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Executives

Deck Slone – VP, Government, Investor and Public Affairs

Steve Leer – Chairman and CEO

John Eaves – President and COO

John Drexler – SVP and CFO

Analysts

Brian Gamble – Simmons & Company

Shneur Gershuni – UBS

Paul Forward – Stifel Nicolaus

Mitesh Thakkar – FBR Capital Markets

Michael Dudas - Sterne, Agee & Leach

Holly Stewart – Howard Weil

Mark Levin – BB&T Capital Markets

Andre Benjamin – Goldman Sachs Group

Lucas Pipes – Brean Murray, Carret & Co.

Brian Yu – Citigroup, Inc

Brandon Blossman – Tudor, Pickering, Holt & Co.

Meredith Bandy – BMO Capital Markets

Richard Garchetorina – Credit Suisse First Boston

Lance Ettus – Tuohy Brothers

Brett Levy – Jefferies & Company

David Katz – JP Morgan

Justine Fisher – Goldman Sachs

Arch Coal, Inc. (ACI) Q3 2011 Earnings Conference Call October 28, 2011 11:00 AM ET

Operator

Good day, everyone, and welcome to the Arch Coal Incorporated Third Quarter 2011 Earnings Release Conference Call. Today’s call is being recorded.

And at this time, I would like to turn the call over to Mr. Deck Slone, Vice President of Government, Investor and Public Affairs. Please go ahead, sir.

Deck Slone

Good morning, and thanks for joining us. 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 pursuant 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 Securities and Exchange Commission 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 Investors section of our website at archcoal.com.

On the call this morning, we have Steve Leer, Arch’s Chairman and Chief Executive Officer; John Eaves, Arch’s President and Chief Operating Officer; and John Drexler, our Senior VP and CFO. Steve, John and John will begin the call with some brief formal remarks, and thereafter we’ll be happy to take your questions. Steve?

Steve Leer

Thank you, Deck, and good morning. In the third quarter of 2011, Arch reported adjusted earnings per share of $0.08 and record $211 million in EBITDA. Quarterly revenues reached $1.2 billion and EBITDA grew year-over-year even with lower PRB shipment and a longwall outage in Appalachia.

Year-to-date we have also generated record free cash flow, a combination of incremental earnings and prudent capital spending. While our quarterly performance and revised full-year earnings guidance are below our second quarter expectations and projections, we remain on track to deliver the best year yet for Arch. In particular and as previously announced, our third quarter performance reflects lower PRB shipments on rail disruptions due to flooding, as you know, our second quarter shipments in that region were affected, and this issue continued into September, impacting plant volumes.

However, we’re seeing a recovery in October and expect to end the year with a strong fourth quarter performance at our PRB operations. In addition, we experienced difficult geology and a longwall outage at Mountain Laurel during the third quarter that reduced our sales of met coal and raised our quarterly cost in the region.

To remind everyone, Mountain Laurel re-entered the final panel of the Alma seam in August. This is the same panel that costs us an outage in the first quarter. The final panel are two of any coal seam often represents the most challenging job geology of a coal mine, and this is proving to be the case at Mountain Laurel. As such, we produced our met coal volume expectation for the full year largely due to lower high-vol B sales out of Mount Laurel.

At the same time, we expect Mountain Laurel to transition our SS time. We expect Mountain Laurel to transition to the Cedar Grove theme in mid-first quarter of 2012. We also believe that the Cedar Grove seam will have a stronger met properties in the Alma seam and the mining conditions in the Cedar Grove will be significantly better than what we’ve encountered during 2011. Our Cedar Grove is a moderately thinner seam than the Alma seam.

Overall, Mountain Laurel has been a star performer for Arch since it opened in the fourth quarter of 2007 and we expect it to continue to be a major contributor to the company’s future profitabilities throughout the current decade and beyond. More importantly, Arch have significantly expanded our met mine profile in Appalachia, while diversifying our sources of supply, with the addition of the high-quality ICG met coal assets.

By mid-2013, Arch will have an even more powerful portfolio of met coal operations in Appalachia, anchored by low cost longwall mines at Tygart Valley and Mountain Laurel and exceptional continuous miner operations at Beckley and Sentinel. These four cornerstone operations will be further supported by met production from Vindex, Cumberland River, Buckhannon and Lone Mountain.

We are also moving forward aggressively with planning work on a second longwall mine at the Tygart Valley number two high-vol A reserve now called Shelby Run with the goal of starting up that operation towards the end of our five-year time horizon. We are also strong believers not only in the continued demand for met coal in the developing world, but also in the scarcity of high-quality met coal supply. While there will be an inevitable volatility, we believe increased demand and constrained supply will be the prevailing factors in the met coal markets over the next five years, and we’re preparing to capitalize on that trend.

Turning to current state of the global met coal markets, we continue to see a very constructive environment. In fact, domestic steel utilization has averaged at above 75% since July. Remember that utilization dipped below 40% at the depths of the recession of 2009. On a global scale, year-to-date steel production has increased 8% through September and capacity utilization has risen to 79%.

That being said, steel production in China slowed in September due to consolidation efforts and some slowdown in end-user demand. But the month-over-month reduction in Chinese steel output was offset by a rebound in European steel sector, even with some announced mill idling there. So we are cautiously optimistic about the near-term and believe met coal markets will remain relatively tight.

Although we expect some easing from the record price level set earlier this year, our guidance also reflects and assumed a modest weakening in demand for lower quality met coal, driven by the economic uncertainty in Europe.

The outlook for global thermal markets remains positive despite the overhang of the European debt crisis and the recent decline in ARA prices. We anticipate growing coal demand in Western and Eastern Europe in 2012, a function of higher natural gases, German nuclear plant shutdowns, destocking, and reduced supply availability from traditional sources. In fact, while over 78% of South African exports have been diverted from the Atlantic to the Asian-Pacific to date, we anticipate that Asia could capture 90% or more of South African output over the next five years.

Coal demand in Asia remained strong, helped by the return of Japan to the market place, a pickup of other Southeast Asian nations, and continued growth in China. According to industry estimates, met coal imports into the Chinese mainland will reach at least 150 million metric tons in 2011. Furthermore, despite the talk of Indian price sensitivity, we still believe that the country will import 30% more coal than it did in 2010, and we haven’t even mentioned Central and South America, and, specifically, Brazil, where a doubling of coal import is expected by 2015.

These estimates suggest to us that the opportunities to export US coal overseas will accelerate. While Australia and Indonesia will remain the powerhouses in the met and thermal coal trade, there is no reason why the US can’t displace Russia as the third largest player in the international coal market place, particularly as port capacity is expanded and built in this country.

At Arch, we’ve already have a strong export capacity in place and we will continue to work on further expanding that capacity as opportunities develop.

In the domestic coal markets, we also see meaningful opportunities to capitalize here at home. With the new Cross-State Air Pollution Rule and assumed to be finalized Map Rule, it seems clear that low-sulfur and low-chlorine coals will be advantaged. We’re seeing now that with growing interest – or we’re seeing that now with growing interest in sales of our ultra-low-sulfur product out of Black Thunder. The anticipated increase in demand domestically for PRB coal coupled with export potential of this coal should allow us to unlock additional value from our PRB asset.

Of course, these rules have a downside for the coal markets and for energy, affordability, reliability of supply. We expect these new emission rules to fork older coal plants into early retirement and currently believe that 35 gigawatts of coal capacity could be at risk for closure over the next decade, impacting coal demand by some 40 million tons or so.

In addition, some incremental coal consumption could be lost to natural gas over time, although our analysis shows that this displacement is likely to remain in the 30 to 40 million ton range in the near to intermediate term, and that most of that displacement is already occurring.

