trains. Both shippers struggled but I think this was being a fast worse month since I think about a year and nine months. So they have really struggled and you look at it as compared to the NCTA forecast, which are the volumes our customers normally. The joint line as a whole saw an 80.6% service record, which is pretty low historically compared in Q1 to Q2 be an access drop from 79% to 76%, but also troubling was UP drop from 91% to 85%. Net result I’d say we lost between 4 million and 5 million tons of shipments in the first half of 2014. Obviously the service has been demonstrating to us our customers but it’s also been tough on the rail roads.

John T. Drexler

This is John, let me just follow on what Paul said I mean it had a real impact on our results not only from a volume standpoint, but from a revenue standpoint as well. Certainly the improvement has been a little bit slower than we anticipated that’s why we are building in a gradual improvement in the back half of the year. We’ve got weekly if not daily contact with the major railroads particularly the one that’s been the most challenge, really from the Chairman, CEO on down and I know Paul and I both were talking to them frequently as well as our team.

Your point are we going to a structural change, there has been something’s happen to them that I think it really impacted their performance one would be hauling oil out of the Bakken, grain season, weather congestion in the mid west. And then they had lot of their track fall out and they had to reconstruct a lot of their track. I do believe they are going to fix the problem they have told Paul and time and time again the problem will get fixed they are spending about one of the railroads are spending about $5 billion of capital to bring power and crews back on. It takes time to get those crews trained.

So I guess I feel that it will get resolved, but I think we are going to be late 2014 going into 2015, before we see the results that we’ve like. So it is something that we are frustrated with. We continue to work with them. We’ve went through this before this is about the third time in the last ten years was had a meltdown of railroads and they do tend to get it fixed. Is just a little bit slower than we would like.

Neil Mehta – Goldman Sachs & Co.

And can PRB prices improve until rail service is back to that run rate or more normal levels?

John T. Drexler

Well, I do think it’s put impairment on the pricing this year. We’ve seen that recently and then with the slow start that we had for the summer, natural gas we’ve seen a little pressure, but as Paul indicated we went out and we continue to see a lot of interest 15, 16, 17 in the marketplace that we think are going to be a pretty decent pricing. So, something short-term I think it is having an impact I think the buyers are reluctant to go out and commit any additional volume at least the balance of this year until I can get what that contract it will.

Neil Mehta – Goldman Sachs & Co.

All right, guys. Thanks for the color.

John T. Drexler

Thanks Neil.

Operator

And we’ll take our next question from Mitesh Thakkar from FBR Capital markets. Please go ahead.

Mitesh Thakkar – FBR Capital markets

Good morning, everybody. And good job on the cost. Paul, my first question is, how sustainable is this cost improvement? And part of that, like in the PRB, is sales price-driven. But outside of PRB, how do you feel about Leer ramping up and having a full year potentially next year, versus this year, where they are still ramping up? And its impact on cost as we go forward?

Paul A. Lang

Well. It’s a broad question, Mitesh, but I will dive in. Overall, I think team did a great job lower end cost, obviously that allowed us to drop our guidance in two of the regions. As I said here today we’ve had a lot of success in the process improvement efforts we had and you look structurally around the industry, skilled labor is plentiful. We've got some very strong alliances with our vendors and suppliers. They are filling the pinch also, and they are working with us and together to both improve our situation. I think I’m pretty optimistic about what we can hold going into the future when the market returns. There’s always going to be variability in the commodity of diesel prices.

In general what we’re doing should carry forward even when time is turnaround. Relative to eastern cost, obviously, we are seeing some great results at Leer and I feel very good. You think the second quarter we had some headwinds with Mountain Laurel, we also had few of the other things, slow down but at the same time we are able to drop our cost and really what you are seeing is the benefit of Leer operation coming online. And I would say we are through the ramp – getting through the ramp-up period. It will continue on the next two quarters but feel very good about where we are at.

John T. Drexler

Mitesh, this is John. Just a follow-on the what Paul said, I mean, we made a lot of tough decisions in last 12 to 15 months, we’ve reduced our planning, we have closed coal mines, all those are very, very difficult on the management team but in an effort to refine our portfolio, where we go low cost structure, not only on the thermal side, but on the met side that really sustains us through this difficult market we think it was prudent starting to see the benefit of that and it is really a credit to Paul and his team, how hard they've worked on cost control and management of our capital and you are really starting to see this. I'm confident that we can carry that not only in the back half of the year, but as we move into 2015.

