Oct 30, 2009
Executives
Deck S. Slone - Vice President of Government, Investor and Public Affairs Steven F.
Leer - Chairman and Chief Executive Officer John W. Eaves - President and Chief Operating Officer John T.
Drexler - Senior Vice President and Chief Financial Officer
Analysts
Pearce Hammond - Simmons & Company International Michael Dudas - Jefferies & Co. James Rollyson - Raymond James Kuni Chen - Bank of America Merrill Lynch Schneur Gershuni - UBS Paul Forward - Stifel Nicolaus Brett Levy - Jefferies & Company Andre Benjamin - Goldman Sachs Jeremy Sussman - Brean Murray, Carret & Co Michael Goldenberg - Luminus Management John Bridges - JPMorgan David Lipschitz - Calyon Securities Inc.
Operator
Please standby, we're about to begin. Good day everyone and welcome to this Arch Coal Incorporated Third Quarter 2009 Earnings Release Conference Call.
Today's call is being recorded. At this time, I would like to turn the conference call over to Mr.
Deck Slone, Vice President of Government, Investor and Public Affairs. Please go ahead, sir.
Deck S. Slone
Good morning from St. Louise.
Thanks for joining us. As usual and before we begin, I want to remind you that certain statements made during this call including statements related to our expected future business and financial performance maybe 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 filed with Securities and Exchange Commission may cause our actual future results to be materially different and those expressed and are 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 maybe required by law. I'd also like to remind you that you can find the reconciliation of the non-GAAP financial measure that we planned to discuss this morning at the end our press release, a copy of which we have posted in the investor section of our website at archcoal.com.
On the call this morning, we have Steve Leer, Arch's Chairman and Chief Executive Officer; John Eaves, Arch's President and Chief Operating Officer; and John Drexler, our Senior Vice President and CFO. Steve, John and John will begin the call with some brief formal remarks and thereafter, we'll be happy to take your question.
Steve?
Steven F. Leer
Good morning everyone and thank you for joining us today. Today, Arch reported earnings per share of $0.16 and generated $121 million of EBITDA for the third quarter.
These results represent an improvement over the second quarter, but continue to weak domestic steam coal market compared with the year-ago quarter. Each of our operating region achieved margin expansion in the third quarter when compared with the second quarter.
Our trading function also continued to provide a positive contribution to our earnings in the quarter just ended. We also realized and improved other operating income, principally from an increase equity contribution from Knight Hawk operations and a gain on broker ton previously designated as a physical sales that would sell financially.
Looking ahead, we see a resurgence in metallurgical coal market driven by increased global steel utilization rates; in fact, domestic steel capacity utilization has climbed above 60%, which is up from only 38% in early January. While utilization rates are well below to 80 to 90% level that the steel mill's average before the economic downturn last year, it is still a meaningful first step to recovery.
Along with an improving met picture we're seeing positive growth in the global economy. In particular, China has imported on a net basis more than 75 million short-terms of coal through September of 2009.
Last year at this time, China was a net coal exporter of 3 million short-term and through July of this year, India has imported on a net basis, 33 million short-terms of coal with 40% of those imports originating in South Africa. By comparison, India imported just 20 million short tons for the first seventh months of 2008.
The fast growing Asia-Pacific market along with the redemption of economic activity and the allowing market should open up even more opportunities for U.S. met and steam coal to move offshore in the coming months.
The challenges of growing supply on a demonic and global scale, these reserved depletion, constraints on infrastructure and increasing lease stringent government regulations are as apparent today as they were before the market run up in 2008. It's just that these constraints have been overshadowed by the global economic recession and the rapid -- the resulting rapid decline in energy demand during the past 12 months.
Turning to the domestic coal markets, the large drop in coal demand this year has caused stock out to build that U.S. generated.
We could in the year, with as much as $200 million tons of stock pile, which would represent a meaningful overhang as we head into 2010. If we assume that the stock coal target for the utilities are around 160 million tons, then you're talking about the need to liquidate roughly 40 million ton.
I would argue that 40 million tons and 1 billion ton coal market even that much, if you assume even very modest growth and power demand next year. And the growth is more robust as yesterday's GDP report and recent forecast suggest that draw down could occur as early as mid 2010.
The return of more normal weather patterns increased nuclear refilling, the reversal of coal to GAAP switching and the movement of high quality steam coal into the met market will likely accelerate stockpile godowns as well. And while we're at it, we believe U.S.
coal exports will jump once again in 2010, further reducing the available domestic coal to refurnish utility stock paddle. Additionally, supply decline have occurred at a rapid pace in 2009.
In particular reported interim production figures so far with the third quarter, which do continue to be updated adjusted Central App production fell by more than 11 million tons when compared to the third quarter of 2008. This decline also represents 5 million tons more than the EIA had originally forecasted for the third quarter.
Further demonstrating that high cost supply continues to be rationalized. Looking ahead, we believe additional supply that's likely in 2010, especially in Central Appalachia given our contract roll off, continued reserve depletion, the shut down of high cost mine and the intensifying regulatory and permitting challenges.
In fact, we estimate the roughly 30 million tons of Appalachian steam coal contracts, with prices above $70 per ton will roll off at the end of 2009 and alone. All of these factors suggests that it's possible for 40 million tons of stockpile to decline in a fairly brisk fashion during the course of 2010, which will set the stage for the next market cycle to become obvious to all market participants.
Moving ahead or moving on, I would like to spend a few moments, discussing the acquisition of Jacobs Ranch at the beginning of the fourth quarter. John Eaves and his prepared remarks will provide an update on the synergies that were currently in the process of unlocking as we integrate the two mines into one single operation.