It’s also important to remember that there are significant offsets to these assumptions. First, some loss of coal consumption related to the retirement of coal units that’s likely to be offset by increased utilization at the remaining coal plants. Second, without a massive build-out, the new gas-fired capacity or transmission line, it seems reasonable that the market share loss in natural gas will be tapped. Third, as I’ve noted, we’ve projected a significant step-up in coal exports. And fourth, which grants us, is more Arch specific, we see continued switching to low-sulfur, low-chlorine PRB coals over time.

These demand offsets coupled with decline in production in the mature coal supplier regions, like Central Appalachia and the Western Bituminous region, suggest that domestic coal market will be balanced or even, perhaps, undersupplied in the future.

On that note, I will turn the call over to our president and COO, John Eaves to discuss the steps we’re taking from here and the company’s perspective to capitalize on the trends discussed. John?

John Eaves

Thanks, Steve. First, I’d like to extend my deepest sympathies to the family of Charles Hall, the miner who was fatally injured at our Mount Laurel operation in August while assisting in a longwall equipment move. As fellow co-workers, we are saddened by the loss and more determined and ever to strive for our ultimate goal of zero safety incidents at each operation every single year.

Next, I’d like to touch on our met sales efforts. During the quarter, we shift 2.1 million tons of met coal even with Mount Laurel being down 45 days. However, given the Mount Laurel outage and its impact on inventories, we’ve revised down our met sales for the full year 2011.

Pricing on our met shipments this past quarter was strong, averaging $126 per ton across our blended met portfolio, high quality lowball coal such as Beckley coal and high-vol A coal such as Sentinel, remains scarce in the market place, while lower quality high-vol coal price has drifted down recently in the face of global economic uncertainty.

Yet, we continue to place met volumes in 2012 at attractive price levels and, as Steve pointed out, believe met markets will remain tight in 2012. As for export sales, we continue to pursue opportunities off the East and West Coast and via the Gulf. We have recently shift PRB coal to Europe via the Gulf and to China through Ridley in Canada, underscoring that the US is becoming a strategic supplier in the seaborne markets.

We are also building our success in sending Western Bit coal overseas, which is particularly important given the domestic market weakness in that region. We see increased interest from abroad in this bituminous low-sulfur coal and are exploring creative ways to liberate more of that coal in the seaborne market.

In Appalachia, we have shipped thermal coal through DTA as ARA prices have supported that move until very recently. However, the first priority for our port space on the East Coast remains moving met coal and we’ve exported about 60% of our total met volumes year-to-date.

Also in recent months, Arch has added to its management strength and sales marketing and business development areas, with a clear focus on supporting and elevating our activities in the global coal market place. This year, we opened an office in Singapore and are planning to open an office in London in early 2012. In this way, we are seeking to expand relationships with international customers as well as better understand the Asia-Pacific and Atlantic basin dynamics, market intelligence and, eventually, trading perspective.

On a domestic front, thermal pricing for bituminous coal remains muted, a function of flat demand load, competition from hydro and natural gas and weak industrial pull. However, we are seeing real demand for our PRB coal, which is benefiting from the rebuilding efforts by PRB-served generators that have seen their stockpiles dipped below normal and from interest in ultra-low-sulfur coal associated with the Cross-State Rule.

Since our last update, we priced tins in the PRB for annual delivery in 2012 through 2014 at attractive price levels and in the case of ultra-low-sulfur at meaningful premiums to prevailing benchmark. In the Western Bit and Appalachian markets, we placed some volume in the domestic and export markets where we felt we can earn a sufficient return. Also to note that 2013 commitments included in the press release reflect legacy ICG contracts in Appalachia.

Looking ahead, we remain committed to following a market-driven strategy and we’ll take steps across our mine portfolio to optimize sourcing and to match our production levels to future market requirements.

Now let’s review our third quarter operating performance by region relative to the second quarter. In the PRB, operating cost per ton declined quarter-over-quarter on lower maintenance expense as Black Thunder had a major dragline repair during the second quarter. PRB operating margins expanded slightly in the most recent quarter and we expect an even stronger performance in the fourth quarter.

In Western Bit, we had two longwall moves in the third quarter versus one move in the second quarter. The third quarter moves were West Elk and Sufco, Arch’s largest and lowest-cost mines in that region and does have a disproportionate impact on quarterly volumes and cost. However, our Western Bit segment had a solid third quarter operating performance versus record second quarter performance, despite sluggish demand in that region.

In Appalachia, third quarter prices declined on a larger mix of thermal shipments, which outweighed higher met pricing on met sales. In addition, costs were insulated due to the longwall outage in Mountain Laurel which cost a 40% jump in that mine’s cash cost quarter-over-quarter. Total cost in App also rose given the full quarter’s contribution to the former ICG mines, which have a higher cost base in Arch’s mines. Of course, it’s important to point out that those ICG mines are still very competitive in a region that has seen escalating mining and regulatory cost over the past few years.

We have now essentially finalized the integration of ICG and continued to work on bringing those $110 million of synergies to the bottom line while pulling forward cash flows particularly via the acceleration of Tygart Valley’s longwall startup to mid-2013. We’re also in the process of upgrading the preparation plans at Beckley and Sentinel, both of which turned in strong operating performances in the third quarter.

Looking ahead, our focus now turns towards maximizing the operating performance of our entire asset base. This would include prioritizing cost containment efforts, prudently allocating capital and right-sizing operations to measure estimates of current market demand. These efforts should further improve our profitability as we move forward.

With that, I will now turn the call over to John Drexler, our CFO. John?

John Drexler

Thank you, John. Even with some of the operating and market challenges that Steve and John discussed in their prepared remarks, it’s important to note that Arch continues to generate substantial free cash flow, pay down debt and further shore up its balance sheet in the third quarter. In fact, we paid down $316 million of debt during the quarter, some of it with restricted cash and grew our cash balance by $76 million.

At September 30th, our net debt to cap position of 51% is a slight improvement over the last quarter and our liquidity continues to be strong with over $1.1 billion from existing cash and borrowings under the revolving credit facility. As a reminder, the financial results for the three months ended September 30th include a full quarter of legacy ICG operating results.

In the quarter just ended, we incurred a nominal amount of ICG transaction related cost. These costs include incremental severance cost, miscellaneous transition expenses and a non-cash charge from the write-up of acquired coal inventories to fair value. We have excluded those costs from our adjusted EBITDA and EPS calculations to better reflect results from our continuing operations. We also continue to work on allocating the purchase price to ICG’s assets and liabilities.

We have made some changes this past quarter, including the aforementioned inventory adjustment and an adjustment to the next liability related to acquired sales contracts. We currently expect to finalize the purchase price allocation in the fourth quarter. At that time, we expect some adjustments will be made to the value of the acquired property, equipment and coal reserves. These changes will affect non-cash charges such as depreciation, depletion, and amortization, but will not affect EBITDA.

For the remainder of 2011, we project strong free cash flow due to an expected solid fourth quarter operating performance as well as reduced plan capital spend versus what was previously forecasted. In particular, we’re finding ways to reduce our defer as we continue to unlock value from the ICG transaction and we’re focused on a prudent allocation of our total capital needs in response to current market conditions.

With that, let me now discuss our outlook for 2011. We expect the following – total sales volumes including brokerage tons to be in the range of 157 to 160 million tons, EBITDA in the range of $900 million to $1 billion, adjusted earnings of $1 to $1.40 per share. The adjusted EPS range excludes an expected $34 million or $0.11 per share of non-cash intangible asset income related to sales contract amortization.

As a reminder, adjustment to purchase accounting that we expect in the fourth quarter will affect EPS, but not EBITDA. Moreover, our full-year EPS guidance is based on a count of $191 million shares, which we estimate will be the average for the year. Please keep in mind that the fourth quarter EPS will be based on the average count for the fourth quarter of approximately $212 million.