Mitesh Thakkar – FBR Capital Markets

Great. And just a follow-up question. On the 8,400 coal, how is that market holding up? And I know Coal Creek is your only mine which produces that quality of coal. It looks like MSHA as so far as showing that the volume was down dramatically. Is that a conscious decision you guys made? Or is that something we should be looking out for?

Paul A. Lang

Mitesh, just on the Coal Creek data and MSHA I think there's an error in it. Coal Creek, I think ran at a nominal rate to Q1 but having said that we are seeing increased interest in 8,400 versus 8,400 coal. And I think what's been surprising to me is the pricing, the spread has stayed relatively wide since about $2.5.

I think some of this is a result of rail service, where generators who have a choice tend to be taking the 8,800 coal. If they are limited on their deliveries. And I also think there's a little bit of residual of what I've seen in the past and that is when the market gets a little tough, the 8,880 mines tend to cannibalize the 8,400 mines. So, I don't think there's anything structural and I think some of these things will turn around but during the quarter we did place some tons for Coal Creek at prices I thought were pretty attractive.

Mitesh Thakkar – FBR Capital Markets

Was it longer-term coal – like are we seeing a solid pricing in 16/17? Or was it more 14/15 kind of coal?

Paul A. Lang

Mitesh, we sold Coal Creek coal at 15 but the term agreements we've done have been for Black Thunder.

Mitesh Thakkar – FBR Capital Markets

Okay. Perfect. Thank you very much guys. I really appreciate it.

John W. Eaves

Thank you.

Operator

And we’ll take our next question from Lucas Pipes from Brean Capital. Please go ahead.

Lucas Pipes – Brean Capital

Hi, good morning everybody.

Paul A. Lang

Good morning, Lucas.

Lucas Pipes – Brean Capital

So with met coal prices kind of bouncing around here at pretty low levels, I wondered if you could maybe give us a sense on where you are selling? What price levels you are selling your various products?

John W. Eaves

As Paul indicated we sold 700,000 tons or so during the quarter about $77 on a blended basis. I would tell you, with third-quarter benchmark at 120, we are seeing spot kind of we’re around that 112 to 114 range. We are certainly disappointed in the pricing, but we don’t think that this pricing sustainable. When you look at the percentage of suppliers in the seaborne market that are not generating any positive cash that percentage is pretty significant.

You can look around at the independent consultants and pick different numbers, but no matter which one you pick there’s a lot of people that aren't generating cash. We’ve seen about 20 million tons announced in terms of curtailments. We think that will continue as we move through the earnings season into the back half of the year, because people just can’t make it and it’s not only in U.S., we think it is Canada and Australia as well.

Currently, we see about, call it, 25 plus or minus, million tons of oversupply in the market today. We think that as we move into 2015 and you get a full year of these curtailments, that that will have an impact, 2.5% to 3% growth in steel demand will have an impact and you’ll see this balance out. We don't see a whole lot improvement for the balance of this year, but as we move into 2015 there's one thing that we know about met market is they correct, and they often over correct.

And the goal of this management team just to make sure that we have this company positioned, when it does correct that we can capitalize on that and that's what we've been with our met mines. If you look at our portfolio of qualities you look at our cost structure, we think we are in a position on the lower end to the cost curve here in the U.S. it can participate not only in the domestic markets but in the global markets as well.

Lucas Pipes – Brean Capital

I appreciate that. And a direct follow-up on that. You mentioned the industries a lot is below kind of cash breakeven. You've streamlined your portfolio, just actually most recently, with another curtailment. With the mines that you have remaining, would you say that they are all cash flow positive? With the met coal mine specifically

John T. Drexler

Yes, there's no question, Lucas. In the second quarter in our Appalachian segment both are metallurgic and thermal mines are cash positive.

Lucas Pipes – Brean Capital

That’s helpful thank you.

John W. Eaves

Thank you.

Operator

And we’ll take our next question from Brandon Blossman of Tudor, Pickering, Holt. Please go ahead.

Brandon Blossman – Tudor, Pickering, Holt & Co. Securities

Good morning guys, Jennifer.

John W. Eaves

Good morning.

Paul A. Lang

Good morning, Brandon.

Brandon Blossman – Tudor, Pickering, Holt & Co. Securities

Hi, Paul, this is to fill out a question already asked. But Leer continues to ramp. How many quarters until we get to optimal production at Leer and optimal cost structure? And then kind of related, is Leer production ultimately constrained by its capacity, or by market demand, as the current market exists for its product?