This acquisition follows in the foot steps of strategy of buying assets during market downturn to help position the company to emerge as in and even stronger player when markets recover. And we believe the world's economies are on course for that recovery to strengthen over the next six to 18 months.
We also think that this acquisition will be increasingly attractive in future years as domestic coal production continues to ship Westward. Since 1997, Southern PRB market expansion has been impressive, growing at an annual rate of 6%.
During that timeframe, PRB has over taken Central App as the nation's largest and most prolific coal supplier region. Quite simply, the PRB as the most competitive, top competitive coal supply force in the United States with low geologic risk and significant economies of the scale.
These advantages allow the region to be highly competitive in its continued expansion of the national and the international stage. Looking ahead PRB's growth potential both in the U.S.
and outside the U.S. is significant.
As production and Central Appalachia continue decline, the PRB will likely be called upon to fit in and fill the supply gap as well as to meet demand growth from new coal plant starting up in 2009 and 2012 and from steadily increasing capacity utilization at existing plant. Over the long term, we see potential goods stand export to PRB off the West Coast directly into the Asia Pacific market as a game changer that will allow us to further unlock the value of our PRB assets.
Given our view on the PRB, there's no surprise that then we've showed to grow the company's PRB footprints, when the opportunity arose to acquire one of real best assets Jacobs Ranch, the third largest coal mine in the U.S. As you know, Jacobs Ranch represents an excellent strategic fit with Black Thunder as the properties shared a six mile border.
We believe that the acquisition not only creates the premier mine complex in the PRB, but also the largest single coal mining complex in the world. Jacobs Ranch also bring a highly committed near-term sales position to our goods portfolio and our new employees from that operation, our trained and experience that can share best practices to further compliment our highly skilled work force to Black Thunder.
Furthermore, future reserves development opportunities for the combined mine will surely create additional incremental value at Arch overtime. Couple of these synergies with the hard assets and reserves and it becomes clear why third party consultant Wood Mackenzie independently valued the transaction of $1.5 billion.
Since Arch's became public in 1997, we have continued to successfully grow our coal volumes and reserves, but a focus on running large scale safe efficient mining complexes. In addition, we have a superior asset base to profitability whether market down turn and to truly excel in market upfront.
With our strategic position in the PRB, our number one position in Western Bit our strong met production and low cost profile of Central App, we are poised to capitalize as markets recovered. On that note, I will turn the call over to our President and COO, John Eaves.
John W. Eaves
Thanks Steve. As previously disclosed, Arch anticipates capturing annual synergies of 45 million to $55 million per year beginning in 2010 from the JK finance transaction, which equates to above 20 on acquired tons.
At least 50% of the synergies come from operational benefits and integrating the two mines. Based on our success from integrating the North Rochelle and the Black Thunder in 2004, we've identified similar efficiencies that will enable to combine mine to run at an optimum manner.
I'd like to highlight some examples that give you a flavor for the type of concrete items that we are implementing. One of the keys cost of mining the PRB is hauling coal over the trucked up and load out facilities for processing and loading into railcars.
This mining on the former Jacobs property move to the West Elk, all truck distance is back to the lowdown on eastern edges of the property were increasing. With Arch's new state of the art low down that in a direction of mining just to the West Elk, we are redirecting some of Jacob's truck to the new load out to shorten haul distances, resulting in significant cost savings.
We've also deployed Black Thunder's GPS-enhanced MineStar system to the equipment related Jacobs Ranch and already efficiencies at integrated mining. The GPS system functions like an air traffic control system with a master computer determining what trucks should load, what type of material they should hold, and where they should dump.
The MineStar system is directly tied to the scale of mining and is naturally more effective at larger and more complex mines. Furthermore, we are currently preparing mine plant and permit revisions to deploy one of Black Thunder's idle draglines on a former Jacobs Ranch's property to displace the portion of the mines more heavily skewed truck shovel operation.
The dragline redeployment will help movements here of roughly one-half the cost, so the truck shovel spread without any changes in production. Additional operating synergies include consolidating and eliminating duplicate facilities, such as the admin office, the warehouse, and the coal laboratory at Jacobs to reduce overhead of the carrying costs.
We're also consolidating our purchase agreements with key vendors, which is yielding incremental supplier savings. Beyond these operational cost savings, we estimate that 40% of the synergies reflect overhead and admin costs savings, most of which have been implemented.
These savings include the elimination of duplicate jobs, corporate management fees and inner company leasing arrangements. Overtime, we should also be able to reduce reclamation costs with a coordinated pit closure plan.
The remaining synergies consists of coal blending opportunities to provide more diverse products to the customer in the power generation industry. Blending a portion of Jacob's higher sulfur product with Black Thunder's ultra low sulfur coal wheel, additional OTC spec products that are preferred by utilities, resulting in greater recovery and revenue enhancement for the combined operation.
Furthermore, over 110 million tons of low cost coal lies underneath the railcar that service Jacobs Ranch. The combined operation will be all the miners reserves as production transitions west and colas hold the other load outs on the property.
Without the acquisition, it would have been difficult to coordinate a solution to mine these reserves. We also expect future net capital spendings from the combined mine to a far below what would have been required on a standalone basis.
So overall, we remain on target to complete the integration of Jacobs Ranch and Black Thunder in the fourth quarter and enthusiastic about the newly expended Black Thunder mine. Now turning to our sales marketing efforts, we're seeing increased demand for met coal both domestically and abroad.
We ship nearly 50% more met and PCI coal in third quarter versus the second quarter, the both traditional new customers in Eastern and Western Europe as well as Brazil. We also expect an even stronger fourth quarter, which will enable us to ship the 2 million tons into the met and PCI market this year.