DD&A excluding sales contract amortization in the range of $449 million to $465 million. Capital expenditures excluding acquisition and new reserve additions of $390 million to $410 million. Our next CapEx range is $100 million lower than our previous forecast. And, an effective tax rate between 5% and 9%.

With our diverse low-cost portfolio of steam and met operations, we are confident that we have positioned the company well to excel throughout the full market cycle.

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

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator instruction) And we’ll go first to Brian Gamble with Simmons & Company.

Brian Gamble – Simmons & Company

Good morning, guys.

Steve Leer

Good morning, Brian.

Brian Gamble – Simmons & Company

Everybody has adequate amount of coffee this morning after last night?

Steve Leer

It was a late night, but with great outcome.

Brian Gamble – Simmons & Company

Yes, I know we’re on opposite side of that. So we’ll just leave it at that. How about that? My biggest question, I guess, has to do with the cost in Central App. John, I was hoping you might be able to break out the portion of the cost created directly related to Mountain Laurel versus that of the inclusion of ICO just to get a better feel for what a more normalized cost structure will look like going forward.

John Eaves

Sure. Brian, with Mount Laurel’s longwall down 45 days, clearly, it had an impact on our cost and I would tell you it was probably well over half of the cost impact that was driven by Mountain Laurel. As we said, we brought on the ICG mine’s third quarter. Those are higher cost mines than what Arch has, but clearly very competitive mines in the Central Appalachian. So that would be kind of driving the balance of that.

As we move forward, with Mountain Laurel back running now, we would expect a pretty good step down in that as we move into fourth quarter.

Brian Gamble – Simmons & Company

John, I think you might have mentioned last quarter that you were hopeful to keep cost in Central App under 70 bucks for 2012. Do you still think that has potential?

John Eaves

Brian, it’s a little bit early. We’re kind of in our planning stage right now for budgets. In fact, we’ve got budget meetings in the next two weeks and I kind of want to look at the numbers and see how we move forward. I mean we’re going to do everything we can to manage our cost.

But you’re well aware of the challenges in Central App and the things we face. But clearly, we’re focused, and hopefully we can update you on that at our next call.

Operator

Thank you. We’ll take our next question from Shneur Gershuni with UBS.

Shneur Gershuni – UBS

Hi.

John Drexler

Hi, Shneur.

Steve Leer

Hi, Shneur.

Shneur Gershuni – UBS

First question. You have some positive contracting data with respect to the PRB. You did mention about inventories in the prepared remarks. Is it specifically related to the drawdown of inventories? Obviously, they’re way down from where they were. Were some of it CSAPR related at all?

Steve Leer

I think it’s both, Shneur. Clearly, when you look at the heat of summer and then the performance of the rails due to the flooding, the stop outs were drawn down and they’re below the five-year average in traditional PRB market. So you’re seeing some recovery of that both on stock purchases and in make-up of contracts.

But we have made and we’ve often said or at least in the last year, we’ve said that we were reading the preliminary proposals of these rules that appeared to us and was a rule that would cause some utilities or perhaps a lot of utilities to switch to PRB over time. And clearly now, we have actually made sales under that both the one-year to three-year term type sales and of some significant tonnages.

So it’s still every customer is primed to wrestle with CSAPR or the Cross-State Air Pollution Rules. It’s almost (inaudible) by unit. I described it to someone the other day. It started as a trickle, it widened into a stream, and it may not be raging river yet, but it looks like it may have that way.

Shneur Gershuni – UBS

Okay, great. A follow-up question on your comments about Mountain Laurel. I understand that you’re in the last part of the panel there and there’s always some difficult challenges and so forth. Have you done any development work on the next section? And can you speak to the risk control if there’s going to be any issues there or anything that you’ve seen in your early development work?

John Eaves

Yes, Shneur. Certainly, it’s been a challenging panel. It is our last panel in the Alma and, quite frankly, we’re ready to get out of it and move forward. We are excited about moving in the Cedar Grove. We expect to do that mid first quarter. It is going to be a little bit longer move just because we’re moving to a different section.

Steve indicated in his comments the quality is an improvement from what we’ve seen in the Alma, and clearly, the conditions, although the seam a little bit thinner, is going to be much better than we’ve anticipated in the last couple of panels in the Alma. Any time you’re finishing up your last few panel in a section, it’s always a challenge. And this has proved to be that, and we’re ready to move on.

So we’re excited about getting to Cedar Grove and then put in good results to the board there. I mean Mount Laurel has been a star performer for a long, long time and we would expect it to be continue to be a good performer in our overall met supply over the next several years. So we’re excited about it, have had a few challenges.

We’re going to watch it for the balance of the year. It currently is running recently well. I think it’s a day-to-day thing that we continue to monitor, but we continue to be excited about the opportunities we see in the Cedar Grove.

Operator

Thank you. And with our next question, we’ll go Paul Forward with Stifel Nicolaus.

Paul Forward – Stifel Nicolaus

Yeah, thanks. Good morning.

John Eaves

Good morning, Paul.

Paul Forward – Stifel Nicolaus

Just a follow-up on that question on Mount Laurel. It’s been doing kind of over the last three years maybe a little over 4 million tons a year. I’m just wondering when you talk about thinner Cedar Grove seam, you get a higher quality out of it, maybe a little bit higher price. But is it still a 4 million ton per year mine going forward in Cedar Grove?

Steve Leer

Paul, as I indicated earlier, we’re in kind of the planning stages right now and budget meetings, but I would think in that 3.5 million ton range is probably a reasonable range right now to kind of plan. We’ll see how it goes, but I think mid-threes it’s probably a pretty good volume as you think about 2012. And I’ll update you more on that in the call in January.

Paul Forward – Stifel Nicolaus

Thanks. And I know you’re still budgeting and everything as far as capital for 2012. I’m just curious. I think the number is just back into this quarter, $108 million or so of CapEx and your guidance which was lower would imply a step-up in CapEx pretty sharply to kind of 180 plus CapEx in the fourth quarter. I’m just wondering. As you look at 2012, you’ve got some heavy spending going on and an accelerated time table on the Tygart longwall development, can we think directionally in terms of kind of up or down from that fourth quarter level where you can anticipate capital spending throughout 2012?

John Eaves

I think it’s a little early to say. Again, getting back to the old budgeting process, I mean, I’d rather take some time to look through the numbers. I think the gas have done a great job this year in managing their capital if you look the $100 million reduction. It’s something we’ve been managing all year. And then when we put the ICG assets with Arch, we sell some additional opportunities to reduce that capital.

I think there’ll continue to be opportunities we see moving into 2012. As we said, we’re going to match our production to the market and we’re going to let the capital kind of drive that. And I think we’re not going to pull back on Tygart. We continue to strength in the met markets going forward. That will clearly be a focus point.

And I think we’ll continue to evaluate the Easter thermal market. We haven’t seen any real demand there. We will continue to match our production with the demand we see there. Clearly excited about what we’re seeing in the PRB, not only with the generic product, but with the ultra-low-sulfur. That and the met, I think, are very encouraging.

As we look at Western Bit, I will tell you that we’re not seeing a lot of improvement in the domestic demand there. We are encouraged by what we’re seeing in terms of the international market in Western Bit. We’re going to see somewhere around 1.5 million tons there of exports this year and hope to grow that to over 2 million tons next year.

So I think all those things as we think about them in the ‘12 will help us make the capital decisions that we need to make.

Paul Forward – Stifel Nicolaus

Okay, thank you.

Operator

We’ll take our next question from Mitesh Thakkar with FBR Capital Markets.

Mitesh Thakkar – FBR Capital Markets

Good morning, gentlemen.

John Eaves

Good morning, Mitesh.

Mitesh Thakkar – FBR Capital Markets

So, can you walk us through the bridge in terms of your met goal production capacity? If you were to take 7.5 to 8 million ton guidance for 2011, I know there would be a performing number which will be getting added for Arch Coal, but how should think about your methodological coal capacity right now and outside of Tygart which I think as part of your 2015 plan of getting 15 million tons?