Paul A. Lang

Brandon, I got to say the guys have done a great job and pretty well hit all our expectations to date. I’ve been there twice in the last couple of months celebrating really what the guys have gotten done. As you look at the ramp that we laid out, John may argue it was being conservative, but we laid it out as about a 12 months ramp up. And as I noted in my prepared comments we’re going through our first longwall move as we speak and we are finishing it up and got to say that well for the first time from these guys. So if you were to tie it all together I would say we are slightly ahead of where we thought be that I still feel good about things. As far as its cost, it is very cash positive even in this market, so what you are seeing us do is with our portfolio of mines we are culling out they are slowing down in the lower – the higher cost ones, and pushing the lower cost ones pretty well the capacity.

Brandon Blossman – Tudor, Pickering, Holt & Co. Securities

And marketing efforts for that coal successful to date?

Paul A. Lang

No, problems at all with that coal it’s being very widely accepted. And kind of a side note, we've been pleasantly surprised with the as-shipped quality versus what we thought.

Brandon Blossman – Tudor, Pickering, Holt & Co. Securities

And then Next question, John, asset sales, was there any asset sales in the quarter? Asset monetizations?

John W. Eaves

No, we didn’t have any asset sales during the quarter, if you think about what we’ve done over the last 12 months to 15 months. We monetize about $475 million worth of asset. These are assets that were non-core to us executing our strategy. In addition to that we eliminated capital requirements of over $200 million over the next couple of years. So we have look at our portfolio hard. We continue to do that – we’re not only sellers of assets, we’re buyers of assets, we are always looking our portfolio to make sure that it’s consistent with our strategy and that’s something that will continue to do, but in our position we don’t feel like we’re compelled that have to anything unless we get full value for those particular assets.

Brandon Blossman – Tudor, Pickering, Holt & Co. Securities

All right, thank you.

Paul A. Lang

Thank you, Brandon.

Operator

And we’ll take our next question from Caleb Dorfman of Simmons & Company. Please go ahead.

Caleb Dorfman – Simmons & Company

Good morning, gentlemen.

John W. Eaves

Good morning.

John T. Drexler

Good morning, Caleb.

Caleb Dorfman – Simmons & Company

Mr. Paul, you had a nice job at Black Thunder this quarter. It seemed like the rest of the PRB struggled. Was that something specific with the mix of rails that you have at the operation? Or were you doing anything specific which allowed your PRB operations to actually increased their volumes quarter-on-quarter?

Paul A. Lang

I will start off, I appreciate you saying they did well. I was pretty disappointed in what they've done. I think actually we’ve been a little more disproportionately affected by it. If you think about it the majority of the issue has been with the BNSF. And just kind of the quirk of the sales this year we are about 60% or 65% BNSF. So while it is been a tough road, as John said, we spent a lot of time talking to the railroad, a lot of time working on anything we can do improved service.

Caleb Dorfman – Simmons & Company

Then normally, we have a pretty significant step-up in Q3 volumes from Q2 volumes. And you’ve talked about how you think that rail service would get gradually better. Do you think that we will be able to have the same magnitude of a step-up? Or is that just going to be a pretty minor step-up when you look forward?

Paul A. Lang

Caleb, as I mentioned in my prepared comments, we didn’t get after good start in July. So, I’m a little concerned that Q3, probably, if you measure it versus Q2 which is I think a pretty low benchmark, I think you'll see a step-up, but I don't think it’s going to be the magnitude we see in the past.

Caleb Dorfman – Simmons & Company

Thank you.

Operator

And, we’ll take our next question from John Bridges of J.P.Morgan. Please go ahead.

John Bridges – J.P Morgan

Good morning, everybody.

John W. Eaves

Hi, John.

John Bridges – J.P. Morgan

I just wondered, is there a problem with the Leer – sorry, with the Mount Laurel reporting in MSHA, as well, that was a bit weak in the quarter?

John W. Eaves

No, John, I think we continue to see a gradual improvement at the operation. Honestly, I'm a little bit disappointed with where we are. I would say we are running about 85% or 95% what I though would be. All that put together though I still think what I told you last quarter and that is – I think we’re going to be on par to be in that low 2 million to 2.2 million ton production level. It’s going to be a little bit lumpy. We have a long wall move that comes up this quarter. We are thinking this third panel in the districts going to be better conditions from what we've seen on developments. So I’m sticking with the, as I say the 2 to 2.2 range.

John Bridges – J.P. Morgan

So this is geology?

John W. Eaves

Yes, this is all geology.

John Bridges – J.P. Morgan

Okay. And then, you pointed out that you are having a lot of success with West Elk. Where is that going? What customer is getting excited about that coal?