And for 2010, our goal is to more than double our met coal shipments compared with 2009. In addition, we're pursuing new steam coal sales off to East and West Coast as some global economies are recovering at a faster rate than here at home.
We shipped another steam vessel to China in September and continue to have discussion with customers in Asia who are interested in securing a diversified source to satisfy their going coal needs. As Steve discussed in his prepared remarks, one market that remains week its domestic steam market.
As a result, we'll continue to follow a market driven strategy patiently and selectively committing coal in this weak pricing environment. Based on 2009 production levels, Arch has between 15 and 25 million tons uncommitted in 2010 and between 80 and 90 million tons uncommitted in 2011.
We're also continue to evaluate what we believe are appropriate production levels in 2010 based on our expectations of market demand. On the cost front, we continue to benefit from successful cost control measures implemented across the organization.
In the PRB, we reduced cash cost per ton by 5% in the third quarter versus the second, despite level production levels. In particular, we cut our mining cost by reducing contractor services lowering our repairs and maintenance costs and reducing our usage of raw material such as diesel and explosives.
I want an effort to adjust the mines to operate profitably at reduced volume levels. In Central App, we maintained our cash cost at $49 in the third quarter as increased volume levels on a larger mix of production from lower cost operations offset increase sales cost.
In Western Bit, our all-in costs improve substantially versus a second quarter, reflecting the absence of long, long moves at our operations and better cost control at West Elk. Looking ahead we expect geologic conditions at West Elk to continue to improved, which should reduce and need to truck some coal for washing.
We continue to expect our all-in cost in the region to between $26 and $28 per ton for the full year 2009. Additionally, we are progressing on the construction of the West Elk preparation plant, which we expect to have up and running for the third quarter 2010.
Let me close by congratulating our operation for another strong performance in safety and environmental compliance. We're on target to deliver another industry leading year in term of the safety performance during 2009.
Furthermore the first nine months of 2009 were on pace to be the best ever environmental compliance record set in 2008. At Arch, we strived our power of three key pillars: safety, environmental stewardship and financial performance.
And I want to thank our dedicated employees for their contribution so far in 2009. With that, I will now the call over to John Drexler, Arch's CFO to provide an update on our consolidated financial results.
John?
John T. Drexler
Thank you John and good morning everyone. Before addressing our quarter and liquidity position and balance sheet, I would like to summarize the significant financing transaction that we completed in the third quarter.
In late July, we issued senior notes at the parent company level with a face value of $600 million. The notes mature in 2016 and we're priced at a discount with an effective yield of 9.25%.
Net proceeds from the debt offering were $570 million. We also sold 19.5 million shares of common stock including an overall lot there at a price of $17.50 per share.
Net proceeds from the equity offering were $327 million. We completed our financing efforts with an amendment and extension of our revolving credit facility.
Before the amendment, the facility totaled $800 million and matured in June of 2011. After the amendment, the facility was expanded into $860 million to June of 2011 and $763 million of the facility was extended to March of 2013.
In combination, the transactions resulted in proceeds of nearly $900 million putting Arch in position to complete the Jacobs Ranch acquisition, strengthen the balance sheet and preserve liquidity both for current operating needs, and for addition growth opportunity. For the financing activities with the largest items of note on the note on cash flow statement for the quarter, I believe, one of the smaller items is just is noteworthy.
Capital spending for the quarter was $34 million Arch's lowest quarterly capital spend in more than five year. As discussed throughout the this year, we will continue to limit capital expenditures while market conditions remain week.
For full year 2009, we continue to expect capital spending of $160 million to $170 million excluding land and reserve addition. Turning to the balance sheet, at quarter end, we had cash on hand of $840 million, total debt of nearly $1.9 billion and a debt to total capital ratio of 47%.
We utilized 764 million of cash on October 1st to complete the Jacobs Ranch acquisition. On a pro forma basis reflecting the payment of the purchase price for Jacobs Ranch liquidity was $702 million.
Before going to our outlook for 2009, let me briefly mention what we can with regards to the acquisition accounting for the transaction. We are still very early in the expenses valuation process and the allocation of purchase price for the acquired assets and liability, however one thing that is become clear as far in the process is that some value will be assigned to the acquired sales contracts.
Business due to Jacobs strong contracted position combined with the fact that PRB prices were near the low point for the year on a data we closed the transaction. Given the relatively short life of the contracts, we expect the amortization of the sales contract value to have an impact on our GAAP reported fourth quarter earnings per share.
With that, let me now outline our revived 2009 guidance, which includes our correct estimate of the impact of the Jacobs Ranch acquisition. We expect the following: volumes from company controlled operation to be in the range of 121 to 125 million ton, earnings of $0.28 to $0.43 per share.
Our EPS estimates include an expected $15 million for $0.06 per share related to acquisition expenses incurred for Jacobs Ranch and an estimated $16 million or $0.07 per share of non-cash intangible asset charges related to sales contract amortization expected to be recorded in the fourth quarter as previously discussed. Adjusted EBITDA in the range of 449 to $490 million, the EBITDA estimate exclude the impact of the act acquisition related expenses.
CapEx of 160 to $170 million as discussed previously and DB&A in the range of 314 to $322 million. With that, we're ready to take questions.
Operator, I'll turn the call back over to you.
Operator
Thank you. The question-and-answer session will be conduct electronically.
(Operator Instructions). Our first question comes from Pearce Hammond of Simmons & Company.
Pearce Hammond - Simmons & Company International
Good morning.
Steven Leer
Good morning, please.
Pearce Hammond - Simmons & Company International
Congratulations on a great quarter. Based on your guidance for 2010, it looks like you've committed based on your '09 production levels about 80 to almost 90% of your tonnage.