John Eaves

Yes. Clearly, Mountain Laurel had a big impact on our met volume this quarter and will impact the overall volume for the year, i.e. the 7.5 to 8 million tons. But as we plan towards next year, again, we’re in the budgeting process and we feel very strongly that the 10.5 to 11 million ton range for next year is very supportable. We continue to build out our met supply. The guys are doing a great job in expansion projects. I mentioned the Beckley and the Sentinel plan expansion. Those are going well.

We’ll bring those volumes to bear going in to next year. And then as we move out over the next year – a couple of years, we talked about 15 by 15 and we think that’s very achievable as moved up to Tygart longwall six months to mid 2013. We’ve got some other very exciting projects that we continue to look at that we’ve gotten more excited as we close on that transaction and we think we can bring those volumes in quicker than maybe we originally thought. So, as we finish these planning cycle over the next few weeks, I think we can update you at the next call on kind of what that met outlay looks like. But we’re very encouraged about what we’re seeing from 2011 to 2014, 2015 in the met volumes.

Mitesh Thakkar – FBR Capital Markets

Great. And one last question on the same – on volumes with Powder River Basin. How much volume impact you think happen for Powder River Basin due to the (inaudible) flooding if you were to put a number on it?

Steve Leer

Mitesh, this is Steve. For just Arch, it’s a little bit difficult to some of the customers were in different spots. But we would anticipate the total impact was over 4.5 million tons.

Mitesh Thakkar – FBR Capital Markets

This is for Arch or..

Steve Leer

Yes. I don’t know of – we could probably estimate at – it’s impacted of the 8,800 mines more than the 8,400 mines simply because the kind of a concentric circles of where 88 regions versus 84, the floods were in between the 88 and 8,400 customers. And then for anybody shipping kind of to the West or to the North, they didn’t get impacted by the flood as much. So, we’d have to sit on and really look at it, but we did look at simply our shipment.

Mitesh Thakkar – FBR Capital Markets

Great. Thank you, guys. This is great (inaudible).

Steve Leer

Thanks.

Operator

Thank you. We’ll go next to Michael Dudas form Sterne, Agee.

Michael Dudas - Sterne, Agee & Leach

Good morning, gentlemen.

John Eaves

Hi, Michael.

Michael Dudas - Sterne, Agee & Leach

To John or Steve. In your prepared remarks, you talked about obviously I think the market is anticipating a lower – higher discount for the lower quality versus good quality coals. As you have taken the ICG assets and got know them from a marketing and operational perspective and what you have on the lower quality (inaudible) are there any issues on volume or inquiries from your domestic to international customers? Or is it just the uncertainly becoming a price but the volume opportunities for you still to be pretty solid moving into 2012?

John Eaves

Yes, Michael, this is John. We continue to be encouraged about what we’re seeing certainly with the qualities we’ve found and the combination of those qualities with Arch has I think makes it a pretty powerful portfolio. The guys are in negotiations right now for some of our domestic business next year. I think they’re encouraged about what they’re seeing. The international markets, yeah, we’ve some softening in the high-vol B products.

I think I indicated about a $126 this past quarter average pricing and that was obviously mostly high-vol B and some PCI. But clearly the low-vol products that we got form ICG, the high-vol As, we think, are going to command a real premium in the market place. I think when you look at Beckley and you compare Beckley to some of the other low-vol coals around the world, we’ve been very pleased when you do a side-by-side and how they look in the international market place. So, I think they’re going to be high demand US and international market place.

And then, as we build out the Tygart production, that’s additional high-vol A that we’re adding to the overall mix, which is going to command a real premium versus what we’re used to with our high-vol Bs. So, we’re absolutely very pleased with what we’ve seen, really, no surprises from a quality standpoint, from a volume standpoint. We’re obviously disappointed we had the issue of Mount Laurel with the quarter but we’re working through it. We’re going to move forward.

Steve Leer

I think it’s important to know that John touched on it there is that we marched from the 7.5, 8 million tons of met coal sales this year towards that 15 and beyond that 15 million ton number, it’s really additional high-vol A, low-vol type coal, so the higher quality metallurgical coal. So that shift in next becomes as significant as the shift in overall (inaudible) increase and overall volume.

So, it looks extraordinarily good. And then as I mentioned, the team is already planning the next or the additional longwall in the Tygart reserves. It’ll become a major, major high-vol A source of some of the best coal in the United States and the world.

Michael Dudas - Sterne, Agee & Leach

And I think that’s important to highlight, I appreciate that. My second question for Steve, you mentioned in your prepared remarks, the ability for regulatory-driven demand for low-sulfur, low-chlorine type coal. So, maybe you could talk a little bit about how you see Illinois Basin fairing with what’s happening from a regulatory standpoint. And if the demand accept so much for PRB and then you start to hit the West Coast opportunities, is there a view or a plan that you have that you could actually add more tonnage to the market place if those demand grow somehow? Thank you.

Steve Leer

Sure. As we look at Illinois Basin and Arch obviously has a large – there are very large reserve base there. We have our joint venture with Nighthawk plus we just permitted a coal mine there. Our deal with Illinois instead of entering the exports market very well, it’s moving into some of the scrub markets here in the United States.

If someone has a scrubber, I think they would continue to be able utilize Illinois Basin coals. But we see some of the regulatory environment as the EPA really pushing to move to the ultra-low-sulfur and the very low-chlorine type coals out of the PRB, as they try meet (inaudible) and they try to meet the acid gases, they really plan their compliance for CSAPR.

I don’t see that fundamentally changing the moving forward and from a US domestic position. And we talked to our customers and John and I have spent a lot of time at the time of the C sweet level, talking to the folks along with our normal sales contacts. And so everybody is concerned about CSAPR. They’re wrestling with the compliance option unit by unit, but the general theme is that if this goes forward as currently envisioned, that’s probably a push to PRB over time.

You’ve seen some customers already make those moves. As we look at supply sources in the PRB, Arch does have some abilities. I presume others might have some mobilities. But all of us, if you look at the load out, one of the great positions that Black Thunder has we have three load outs. We can make mix and match our sulfur precisely to what the customers need. If they need our 1 to 0.8 sulfur, we can give it them. If they want a 0.6 sulfur, we can give it them. If they want 0.55 sulfur, we can give it to them, and we can develop with those three load outs really unique capacity that I think is unmatched.

Adding equipment in the basin is not as easy as people think at the moment. Obviously, there’s a – everybody has thought about it, thinking about it. But I think when you look at the lead time for shovels, that’s up around two years, trucks are approaching two years. And right now, I think people are really focused on, well, let’s let the CSAPR uncertainty clear out and form a little better and a get greater understanding, maybe getting to that raging river concept for – certainly I can only speak for Arch, but before they start making commitment and have longer term in nature.

Michael Dudas - Sterne, Agee & Leach

Thank you, Steve. Have fun tonight.

Steve Leer

All right. It’ll be a great time.

Operator

And we’ll take our next question from Jim Rowson with Raymond James.

Jim Rowson - Raymond James

Hey, good morning guys.

Steve Leer

Good morning, Jim.

Jim Rowson - Raymond James

Maybe switching to Western Bituminous for a minute. You had a couple of longwall loss in the quarter. Obviously your cost went up quite a bit. Curious kind of longwall schedule going forward and do you think that kind of comes back down into the $26 to $27 range.

John Eaves

Jim, this is John. Yes, I think the real impact during third quarter that the two longwall moves hit us to our lowest cost mines and certainly had an impact on the cost. To be honest with you, we got two moves in the fourth quarter. They had to bid our higher cost mines. So, I think you’re going to see a quarter-over-quarter improvement in our cost.

Going forward into ’12, I would really like to get through the budgeting process to see where our costs shake out. We got to do everything that we can to manage our cost effectively out there. I will say again, we’re very concern about the US market in Western Bit.

We’re not seeing any real demand for that product and thank goodness that we’ve seen the step-up in the international market. We’re going to try to exploit that market whether it’d be the East Coast or the Gulf to South America, Europe or off to West Coast in the Asian markets. And we’re certainly encouraged about what we’re seeing in there, but we’ve got to see some improvements in the US markets in Western Bit to really feel a little bit better by that region. So, let me come back to you in the January after we finish the budget process and I’ll give you a better number on the cost side.

Jim Rowson - Raymond James

Okay. That’s helpful. And maybe one for John. SG&A didn’t do a whole lot of movement. It went up over 10% sequentially, but given that you had a full quarter with ICO in there, I guess I would have thought that would have gone up a little bit more. What do you think that going forward run rate looks like?

John Drexler

Jim, this is John Drexler. And yes, we did see a modest step up in the SG&A and as we’ve advertise throughout the IPG transaction, we were going to be very focused on synergy opportunity along operations marketing and along the SG&A line. So, we’ve been very focus on that. I feel that we were able to bring a lot of that through the bottom line. We’ll see a modest step up in SG&A, but I think the SG&A that we see this quarter is a reflection of kind of an ongoing rate that we would expect moving forward.

Jim Rowson - Raymond James

Very helpful. Thank you.

Operator

Thank you. We go next to Holly Stewart with Howard Weil.

Holly Stewart – Howard Weil

Good morning, gentlemen.

John Eaves

Hi, Holly.

Holly Stewart – Howard Weil

Two questions for you. One, you talked about record export shipments in 2011. Can you give us what those volumes are going to be and then break that out between met and thermal?

John Eaves

Holly, this is John. Yes, we should export between 7, 7.5 million tons for the year. We hope to step that up pretty significantly as we move into ’12. We have exported about 5.5 million tons to date. About 60% of that is met. The balance would be steam. We continue to look at opportunities on both of those products as we look at the international market.

So, really not seeing anything that would discourage us from additional volumes going to international market. We’re forecasting as a company about a 106 million tons going into international market in 2011 and a step-up to probably plus a 120 million tons in 2012.

So that continues to be a market that we think it’s going to grow. We think that capacity is in place right now to do that. We think they’ll continue to be expansions in capacity whether it’s on the East Coast or the Gulf and the West Coast. So, obviously with our opening of a Singapore office, opening up a London office, it’s a market that we’re going spend a lot more time on as a company and in our marketing team.

Holly Stewart – Howard Weil

Great. And then for my follow, you mentioned Black Thunder in your comments of about the lower-sulfur product. This is obviously your largest mine by far. What are you doing at Black Thunder to sort of separate this ultra-low-sulfur product out to have it sold at a premium?

Steve Leer

All right. Steve. Black Thunder we have three major load out Black Thunder and we’ve basically designated one as, I’ll call it, the 0.8 generic product and the others are ultra-low-sulfur. And again, Black Thunder has the capability to kind of blend in the sulfur to whatever requirements the customer has. Part of the mine does have a – right at the top of the scene, a little higher sulfur about 10 feet or so in it.

And that really gives us our ability to blend and match. So, what we’re finding in the market place right now is, customers love that we can talk through them about a total mix of the sulfur. And then, as the mine goes west, which it really progressively does, you’re seeing Black Thunder BTUs go up, you’re seeing the sulfur go down. So, all things are trending the right way there.

Holly Stewart – Howard Weil

Got it. I appreciate the color.

Operator

Thank you. We’ll take our next question from Mark Levin with BB&T Capital Markets.

Mark Levin – BB&T Capital Markets

Thanks, gentlemen. A couple of quick questions maybe on the balance sheet first. And you kind of look at sort of debt-to-EBITDA levels at the end of this quarter and where you think you can get them maybe by the end of next year, and then, in the context of capital spending next year, should we think of – or cash outflows next year, should we think about LBAs next year and what’s up and interesting in 2012 for you guys?

John Drexler

Mark, this is John Drexler. As far as debt-to-EBITDA levels and projecting asset 2012, as John Eaves has indicated, we’re kind of deep into the budget process and cycle now. So I don’t want to speculate on where we’re going to be at the end of next year. But as we we’ve indicated over the last several calls, we expect to generate meaningful free cash flow post the ICG transaction.

Despite some volatility we’ve seen here this quarter for the remainder of ’11, I think it’s a testament to the portfolio of assets we’ve had and even despite that with the reduction in capital spend that we still see meaningful free cash flows as we move forward. So, our focus hasn’t changed and we’ll continue to work on delevering the balance sheet here in the near term.

From an LBA perspective – yes, there are LBAs that are coming up and that are due here. But from the perspective of, can we really comment on those LBAs or not? But we’re not at liberty to really comment on those. So, they’ll be part of what we’re looking at moving forward but we can’t really talk about them specifically.

Mark Levin – BBT&T Capital Markets

Got it. Fair enough. And then just on the port situation in the Pacific Northwest, any update over the last three months of being just sort of kind of moving ahead as you would expect and then just sort of how you’re thinking about timing again.

Steve Leer

This is Steve. They’re progressively moving forward. Any permitting process is slow and methodical and as by both design pretty mark our view of it and the regulatory agencies. We would anticipate that sometime in the first half of 2012 that the permits would be submitted. They are still trying to focus on what’s the right size and lots of issues out there. But steady progress would be what I would report.

The timing – we got (inaudible) processes out there and certainly, challenges that would be expected. We would continue to think that a 2014 or ‘15 time frame is a realistic expectation.

Mark Levin – BBT&T Capital Markets

Got it. Perfect. Thank you, guys.

John Eaves

Go ahead. I’m sorry.

Mark Levin – BBT&T Capital Markets

No, I appreciate it. And then the last question I had is I think you mentioned shipping some PRB coals to China and Europe. Can you guys, maybe, walk us through what the economics of that looks like. And then what the net backs are, just kind of how to think about – how to frame the economics?

John Eaves

I really don’t want to get into any particulars on the net backs, but you know what I’ll tell you, we’re going to load two largesized, cavesized ships through Ridley Terminal this year to China. And when we look at the net backs, it makes sense from an economic standpoint compared to our alternatives in the U.S.

And we think that’ll continue. We think that volume for us will improve pretty significantly as we move in to 2012. As we look at that market and some of the challenges, some of the other supply regions have, i.e., Indonesia and South Africa. We continue to think that PRB can be a very competitive product in China, India, Korea and Taiwan.

So, the marketing guys are spending a lot of time in developing that market and think over time that we’ll be very competitive, especially with the Indonesian coals that are coming along, which are much lower rank quality coals that allow the PRB to be very competitive.

Mark Levin – BBT&T Capital Markets

Great. Thank you guys.

John Eaves

Thank you.

Operator

We’ll take our next question from Andre Benjamin with Goldman Sachs.

Andre Benjamin – Goldman Sachs Group

Good morning.

John Eaves

Fine, Andre.

Andre Benjamin – Goldman Sachs Group

Back to the PRB and the pending cash flow regulations, it’s been on some prior questions. Assuming that you do get that raging river phenomenon, potentially offset by the lead time for equipment, how high do you think that Arch PRB production could go in 2012? And then your view – how much of FASB could derail a ship to the PRB all the way, say, to the east if it was warranted? Are there any infrastructures bound [ph] that we should think about if demand spikes?

Steve Leer

Well, maybe start on the other side of it. If nontraditional PRB purchase really would come in a big way, I think rail cars would be an issue. There are different sizes in the east and the west.

So, I know the rails are thinking about that. They’re looking at it but whenever there are changes like that, to assume that there would be some bottleneck and disruptions, I think, would be optimistic. But I do know it’s on the agenda of at least three of the major railroads that I personally had conversations with.

So, it’s going to be a challenge if new major buyers would enter that market. But I think the – both the rails and the production units and the PRB would be up to that challenge but there would certainly be dislocations in a month to month types and scenario.

Arch’s Mines on paper – again, you can get into that 130 million to 140 million tons of everything rundried at Black Thunder. But at the same time, we’re very focused on meeting the demands of our customers and their requirements. And I wouldn’t want to say that wouldn’t require some equipment but it’s a very, very large mine. And they have the capabilities to do a lot of good things and if the market demand is there – but I think we’ve proven over the years that we will meet market requirements.

Andre Benjamin – Goldman Sachs Group

Thank you. That’s helpful. And then back to metcoal. Could you just speak a little bit to the sensitivity of your expansion plans, the pricing – both next year and long term? Maybe give a little color as to what price you’d maybe reconsider some of the projects that are on the table. And are there any anticipated changes to (inaudible) previously stated growth plans now that you’ve owned them for a quarter?

John Eaves

I mean, we studied the ore markets pretty hard. And we’re pretty confident there is, going to continue to be, an under supply of metcoal over the next three to five years. We think it will cyclical. There will be peaks and valleys but if you look at Arch’s cost structure with the combined assets, we think it’s pretty compelling. And we think we can make very good margins in the markets going forward.

We haven’t seen any changes in the volumes on the downside. What I would tell you, we’ve seen some volume changes on the upside, is we’ve looked harder at this. Obviously, Tygart One was in the planning process when we acquired the assets. We’ve advanced that, six months which we’re very excited about. But beyond that, I think there’s some other projects that we continue to be excited about – continues minor projects, the long wall that Steve mentioned. All those are coming into fiveyear cycle that we can take to the market at which we think is going to be undersupplied.

And when we talk about this quality of coal, it’s a highvol A product that – it is in high demand, not only in the U.S. but around the world. So, we continue to push these projects forward. We continue to look at port capacity expansions because clearly, the global market is undersupplied. And we think Arch’s positioned the company very well to react to some of those opportunities we see.

So, clearly, the opportunities that we’re afforded at some of met side with ICG is really – continues to improve and we’ll build on that and advance that as quickly as we can.

Steve Leer

Just adding to what John is saying is you think about Mount Laurel and its history – a long wall mine – probably one of the lowest cost, if not the lowest cost, major metallurgical coal mine in the east. Tygart Valley will have a very low cost structure, we think and certainly, as designed, was again a long wall mine.

Traditionally, long walls should be your lowest cost operation, assuming you’ve engineered them correctly. We think it’s extraordinarily competitive. And when you look at the cost structure of the continuous minor operations, again, one of the things we did in acquisition analysis is we tested it 2009 depression or severe recession pricing. And it works.

I guess, for the last point, sometimes gets crossed over by – unless you’re down into the details as Tygart Valley reserves is all about Tygart One, Tygart Two, Tygart Three and ultimately, Tygart Four, although, they’ll end up with new names. Those reserves are on (inaudible).

So, we think Arch’s projections over the next five years and march towards the 15 plus million tons by ‘15 and then more than that as we move forward, really survive any short term or one year downturn if the globe will slip into a double dip recession here. So, I don’t think there will be a slowdown there. In the thermal markets – the capital there might be shifted to the met markets if the thermal markets don’t perform.

Andre Benjamin – Goldman Sachs Group

Thank you.

Operator

Thank you. We’ll go next to Lucas Pipes with Brean Murray.

Lucas Pipes – Brean Murray, Carret & Co.

Well, I guess it’s still morning. Good morning, everyone. Looking at the – your new contract position for 2012, it seems like you booked some very solid prices during the third quarter. Could you just give us a bit more color on – and if the average quality of the new PRB contracts? And then also walk us through the moving parts of commitments for Appalachian thermal coal?

John Eaves

Well, on the PRB, I think it’s a combination. There was some ultra low sulfur in there, the generic .8 and even some 8400 and so, it was all three of our products, a combination those. And as Steve indicated, we continue to be encouraged by the premiums and the interest we’re seeing from the ultra low sulfur.

When you look at the eastern thermal prices, a lot of those as you look at, would be some of the ICG legacy agreements that the majority of those roll off by the end of 2013. I think we still have a little bit past 2013. Majority of them will roll off.

So, not seeing anything terribly encouraging in the thermal market for 2012, I will tell you, I know there’s been a real draw down in the inventories this summer. And I think people are trying to side – from a regulatory standpoint how they move forward. And what I would tell you, when they do come to the market and start buying, you could see a pretty quick reaction in prices, certainly on the thermal side.

And we’re going to continue to be market driven. As Steve said, we’re pushing all our capital right now to meet supply. And we’ll continue to do that until we see opportunities on the thermal side. So, I think the market driven approach there is fine in some of the capital reduction that’s been in some of these thermal mines, so we’ll continue to be there until we see some improvement in the market.

Lucas Pipes – Brean Murray, Carret & Co.

That’s helpful. Thank you. And last year during the fourth quarter, we saw some rail issues, some – how would you describe the eastern rail situation today? Could we see similar impacts this year? Or do you think they are generally better positioned?

Steve Leer

I think generally, they are better positioned. Both of the eastern railroads went through fairly significant hiring and got most of that accomplished as they moved forward. I think their plans are to maintain their current levels. We’ve also seen both of them commit to capital for new engines and additional locomotive power.

It’s not to say that a hurricane or a flood or something doesn’t disrupt something for a month. But right now, it seemed adequate. One of the previous I think, we have turned a continued major shift to PRB from traditional buyers. You could see some bottlenecks developed as the railroad sort out that movement. But they really do look adequate moving forward.

Lucas Pipes – Brean Murray, Carret & Co.

That’s helpful. Thank you very much.

Steve Leer

Thank you.

John Eaves

And our next question comes from Brian Yu, with Citigroup.

Brian Yu – Citigroup, Inc

Okay, thanks. [Audio Gap] six months advancement in that Tygart project. How does this boost the potential of 2013 production versus what ICG had outlined previously of a 1 million ton.

Steve Leer

I probably should let John answer this but I love challenge (inaudible). ICG had looked at Tygart as basically being a million and a half tons of thermal and a million and a half tons of met. We look at it the same thing at the same wash plant. The steel in wash plant did basically up but we’re physically lowering equipment in the Tygart number one mine. Right now we should see development production – company owned development production begin next week.

And now, admittedly, it will be coming out of the shaft with a twoton bucket, so it’s –– truly as development, it is not a lot. But really, on an ongoing basis if you take that six months advancement, we would expect – you know, if you just assume the long wall starts up day one, it’d be 3.5 million tons of high vol A coal starting from that point forward.

Brian Yu – Citigroup, Inc

And my second question, it has to do with just rail cost. I know a lot of that is formed their customers but it does impact the monetary value of the coal. Are you guys seeing any stability in rail cost and maybe comment on it, generically, even in the west or the east?

Steve Leer

The rails are – as I’ve told them many times, we have a lovehate relationship. And you’re right. I mean, on really domestic thermal shipments, principally, our domestic met shipments – the rail is contracted by the customer. On export shipments, that go by rail is usually contracted by us.

We have seen that the rails are aggressive in their pricing when the markets are robust and supply is tight. At the same time when markets soften a bit or when there’s opportunity to get a new customer into the folds, each one of the railroads will sit down and negotiate to try to make that movement happen.

So, it’s negotiation contract by contract but clearly as John mentioned the movement of the Ridley. I mean, it’s a long way everybody knows that. It’s certainly a two railroad move right now or a three railroad move by another route. But the rails are willing to help develop that market and it’s – the last hour there’s always an argument but they’re working with us.

Brian Yu – Citigroup, Inc

All right, thank you.

Steve Leer

Thank you.

Operator

And we’ll take our next question from David Beard with Iberia.

David Beard – Iberia Capital Partners

Good morning. My questions have been asked and answered. Thank you.

Steve Leer

Okay. Good morning, Dave.

David Beard – Iberia Capital Partners

Good morning.

Operator

And with that, we move on next to Brandon Blossman with Tudor, Pickering, Holt.

Brandon Blossman – Tudor, Pickering, Holt & Co.

Hey, guys.

Steve Leer

Hey, how are you doing?

Brandon Blossman – Tudor, Pickering, Holt & Co.

Good. I’m good. I hate to do this towards the end of the call but I’d like to take another pass at the 12 Central App costs. How about just starting from where we are today at third quarter. Obviously, we need to adjust for Mount Laurel and (inaudible) in the cost structure of ICG, are there any other less obvious adjustments we should make when we’re trying to forecast 12 cost at Central Appalachia?

John Eaves

Not really. I mean, that’s it. I mean, we’re doing everything we can to keep our cost tight. And we’ll see it goes. And certainly, the environment’s tough. I mean, the geology continues to be a challenge for the industry in Central App. We think we have some of the best geology in the business. And you’re combining the lowest cost producer in Central App with the next lowest cost.

So, we think we’ve got a good cost structure going forward. But until we get through the budget process, I’d be a little hesitant to say that – exactly where that number might shake out. But we think we’ll be able to continue to put forth pretty good margins to the bottom line in the Central App, even on the thermal side, certainly on the met side.

Steve Leer

And it’s important when those legacy ICG contracts which are under water roll off. At the end, you’re just going to step up there even if the market doesn’t change one iota.

Brandon Blossman – Tudor, Pickering, Holt & Co.

And you’d (inaudible) for that roll off was essentially by the end of ‘13?

John Eaves

Most of it in the ‘13. There might be a little bit goes in into ‘14 but it’s not material.

Brandon Blossman – Tudor, Pickering, Holt & Co.

Thanks. I appreciated this (inaudible).

Operator

Thank you. We’ll move on to Meredith Bandy with BMO Capital Markets.

Meredith Bandy – BMO Capital Markets

Hey, thank you very much for taking my questions late. I guess, I’m just going to (inaudible) for any questions that you already got, which was on the debt side, this is more for John Drexler I guess, where was – what is your target leverage ratios? And given your cash flow, how long do you think you’ll give yourself to get there?

John Drexler

Meredith, we’ve kind of discussed this in prior calls. So, as we look at our overall leverage and we look at kind of historically where we’ve been, we’ve typically been in that low 40% debt to cap. Post ICG, we’d set that up. Currently, we’re at 51%. We’ve indicated we want to take some of the cash flows there. We have meaningful cash flows we expect post the acquisition and with our own ongoing operations to bring it back down to within that range.

We are deep into the budget process now but suffice it to say, we continue to expect meaningful free cash flows in 2012. And so, we’ll continue to work to strengthen that balance sheet. So, I’m not going to come out right now and give you specific timeframe when we think we’re going to be back in there. But I think we are very confident with our overall leverage and what we expect as we move forward.

Meredith Bandy – BMO Capital Markets

Okay. And then on the tax side – what’s going on this year? I mean, is that sort of related to the ICO? What’s going on this year that you have (inaudible) tax rate and – or are we going to see a more normal tax rate next year, do you think?

John Drexler

I think what you see happening right now and what you see rolling through in this quarter specifically then – and how you account for income taxes, with the reduction that we expect in earnings for 2011 that we recently updated on, that brought down our expected pretax income.

In our industry, we receive the benefit of percentage depletion. So, that’s having a direct impact in our profitability for the remainder of the year and our expectation for taxes. And that’s bringing us below to what we had previously guided towards.

So, right now, for the year we are expecting a tax provision of between 5% to 9% as we move forward. And as our profitability increase, we’ve got significant – to protect assets on the balance sheets. So, we expect to be paying in somewhere in that range of 20%25% for the next several years that we utilize those assets. And we’ve indicated that previously.

Meredith Bandy – BMO Capital Markets

Okay. Thank you.

Operator

Thank you. And we’ll go next to Richard Garchetorina with Credit Suisse

Richard Garchetorina – Credit Suisse First Boston

Great. Good morning.

John Eaves

Good morning, Richard.

Richard Garchitorena – Credit Suisse

Two quick questions. One, you mentioned earlier that you saw some weakness in the low-quality high-vol coal, are you saying that from domestic or foreign customers? And also do you think there’s a risk that some of those may fill us across over time to make a push back to the thermal markets?

John Eaves

We’ve seen some weakness but we haven’t seen tremendous weakness. I think I need to clarify that or certainly emphasize that we’ve seen softening of (inaudible) we saw earlier in the year. Right now we’re not seeing a reversion back into the thermal markets because again, and not to get too specific on pricing. But high-vol B-type coal that might be of super high quality thermal coal, the pricing might be in the 70s or 80s and their index is out there on the thermal market and their Welner [ph] of 100 still in the net market. So that far, we haven’t seen any and we really don’t anticipated that long.

Richard Garchitorena - Credit Suisse

Thanks. It’s very helpful. And then the other question. Can you talk a little bit about some of the concentration across the industry in Central App in the past couple of quarters? Is there any sign of that easing and also where’s labor turnover I guess currently? Thanks.

Steve Leer

I think labor, particularly in the skills labor taken up as a question is still a challenge. We’ve seen improvement in labor turnover as really the uncertainty of the whole IPG sale as settled down and the companies have been integrated as part of Arch. So we’ve seen improvement there from the old IPG mine just simply I think by removing that sales uncertainty. But it still account particularly in the mechanic, the electrical, the electrician, the welder, that sort of thing. And the mines are fine to have that. So we anticipate that moving forward to continue and that kind of build-and-bolt into our thought processes, our training, we’re increasing training red hats [ph], that sort of thing.

In fact build IPG officers where we moved to the headquarters in our East. We’re building a major training facility in the second floor as part of our longer-range planning. What was the first question?

John Eaves

On the cost side, I think, this is John, I think when we think about our position in terms of cost in the industry and the inflation, I think the one thing that Arch has been willing to do over the last five or six years is we get buyers and sellers of assets. And what we try to do is focus on properties so we can manage the cost effectively.

And in good markets and bad, net market, thermal market and we continue to do that. So I think you’re going to continue to see pressure on the Central App on the cost side as an industry, Arch included, but clearly I think we’re in that aperture in terms of low cost and I think we’ll continue to be so. As we said earlier, not really excited about what we’re seeing on the thermal side right now. We think where inventories are that that could change pretty quickly but that kind of what we’re managing are production levels on the thermal side.

Richard Garchitorena - Credit Suisse

Great. Thank you.

Operator

And we go next to Lance Ettus with Tuohy Brothers.

Lance Ettus – Tuohy Brothers

Just a question how you guys I perceived made some bold statements on exports. Just if you have any update on the West Coast port.

And also you said that import to the client which is absolutely true. I heard that there is import facility as considering switching to an export facility. Just if you have any knowledge about it or any other things like that going on? And I know you said you want to play an active role in addition to your proposed West Coast port, just those questions. Thanks for taking my question this day on the call.

Steve Leer

Well, one of the earlier question we did talk about the Millennium Bulk Terminal which we have 38% progressing fully forward on its a goal of submitting the permit application and environmental impact statement, and really the first half, sometime probably at the end of the first quarter and beginning of second quarter, that timeframe. So I think the other terminals out there are progressing forward too but there are certainly push back. We see the Canadian port continued to focus on expansion. In fact I might rephrase that even the – every port of the United States that have capability of export potential is looking at expanding or the process of expanding. And we shall continue to see that. You mentioned the – really that’s the (inaudible) ship terminal.

And the import facilities, there are certainly discussions out there that have might convert that to its original design towards an export terminal and I think Arch’s view of all of these is that we have discussions going with all the various terminal operators, mark operators, disclaimers and we would anticipate that we’ll see additional export capacity developing over the next several years and it looks to us that the global market is going to need that supply.

Operator

Okay. And we’ll go next to Brett Levy with Jefferies & Co.

Brett Levy – Jefferies & Co.

Hey, guys. You know, you’d mentioned one time with synergies associated with the I2 [ph] and sort of trying to push that to the bottomline, can you sort of talk about how much of that is in the bottom line now and sort of what the timeframe is to roll that in?

And then also you said part of your initiatives in the current economic environment is to control cost and to cut cost. Are we going to see like a specific program or a cost-savings target associated with headcount reductions or mine closures or is it going to be something more tangible that we’ll see how you guys in terms of cost-cutting both in terms of the synergies number and in terms of sort of future plans?

John Eaves

This is John. I would tell you that a small percentage of the synergies you’re seeing thus far, I mean obviously some of the G&A [ph] and some of the other things, if hit the bottom line, but really you won’t see the majority of that is we get to 2012. I mean a lot of synergies were blending-driven, operational-driven. You know we’re moving to the budgeting process. But you should see all that $110 million in 2012. And hopefully that’s a conservative number. If you look at our history over the last couple of acquisitions, we’ve far exceeded our forecast and we hope that we can do that again this year.

In terms of laying out, you know by buckets, where we are in the synergies, I think we’ll continue to upgrade this trade each quarter. I don’t know that we’ll break it out any more than that but you should see that benefit flow to the bottom line.

Steve Leer

Yeah. And in terms of evaluating mines we’ve certainly done in the past that we would continue to moving forward. When you look at some of the weaker thermal markets, you have to always ask yourself, “Okay, can we make this mine work and then be profitable in this kind of market environment?” And if it does not one of the earlier questions on labor, I mean we have Arch’s assigned, we cannot offer our people opportunities elsewhere in the company but clearly that’s one of the things we do look at and we’ll continue to look at moving forward.

Brett Levy – Jefferies & Co.

Thanks very much, guys.

Steve Leer

Thank you.

Operator

Thank you. We’ll take our next question from David Katz with JP Morgan.

David Katz – JP Morgan

Hi. Our enterprises have moved down about 35% over the last two months. Obviously there is a difference in the demand. I think the supply dynamics between that met coal. The demand dynamics we would expect to be somewhat similar. They’re quoted differently. So we were curious if you can think that any of the price decrease that you’ve seen there is going to be seen in met coal over the next month or two?

Steve Leer

Well you know, I think when you look at the overall metallurgical market, I mean they’ve moved off their record to high from earlier this year and we anticipate that moving forward. The uncertainty right now in Europe has certainly waned on the market and our discussion with our metallurgical field customers, I mean all of them are kind of saying, “You know, our business is okay right now but we’re really concerned about the next quarter and we’re uncertain and the crystal ball is fogged in.”

So I think there’s a lot of caution in the marketplace. But in our original acquisition economics, the ICG, we had substantially haircut [ph] the then current met coal prices and right now we’re pretty comfortable where we think they’ll come in. You’ve seen (inaudible) weakened a little bit in some of the market’s here in the last several weeks but when you look at them on molding [ph] demands, it can be highly profitable business.

And to the earlier question, I mean we’re really not seeing the volume pushback that really signals a substantially weakening market. We just haven’t seen that.

David Katz - JP Morgan

So you don’t foresee the price decline that has been seen over R&R over the last couple of months?

Steve Leer

Well I think you’ve already seen the coal prices declined too. I mean they come up their records of well over 300 if you have the (inaudible) index out of Australia and it’s down in the 275, 285 number and there maybe some more there. We’ll wait and see. But we don’t see a crashing. You have both of those markets softened over the last couple of months.

Operator

Thank you. And we’ll take our final question from Justine Fisher with Goldman Sachs.

Justine Fisher – Goldman Sachs

Good morning.

John Eaves

Good morning, Justine.

Justine Fisher – Goldman Sachs

My question is about Arch’s pricing strategy. If I look at the number of times that you’ve got committed especially in the PRB for ‘12 and ‘13 now, it seems to be a lot more than you’ve had in previous years. And maybe my memories are wrong and I know that in (inaudible) with ICG it’s difficult. But even when I looked at previous third quarter previously you always had 30 to 40 million tons on price for the proximate year and then 100 or 85, 75 million on price for the following year. And it looks like you guys are willing to price a lot more coal now.

It came to me very different from previous strategies. So I was just wondering A, whether I got something wrong with, that’s the truth, whether it’s true that that strategy is changed; B, what is motivating that strategy? Is it that the pricing is what you want as opposed during the previous year where it wasn’t? Or is it some sort of different take on the coal market where Arch as a company is willing to commit more ton as ahead of time now that it seems you’ve previously been?

John Eaves

Justine, this is John. You know, really there had many changes in strategy. We’re always looking our strategy. We’re market-driven. Yes, we’ve seen some opportunities especially with PRB that we think are good opportunities.

So yeah we book the tons. I don’t think if there was any magic number this time of year that we have, it depends on the opportunities that are presented to us. And I think we’ve been very pleased certainly with the ultra-low sulfur and even the generic problem [ph]. So we can get those opportunity, we can get an appropriate return, we get a lot of tons down, that’s what we’ve done.

And we got quick position in the company very well. We continue to be polished [ph]. We think there’s going to continued to be opportunities on ultra-low sulfur. There’s going to be opportunities for exports up the West Coast. Actually there’s going to be additional opportunities in ’12 for (inaudible) Atlantic market. So, all those opportunities continue to be there. We always weigh the price on every transaction. We’ll continue to be market-driven and we think we positioned our company very, very well.

Justine Fisher – Goldman Sachs

Okay. Thanks and then my follow-up is on the Western Bit market. It sounds that you guys are pretty down in demand in that region but it looks like your pricing is actually holding up pretty well and especially in terms of your commitment for ’12 and ’13. Is there some explanation for that? I mean if it’s just loan some contract where your customers are locked in to hide $30 pricing for the next couple of year even though demands seem pretty weak? Or how should we judge your quality of comments versus the pricing you still seem to be able to achieve?

Steve Leer

We’ve done a good job on the marketing side. I mean we’re pleased with some of the realizations we’ve seen but there’s not a lot opportunity. We continue to see high inventories in that part of the world, there’s been some displacement from hydro in the Pacific Northwest. But on the other side, we’re seeing the export market continued to be real opportunity for our job.

I think I mentioned earlier we’re forecasting a 1.5 million times of exports this year. We’re going to grow that over 2 million times next year. But on the US side, there’s not a whole lot to be excited about but we continue to watch that market.

If you have a big poll on PRB coal into the East, you could see Western Bit follow that pretty quickly. We’ve seen that historically and – so that price is pretty sensitive in Western Bit. When you see a movement like that, it can move pretty hard. So we just want to make sure that we positioned the company to capture that upside when it does happen. Or prepare to be patient and leave the tons in the ground if it’s not there right now.

Operator

Thank you. And at this time, I’d like to turn the call back over to Mr. Steve Leer for any additional or closing comments.

Steve Leer

Well, I thank you for everybody’s time and interest in Arch’s call. We’ve obviously gone over a little bit but some great question and we really felt that we needed to try to answer all the questions. So we’re out there as many as we could.

And as I said earlier and throughout the commentary, both John and myself, you know we’re feeling pretty darn good about the PRB. We’re feeling very good about our met position when you start thinking and modeling Arch going forward in the next several years. I mean those are the two drivers of our company. We’re adding and expanding our export capabilities and that combination, I think, is a powerful combination moving forward into the next several years.

So we really look forward to reporting more as we complete the budget process and start talking about 2012 and beyond and we will do so at the next call. So thank you for your time.

Operator

That does conclude today’s call. Thank you for your participation.

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