Paul A. Lang

It’s been pretty well across the board, but surprising to us is a lot of the coals moving to west. The answer is pretty simple that where we can beat the dispatch of the coal units in Nevada and Utah. So, as we looked at our – as you recall what we did at the beginning of the year, we thought West Elk was going to run about 4 million tons. This is the second time we’ve raised our production target of the operation and lot of it’s been driven by the gas storage this year.

John W. Eaves

It’s not only on that the utility side, it’s on the industrial side as well and we might get a slight benefit from the rail process in PRB, but it’s all demand really driven out where we see natural gas prices. So, we’re pretty encouraged by what we’re seeing in the back half of this year going into 2015, real turnaround there.

Operator

And our next question comes from Kuni Chen from UBS. Please go ahead.

Kuni Chen – UBS Securities LLC

Hi, good morning folks.

John W. Eaves

Good morning.

Kuni Chen – UBS Securities LLC

I guess just to follow-up on the met market. You talk about the oversupply conditions up versus in the near-term. Others have commented on conference calls, how many more tons need to come out of the market to get back to balance. Would you care to weigh in on that? As far as how many more mines globally we need to see idled?

John T. Drexler

Well, we’ve seen the $20 million and I don’t think we’ve seen the full impact of that until we get to 2015. It’s been kind of sporadic year-to-date. We do think with 2.5% to 3% demand growth, but that would lead somehow, but there is still some additional supply that needs to comes up, I don’t know that I’d put a number to it. But I think it need to be in the U.S., Canada, and Australia all looking at some of their higher cost production and pulling it off. And I think given where the third quarter benchmark it is, where the spot market is that you’re going to see further cuts. I don’t know that I have an exact number to put out there, but we need to see a little bit more in the back half of the year.

Kuni Chen – UBS Securities LLC

Right. Okay. Just as a follow-up, can you guys talk a bit about Illinois Basin? And just your thought process there? There's obviously a big block of reserves. Is that strategic longer-term? Is there a potential to use those reserves as an additional source of liquidity?

John T. Drexler

Let me start out, and Paul can jump in, I mean certainly we got a pretty sizeable position in Illinois, it’s been a position we’re pretty proud of, the Viper mine continues to perform better each quarter in terms of same unit cost control. We’ve been very pleased with our investment in Nighthawk that continues to provide benefits to Arch Coal. And then we have our Lost Prairie reserve, which is a sizable reserve there that's fully permitted and ready to go but given the buy-in that we see coming out of that market. We don’t have any near-term plans to bring that on.

It’s certainly Illinois could represent a core operating region for Arch Coal down the road it’s something that we continue to watch. We are proud of our reserve position there but it’s something that I don’t see it in the near-term. We are always looking at opportunities with our assets it’s something that we continue to look at there. We want to try to get as much a value out of that regions as we can. And certainly pleased with where we are today but always trying to enhance that value. So we are always looking at opportunities that maybe out there.

Paul A. Lang

I would simply add you know we have a long history of operating the Illinois basin that’s we’re a lot of us started our careers with the company. I don’t think people really appreciate the value of the assets we have in Illinois between Viper and Knight Hawk we do about 7 million or 7.5 million tons a year. And they’re all very strong and contributors to cash flow and EBITDA. So I think there is a new growth potential in Illinois. We are going to be careful as John said on opening up any of other mines, but it’s definitely an area where we got a lot of growth potential.

John W. Eaves

Great. I will turn it over. Thanks.

Operator

And our next question comes from Justine Fisher from Goldman Sachs. Please go ahead.

Justine Fisher – Goldman Sachs

Good morning.

John W. Eaves

Good morning.

Paul A. Lang

Good morning, Justine.

Justine Fisher – Goldman Sachs

I think the point about the rail issue is interesting out of the PRB. And it does seem that utilities, per your comments and your competitors' comments, at some point will want to replenish their inventories. But despite the low levels of absolute coal inventories that we've seen, they seem to be managing thus far pretty well. And so I was wondering if you would give us some color as to how they seem to be managing? Are they just more comfortable with lower inventories, given that they were lucky and the summer has been mild? Or are they being better at running plants that don't burn PRB instead of their PRB plants? Or are they blending more filomene? How are utilities able to manage through this? And do you think that they would be able to do that in the future, instead of potentially building inventories?

John W. Eaves

I think a couple of things, Justin is going on I think some of our customers have learned to conserve they probably going to burn some natural gas and its inclusive which is certainly an impact to us. I do think that they’ve gotten somewhat of a break as we started the summer. We’ve had very mild winter, mild summer is that I was coming in this morning on my car, it was low 50. So in St. Louis Missouri in late July, that’s not something we’ve seen a lot of. So that low natural gas prices are given our customers particularly out of the PRB a break. I do think that those inventories are some of the lowest inventories in the country.