How should we think about the committed prices for your coal in 2010 by region and is there a significant change from '09 realizations?
Steven Leer
There hadn't been fundamental changes, we didn't really commit much this last quarter a little bit. Our view is as we look at '10 is that a lot of our contract just carried over and from either previous quarter this year on in to the 2010 and on previous year.
So I don't think there is a lot of change, nor do we have a lot of roll off, I'm looking at John, but I don't think we have a lot of roll off at the end of the quarter.
John Eaves
Pearce, this is John. We don't -- I mean we are kind in a budgeting process right now and planning to kind of see where we see market demand developing, but right now based on the 2009 production levels that 15 to 25 million is probably, it's good a numbers we can give.
Pricing loss, certainly it's no secret that the domestic steam market is pretty soft. We would expect to see that going into next year.
We are somewhat encouraged by what we're seeing on the met side both domestically and internationally. So, obviously we're going to try to target that market as we into 2010.
Pearce Hammond - Simmons & Company International
Great, and then a follow up that you could update on your hedge position for 2010 for diesel deals explosive and should we see some positive variants on cost when we compared 2010 to 2009?
John Drexler
Yeah, this is John Drexler. On the diesel front, we are 75%, three quarters percent, three quarters hedged for the fourth quarter that a fairly significant prices we've discussed previously.
Those hedges were laid in when market prices were higher. So it's 350, 375 a gallon in that period.
As we look to 2010, if you allude it to, we expect to see benefit were roughly 50% hedged including the impact of the Jacobs Ranch consumption for diesel at a price of around 215 to 220 a gallon. So we should see a step down in that front.
From an explosives position, we are not in an active hedging position, but we see our natural gas pricing is a large component on the explorers side, so we feel good and as we move forward in the 2010 there. So, that's kind of an overview of our consumer.
Operator
We'll go next to Michael Dudas of Jefferies & Company.
Michael Dudas - Jefferies & Co.
Gentlemen, good morning.
Steven Leer
Good morning Michael.
Michael Dudas - Jefferies & Co.
First question: Steve, I understand you went to coal trends Europe, you spoke this past week.
Steven Leer
I did.
Michael Dudas - Jefferies & Co.
Could you maybe share a little bit of some of the sentiment that you face there and questions and concerns and primary maybe a little bit more on what Europe is thinking about their future in coal given the dynamics we are seeing in the pacific basin.
Steven Leer
I think you have to look at in two manners there. The general team on a metallurgical side both in Europe and globally were positive robust would be too strong a word, but certainly people were feeling that Pacific Rim was really driving the market and they were starting to see positive signs in Brazil and Eastern and Western European fuel mills or in the markets as well.
So, generally a push upward on kind of price sentiment depending on whether you're talking to buyers or economists, they have different views on where that might settle and that as everybody knows, but generally positive across board, in fact very positive across the board. On the steam side, Europe has much of the same position there, the U.S.
has fairly high stockpiles and a lot of the support and utilities probably worse perhaps and written than it is on the continent. But nonetheless there was an underlying tone of real concern of the amount of South African coal that was being redeployed if you want to think about that way into India.
As India just aggressively grows and continue to expand its import and that when Europe return to the marketplace, the South African supply would be limited or perhaps not available and really depending on trade rates in dollar changes they really saw there would be an opportunity for the U.S. in the Europe, but you know as mentioned there are economies continuing to climb out of the whole that they've been in as well.
Michael Dudas - Jefferies & Co.
I appreciate that color statement, follow up is -- certainly there has been a lot of buzz over the past three to six months. Ever since last year, when you and Peabody and others have been shipping marginal tons of PRB coal westward, could you maybe or someone characterize what inning we are in the opportunity getting terminals and rail capacity and a real sense of the specific base and looking to the PRB for reasonable tonnage; is this a three year, five year, 10 year situation.
Just a little bit color on that and how far you guys have come along relative to your discussions with maybe other parties and pushing this forward?
Steven Leer
I think we're in the top of the first and the team has a good picture, but we're getting it. It's an exciting opportunity of course the Pacific Rim lead by China and India are fundamentally changes commodity landscape I think both with their internal needs and external investments.
When you do the map, India really is -- it's its objective, which seems to be high number, but even half of their objectives of 200 million additional tons of import, metric tons of import by 2014 or '15, if you look at what's happening in China. It's going be a challenge to the traditional suppliers of really Australia and Indonesia and then you have Indonesia talking about their internal needs and the various constraints that you can see as Australia continues to grow and expand.
So, we see it as a real long term opportunity, we think it will develop realistically. I think you have to assume there is a step up of moving out through the Canadian port maybe to 6 or 10 million ton range, but the real step up would be then a development of our West Coast.
And that's got to be five year, I mean went through the permanent and other issues, but clearly the level of interest, the discussion are starting to accelerate, so that's why I say, we are in top of the first.
Michael Dudas - Jefferies & Co.
Thank you, Steve.
Operator
We'll go next to Jim Rollyson of Raymond James.
James Rollyson - Raymond James
Good Morning everyone.
Steven Leer
Good Morning
James Rollyson - Raymond James
John, you talked about in nice detail kind of the issues driving your cost savings over the next year roughly with the integration of Jacobs Ranch. When you put that all in a, since we weren't privy to what Jacobs Ranch's cost look like, can you talk about how you see overall PRB cost trending fourth quarter maybe the start when you first integrate this in and then over the time that you capturing the cost savings, just kind of how that might trend?
John Eaves
Yeah, Jim. I think initially obviously, we implemented during the fourth quarter, admin savings closing of offices, consolidation of shops and as we move through 2010, we're expecting a lot more savings as well, i.e.
taking drag lines and replacing truck shovels spreads with them. So, we're very optimistic, we think sharing a 6 mile property line, we are making one big coal mine, we think it's going to be very efficient.
So, truck haul, equipment capital savings, so if you're modeling our cost, that would expect hopefully to be flat improving as we move on. I mean, obviously everybody in the PRB is moving to higher ratios.
So, we've got that challenge, but clearly that 45 to $55 million of synergies, we think is very attainable.
James Rollyson - Raymond James
Do you think for next year with the fuel savings and all, you can get down sub-11 or do you think you are still probably somewhere in the 11s?
John Eaves
Jim, I'd be hesitant to say right now I think we're in the budgeting process right now. We're kind of working through those numbers and see how everything plays out.
Obviously, we've got to look at market demand as well.
James Rollyson - Raymond James
Sure.
John Eaves
As we've said, we're market driven. If the market is not there, we're not going to produce this overtime.
So that's something that we are currently evaluating and we'll make a determination report on our fourth quarter call, which is typically like January.
James Rollyson - Raymond James
Understood. And follow up here on the net slash PCI side, you're looking to double volumes next year given the market you guys see.
Did you may be spend a minute talking about relative prices for the year grades of net and the PCI, maybe compared to what we are all used to staring at in terms of the benchmark on the high end, just big spreads kind of rough gauge or where that might look?
John Eaves
I mean really the benchmarks are moving around or right now, so I am a little bit hesitant, because of all our discussion with customers about talking about pricing. But what I can tell you coming from second quarter to third quarter, we saw pretty good step in met prices, we would expect that in the fourth quarter and as we move to next year.
On a PCI coal, I mean if there is, we see market demand out there little about 5 million tons right now. There is usually, 5, $10 spread between those product generally that can change.
But we'll shift the 2 million ton, we thank for 2009 and the goals was to get to at least four next year based on the demand and the pricing we are seeing initially, it tells you, to take those opportunities versus steam opportunities, so...
James Rollyson - Raymond James
Thanks, very helpful.
Operator
We'll go next Kuni Chen of Bank of America-Merrill Lynch.
Kuni Chen - Bank of America Merrill Lynch
Hi, good morning everybody.
Steven Leer
Good morning.
Kuni Chen - Bank of America Merrill Lynch
I guess just a follow on met coal; as you guys get to 4 million tons next year, is there any significant CapEx needed to ramp up that level? Can you just give us some more clarity on that?
John Eaves
There really isn't, it's very minimal. As I said, we're kind in the budgeting process right now.
But I don't think it's a material number.
Kuni Chen - Bank of America Merrill Lynch
Okay.
John Eaves
And I think we also have the opportunity, we've been indicated that we plan to go 4 million tons next year and hopefully that's a conservative estimate, but we had the capabilities to go well beyond the 4 million ton as the company with very well capital. So, if the market demand is there, we'll be pushing to get that volume higher in 2010 and 2011.
Kuni Chen - Bank of America Merrill Lynch
Great. And then just more of an industry question, there you mentioned that stock about you getup towards 200 million tons and perhaps 40 million tons would need to be work down to get back to a more study state level.
Just as far as the weather goes if we do have a cold winter versus a normal winter, how much do you think that couldn't contribute to work it down that 40 million tons?
John Eaves
Colder than normal winter could work it all of, I mean it depends on obviously how cold. It's a similar question I got at the Board meeting last week from our Board.
And I think, a way to think about out of the way, I'd characterize how could 14 million ton work off on a reason stock process. And you said the EIA is estimating that the economy itself could resolve in another 30 million tons of coal burn or improvement from '09 have had listened to various utilities and certainly unscientific for third quarter.
There is earnings report, there is a common theme that seems to be developing that they've seen a pickup of our offer number for their industrial low demand, 10%, 9%, 11% and I did mention this morning 11%. So, that's positive, that's almost always driven by low cost rate principally cold.
So you get a gain there of 10, 15, 20 million tons perhaps of additional burn and then just normal economic growth. If we say positive which current forecast have it as opposed to the first half of this 2009.
So, maybe you get half over through that. The coal to gas, which gas north of $5, really very little switching curve for economic dispatch purposes, depending on investment, but there may have been 30 million tons of additional switching this year.
Basically that will comeback to coal. Then you take new trend really well, not a really big number, but the real fueling cycles are little heavier a lot heavier in 2010 and that could be another couple of million tons.
And then you have some additional plants coming online in 2010, which could be 5 to 10 million tons. So, you kind go through the map and you sit there and say, you don't need any miracles out there, but I think the key component are you need under a normal winter, not a mild winter and you need the economy to be in plus number, not negative numbers.
And if that occurs, we're likely to see the reduction in stock -- occur reasonably risk base.
Kuni Chen - Bank of America Merrill Lynch
Great, thanks for the color.
John Eaves
Thank you.
Operator
We'll go to next question Schneur Gershuni of UBS.
Schneur Gershuni - UBS
Hi, good morning guys.
Steven Leer
Good morning, Schneur.
Schneur Gershuni - UBS
Most of my question have been asked and answered. But I do have couple of follow up I guess to particular.
And just with respect to the cargos that went to China and Southward. I was wondering if you can give us some color on the feedback as to the uses of coal, I know historically people talked about how similar to the Indonesia coal with the feedback positive.
And secondly as part of that where you estimate the real cost maybe getting out the door essentially?
Steven Leer
I'll tell you we've got good feedback on the first though, obviously, I think is working pretty well. And as you said, we think it will compete very favorably on a cost and on a quality basis in coal.
Just obviously, we don't have a lot of feedback on that, but we think the coal work very well. In terms of real costs, I mean, I can get into particulars, but I will tell you that the rail roads are motivated to move this product to China as well as India.
And we are having meaningful conversation not only with customers, but with railroads. So we are cautiously optimistic that that's going to be a real strong of course for the next three to five years.
Schneur Gershuni - UBS
Okay. If I can ask a follow up question with respect to the guidance that was presented today.
Just trying to work with, work our way through when I look at the EBITDA numbers, I look at the depreciation guidance. So can you give some color on where you expect the tax benefit I guess to be in the fourth quarter as well as any other items like income or training how that correspondent to your guidance so forth we can tract your EPS estimate?
John Drexler
Schneur, this is John Drexler. As we look at to tax provision and we have to look at it for the full year.
We now expect to relatively modest tax benefit for the year between 8 and $20 million primarily due to the impact of percentage of depletion on our pre-tax income. So, you can kind of work that back through with where we're at year-to-date in kind of the range of expectation for the fourth quarter.
Steven Leer
As we look for obviously -- there are other components of your question?
Schneur Gershuni - UBS
I guess the trading or other income.
John Drexler
The trading or other income. As you look at the other operating income we did have an increase here in the third quarter.
If you look at what we trended in the first two quarters of this year, we were running other income of around 6 or $7 million a quarter and Steve discussed in his prepared remarks we did have one transaction what we monitored the brokerage position that we had after and that we had expected to go physical that resulted and another component of the step up in that other income. So, you look back to the first couple of quarters, that's kind of the rate that we've been running out with kind of the one transaction here.
Within the trading organization, as we've talked about previously the trading organization is there not to take significant amount of risks, but they are to make money to provide value with the real component of trading giving us more asset optimization insight into the markets themselves and really helping us to cross our entire sales platform as we look forward. So hopefully I add some color there.
Steven Leer
And now to add to that our Knight Hawk investment in Illinois continues to perform well and improve, so that will be a continuing contribution we hope as we move forward.
Schneur Gershuni - UBS
Okay, great. Thank you very much.
Steven Leer
Thank you.
Operator
We have Paul Forward, Stifel Nicolaus.
Paul Forward - Stifel Nicolaus
Good morning. On your potential growth from 2 million tons of met coal this year to 4 plus million tons in 2010.
We've seen some of your competitors, who got big position in Central Appalachia also talk about. Having the capacity in place to expand production or shipments of metallurgical coal.
Just wondering if I can get your take on what sort of constraints are potentially out there, not market constraints, but really physical constraints through the supply chain to be able to really bring that coal to the market assuming that the main driver exports.
Steven Leer
Really, Paul, there is not lot. Certainly on the railroad side, they've demonstrated they can move the volumes to the port.
In 2008, we exported about 18 million tons. This year we'll forecasting about 55 million tons of export.
So we think there is tremendous opportunity without any capital investment to increase that volume. And we think going into 2010, it'll most likely be met.
So we're forecasting roughly a 10 million ton increase in our exports for 2010. So and I would tell you not a lot and certainly on the operating side as I indicated earlier, there is not much capital of any at all associated, which doesn't going into the met market versus the steam market.
Paul Forward - Stifel Nicolaus
Okay, great. And the just following up on the first question from Pears on the pricing for next year.
You in the PRB you had $12.26 this quarter. And you talked about kind of flattish with your current locked in book of business for next year flattish type pricing.
Just wanted a little clarity if I could, is that applying to the legacy or its PRB operations should have comparable pricing or is it helped by the higher prices that Jacobs Ranch that might be overcoming a decline and pricing from your Black Thunder and coal creek for 2010?
Steven Leer
Well, the fourth quarter 2009, we had the Jacobs Ranch in there obviously. Moving forward, we are facing 15 to 25 million tons on about 40 million ton run-rate at Jacobs Ranch.
John Drexler
I think on your pricing question, Jacobs did have some solid pricing compared to current market. So, that's a positive as we look forward.
But fundamentally, not a lot of change on either one, our view is 10 will likely not the real robust certainly in the first half and really. As we try to move coal in 10, we're certainly not very active and kind to compare beyond ten if we have to sell it at all.
Steven Leer
Paul, we moved a little bit of volume in third quarter, but it was pretty insignificant so, we are trying to be patient not have see a lot of opportunities out their right now in the new term. So, as we go the budgeting process, we'll determine where we are for 2010.
Paul Forward - Stifel Nicolaus
Okay, appreciate it. Thanks.
Operator
Brett Levy, Jefferies & Company.
Brett Levy - Jefferies & Company
Hi guys. As you look at 2010, can you talk about what Jacobs in there, was maintenance CapEx and then as you look at some of the other projects you may optimistically pursue, can you talk in rough sense what each of those projects will cost incremental to maintenance pro forma for Jacobs.
Steven Leer
I think it's a little bit early right now to talk about where our capital numbers are. We're still in the planning stage, but I think the market size certainly plan on having a overall capital saving by combining these two coal mines, and there will be report on that more in the January call.
Brett Levy - Jefferies & Company
But not even a maintenance number for 2010?
Steven Leer
There's not a lot of change. But if the distorted number, simply because if you think about Black Thunder, we have some part right now and as you look forward maintaining the current level of production and equipment of lower than if the mines of full blast.
And as we move one of grade lines over to the former Jacobs Ranch properties and part their shovel cut spread, you can sit there and makes the argument that in a very legitimately that if business would pick up, let's say, in second half of '10 and we wanted to expand if you will or the market demand is expansion, then we would just simply restart that part equipment. So, by moving the drag line, you end up lowering costs and parking equipment.
So, the maintenance GAAP is virtually not been additional as for as Jacobs for a period of the time, but it's somewhat distorted because of current market levels or productions level. Did that make sense?
Brett Levy - Jefferies & Company
Yeah, I was actually looking for maintenance number?
Steven Leer
It wouldn't change from 2009. And I can't remember the number off of my top of my head as we sit here today.
Unless something comes out of budget there, I'm not anticipating.
John Drexler
Brett, this is John Drexler. Historically, we've said in many different forms that maintenance CapEx for our company typically over the last several years is run around 200-250 million.
As it look at this year, we're coming in very much at the low end or below that. Bottom end of that range and given these market conditions as we look to next year, we'll have a critical eye, but I would be willing to say it's safe to assume that in a minimum will be at the low end of that range.
The number we have talked about we are building a plant at our West Elk operations that will be next year as well. And so, but suffice to say, we except on a maintenance capital basis from were we stand now has given these market conditions that we are going to be on the low end of our traditional range.
Brett Levy - Jefferies & Company
Thanks very much guys.
Steven Leer
All right
Operator
We'll go to Andre Benjamin of Goldman Sachs.
Andre Benjamin - Goldman Sachs
Hi, good morning guys.
Steven Leer
Hi Andre.
Andre Benjamin - Goldman Sachs
I just had a quick question. I just get a little bit more color on the Western Bit region, where you guys actually surprised us by selling more than a million tons more than you did last quarter; however, that 4.6 million tons is still below 5 to 5.5 run rate you've done last year.
So I was wondering if you can give a little color on how we should be thinking about fourth quarter and then going into 2010 as you work through some of the mining conditions out there.
Steven Leer
Yeah, well, going from second quarter to third quarter, you know obviously we had three long moves in the second quarter all those in retail. We didn't have any in the third quarter.
So that was part of that million tons. At the same time, we have throttled back through the quality issues out there from an annual run-rate of about 6.5 million tons to about 3.5 to 4 million tons.
So we're in the planning stages right now as we move into next year. We are building the preparation plan West Elk, which will not be operational to sometime early in the third quarter of 2010.
So I think probably that 4.6 is probably a decent number moving into the year and we'll have to see what the back half of the year looks like in terms of market demand.
Andre Benjamin - Goldman Sachs
Okay. And then so I guess do you expect given that you cut total pretty flat quarter-over-quarter despite producing a 900,000 more tons, we should expect with some more of that condition next quarter as well?
Steven Leer
Yeah, I think if you're modeling fourth quarter, I think the cost you see obviously if we're going to stay in Western Bit in that 26 to $28 range, we've got a have a pretty good fourth quarter and we're expecting to have that. I think modeling PRB and modeling Central App to use kind of a numbers you are seeing in the third quarter that will get you pretty close.
Andre Benjamin - Goldman Sachs
Okay. And then I guess one last question realization took a little of the step down, we're on the impression that you were kind of in the worst part of the patch last quarter.
So, if anything I would have thought that are if you can't sell in the same quality core at the worst, the realization should have been flat. Is there any color why that went down if it's the market condition?
Steven Leer
Yeah, I think it's the primarily with customers mix.
Andre Benjamin - Goldman Sachs
Okay. Thank you for the call
Steven Leer
Thank you.
Operator
We'll go to Jeremy Sussman of Brean Murray, Carret & Co.
Jeremy Sussman - Brean Murray, Carret & Co
Hi, good morning.
Steven Leer
Good morning.
Jeremy Sussman - Brean Murray, Carret & Co
Good morning. Clearly you are still busy integrating Jacobs Ranch, but it sounds like everything is going on real smoothie, so I am going to go ask you about your growth strategy going forward after that?
Steven Leer
Well, right now we are looking at the marketplace recovery. Think we talked a little bit about it if you really think through the potential for the Powder River Basin expansions into the Pacific Rim.
We see that as a real opportunity middle intermediate term. We continue to see success in our Illinois basin operations, we have a little under 400 million ton reserve there, I should say our investment in Illinois in the Knight Hawk operation that's down the road in my mind, I am probably a little bit more pessimistic than other than the expansion there, but I am confident that Illinois will become a major supplier stepping in along with the PRB into the short fall that are developing if you will in Central App production abilities.
So, we see that, we continue, we're always looking overseas. It just never find anything that we are willing to write a check for.
And so, that would probably keep us busy for the next couple of years I guess. We do continue to believe that there will be further rationalization in the industry as we move during through the next two to three years and as Arch has demonstrated many, many, many times in the past.
We look at virtually everything but, we're very diligent if you will on what we choose to buy and how it fits into our operation, so we'll continue down that opportunistic path too. Because we see potential and everyone of our major basements that we operate in.
Jeremy Sussman - Brean Murray, Carret & Co
Great. And just as a follow-up: you mentioned in your prepared remarks that you could see inventory a level reaching 200 million tons by year end.
Can you just give us a sense of that's pretty evenly spread and in terms of a inventory day basis throughout the various regions or kind what's your thoughts about that.
Steven Leer
Sure. It's interesting and there has been some articles gone at that frankly I haven't been, I don't think it has been quite accurate.
If you look at the Powder River Basin, we entered 2009 with pretty high inventories. And as the year developed basically you know Powder River Basin kind of match demand.
And the inventory didn't grow, they certainly didn't come down. But they more or less stay the same, where we saw the growth was then really the eastern inventories.
And I think that continues to be one of the area that you -- we've seen going through the maybe the third quarter here. As we've entered the fourth quarter and looking at some of the other early weather, we may have hit the higher watermark on total inventories during this month.
And with the decline in production in notably in Central App, but elsewhere and if whether this kind of whole thing, we've probably see inventories start to decline as we move through the end of the year. But who know what the whether is going to be, I think speaking of that, so if you look at the Powder River Basin as an example, the weather -- if we hadn't had one of the mildest summers on record across pretty much the entire U.S., we would have seen inventories actually come down given the production rates and demand that were there, because really PRB didn't give despite very often by natural gas.
We certainly thought some of that in Central App. So we're sitting there saying kind of the worst cases, maybe we entered the end of the year was 200 million tons or probably we think internally it will be a little bit lesser that.
We probably hit that number, very close to it here at the beginning of October. But if you're sit and think at St.
Louise, we just have one of the coolest, rainiest Octobers ever. So, demand is up a bit.
We're seeing that in some of our other utilities as they announced third quarter. Obviously anybody, who is following those no storms and Denver, Colorado, Wyoming are seeing -- looks like there might be an early start to winter, which would be a good thing.
Jeremy Sussman - Brean Murray, Carret & Co
Great, thanks.
Steven Leer
Okay. Thank you.
Operator
We'll go to Michael Goldenberg of Luminus Management.
Michael Goldenberg - Luminus Management
Hi, my questions have been asked and answered. Thank you.
Steven Leer
Hi, Michael. Thank you.
Operator
John Bridges, JPMorgan.
John Bridges - JPMorgan
Good morning, Steve.
Steven Leer
Good morning, John.
John Bridges - JPMorgan
I was in Denver, enjoying the early start to winter yesterday?
Steven Leer
We had people trying to get in and out, may have really enjoyed it.
John Bridges - JPMorgan
And any comments on how much met was in the mixed in the third quarter. We're just trying to make our models work.
John Eaves
We had 500,000 John in the third quarter of met. So, I think through October, we should divide a 1.5 million of met and we're going to hit that 2 million ton level, which is really the upper end of the range that we gave during the second quarter call.
John Bridges - JPMorgan
And is there a mix that you are including PCI in there as well.
John Eaves
That's correct.
John Bridges - JPMorgan
Are we talking 50-50?
John Eaves
No, it's about 25% PCI, the balance being met.
John Bridges - JPMorgan
And then just wondered how much of income you were factoring into your estimate for 2009?
John Eaves
That would be more the traditional level of the first half third quarter.
Steven Leer
Other income is lumpy when we tell out there for sometime you gain, sometime you lose is part of the ongoing business, but it's certainly low lumpy as we look forward a formal can possible too project. But we usually used just kind of the, I'll call it, a running average.
John Bridges - JPMorgan
Okay. Well, congratulations on the results those spans as you turn the corner, well done.
Steven Leer
All right, thank you.
Operator
We'll go to David Lipschitz of CLSA.
David Lipschitz - Calyon Securities Inc.
Good morning, good afternoon whatever time is it right now.
Steven Leer
Hey David, how are you?
David Lipschitz - Calyon Securities Inc.
Good; how are you?
Steven Leer
Good.
David Lipschitz - Calyon Securities Inc.
In terms of the deals and commitments still available for next year, the prices stayed where they are right now, would you keep those tons in the ground or are they still in the plan?
Steven Leer
I mean it would be a mix, David, when you look at the operational coal mine there, particularly the big Powder River Basin type mine that really all the mine, there are certain production level that are natural economic breaks. And we would adjust to the marketplace, but there would be some tons that would be sold.
I had an interesting discussion overseas someone brought it up, where with the merchant plant, but they told me they were totally uncommitted for a pin unhedged, because they'd have such terrible business and nine, they just said no where they are going go. So again to comeback to that whether there economic question.
So, I like in it say that if we have normal winter level, colder than normal winter I think the industry gets the double benefit and it stands that natural gas pricing would likely to stay fairly positive compared to where it's been and obviously burn to go up as the result of that and then so the economy on top of it. Now, if we have a mild winter, you get a double negative.
So, that's kind of where we are sitting it would end up been in mix with some stories.
David Lipschitz - Calyon Securities Inc.
So, as of right now, based on from 2009, we are now would -- that means you wouldn't have any more production cuts for next year?
Steven Leer
Again, we're not going to commit one way or the other. I think what we have demonstrated time done against since over the last decade partial map market demand and market demand moves up will match and then if it goes down, we'll look at our mines and say what's non-economic.
David Lipschitz - Calyon Securities Inc.
And then just if I kind of follow-up, in shares outstanding, so what is the total shares outstanding right now?
John Drexler
Right now, we're to 163 million shares outstanding give or take.
David Lipschitz - Calyon Securities Inc.
Okay. Thank you.
Steven Leer
Thank you.
Operator
At this time, I'll turn the conference over to Mr. Steve Leer for closing remarks.
Steven Leer
Let me call us today by really reemphasizing that are mines are running well. The Jacobs Ranch integration is going very, very well, and we're seeing positive signs on the economic recovery.
As we've listened to other calls from our customers and other, you've seen it not has been that there industrial based well certainly not back to normal have come off the bottom, which we think will bode very well to the coal industry. We would argue that coal has really taken a blunt coal generation in the U.S.
has taken a blunt of the economy downturn with electric generation down about 4%. I think it may be the highest and something being keeping records at certainly the last 50 years.
But coals of generation down around 10% or so. And as we see the economic turnaround that continues, we really see positive implication that coal will probably get a more than its fair share on the upturn just as it took more than its fair share on the downturn.
So, thank you for your interest today. I think we have -- Arch is very well positioned for the next market cycle as it plays out over the next six to 12 months, on the upside of it and then hopefully go well beyond that.
So we're very pleased and we look forward to talking to you again. I guess it would be in probably late January or early February when we close out the year and talk about 2010.
Well, thank you.
Operator
That concludes today's conference. Thank you for your participation.