I think when they get comfortable with the rail performance that they will not only come out and take the tons that they contracted for, but they will be after replenish their inventories as well. We are seeing that for 2015, 2016 and 2017 with the amount of RFPs that we’ve get on the table currently. So I think these problems gets fixed. I think the utilities are probably are sitting on lower inventories and they like under normalized weather conditions, but I think they have done a decent job and managing that was still a pretty difficult period. Paul?

Paul A. Lang

The only thing I'd add to that, Justine, is we look at these averages, and the averages can be deceiving. We know in several instances where we have customers that they are not on the ground but they’re down to 10, 15, 20 days of inventory. They’re in a really bad situation. So while the averages are there, I think when there is some sense that the railroads are – have got their act back together I think you will see kind of the change in what’s going on. But right now, it has created kind of an implied market that’s oversupplied in under-demand simply because the rail service.

John W. Eaves

And even with the mild summer that we’ve started out with, we still were forecasting inventories, by the end of the summer somewhere between 115 and 120 and they want normalized weather through the fall end up somewhere between 123 million tons and 125 million tons by the end of the year, still well below where we’ve been for many, many years.

Justine Fisher – Goldman Sachs

Okay, thanks. And then just a quick question on those take-or-pay contracts with the ports. Can you remind us how many years those run for?

John T. Drexler

This is John Drexler, we talked about the liquidating damages that we did incur I think we talked about this before those agreements there is a variety of them they do crossover multiple years. It is too early to discuss what our expected impact in 2015 will be as we continue to look at opportunities and how we manage that more markets will be as we move forward. So, I think we’re comfortable and looking at the back half of the year, we’re working very aggressively to mitigate the impact of those I think if you look at what we did in 2013 we’re very successful in minimizing those, we provided our expectation for the reminder for this year, but we’ll continue to work to manage those for the remainder of the year.

Operator

And we’ll take our final question from Brett Levy of Jefferies. Please go ahead.

Brett Levy – Jefferies & Company

Hey, guys. In terms of your bank covenants and your senior secured note covenants, but if you wanted to raise additional cash or availability, what are the constraints right now? And how much could you raise in cash? How much could you sort of increase your bank availability? And how hard would it be to get a waiver to take that number up to an even higher level?

John T. Drexler

This is John Drexler. We have worked very hard over the last several years to position the company to manage through the challenges that we’ve seen in these markets. And we’ve been very successful. And enhancing our liquidity extending maturities and converting all liquidity to that being primarily focused on cash.

As we sit here today, if you look at financial maintenance covenants that we have they really apply only to our undrawn revolving credit facility of the $250 million facility. We have a relaxed senior secured leverage ratio that steps back in mid-next year, we’ll continue to watch markets and see where those developed. But right now we are comfortable as we look forward in where those are.

I guess as we sit here today and specific to your question, you’re asking what additional opportunities are there. I guess first of all we feel with $1.25 billion of liquidity $1 billion of that in cash coming out of was expected to be our heaviest cash out flow quarter with reduction and improvement in net cash flow out flow as we move through the reminder of the year.

That primary restriction on secured additional capacity is a CNTA consolidated net tangible asset limitation which is at 30%. And so if you look at our balance sheet work through the mechanics what you roughly come out to is there is $2.5 billion of secured borrowing capacity. Right now, $1.25 billion of that is – $2.25 billion of that is currently utilized in the secured borrowings that we have in our first and second lien debt. And then the remainder just in kind of looking at in broad terms is available on the undrawn revolving credit facility.

As we have been we will continue to look and manage our liquidity proactively those are the current restrictions I can't get into details on what is viable or not viable in the current market et cetera. But suffice it to say we feel very comfortable with our position and with future opportunities and continue to be able to manage our liquidity aggressively as we move forward if the challenging markets persist.

Brett Levy – Jefferies & Company

Could you issue any more senior secured notes?

John T. Drexler

I mean if you did you’d probably be looking at a situation where you would be bringing down the size of the revolving credit facility.

Operator

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

John W. Eaves

We certainly appreciate your interest in Arch Coal, we want to thank all the employees for their performance during the quarter on safety environmental performance. As a management team will continue to focus on margin expansion, capital management and liquidity. We look forward to updating you on our third quarter results in late October. Thank you very much.

Operator

And this concludes your teleconference. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Arch Coal's (ACI) CEO John Eaves on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts