Feb 4, 2014
Executives
Jennifer Beatty – Vice President, Investor Relations John W. Eaves – President and Chief Executive Officer Paul A.
Lang – Executive Vice President and Chief Operating Officer John T. Drexler – Senior Vice President and Chief Financial Officer
Analysts
Michael S. Dudas – Sterne, Agee & Leach, Inc.
Lucas N. Pipes – Brean Capital LLC Paul S.
Forward – Stifel, Nicolaus & Co., Inc. Curt Woodworth – Nomura Securities International, Inc.
David Gagliano – Barclays Capital, Inc. Mitesh Thakkar – FBR Capital Markets & Co.
Meredith Bandy – BMO Capital Markets Caleb Dorfman – Simmons and Company Brian Yu – Citigroup Inc. Jim Rollyson – Raymond James Evan L.
Kurtz – Morgan Stanley & Co. LLC Lance Ettus – Tuohy Brothers Investment Research, Inc.
Timna Beth Tanners – Bank of America-Merrill Lynch Neil Mehta – Goldman Sachs Brett M. Levy – Jefferies LLC Justine B.
Fisher – Goldman Sachs & Co. Dave A.
Katz – JPMorgan Securities LLC David A. Lipschitz – CLSA Americas LLC
Operator
Good day, everyone, and welcome to this Arch Coal Incorporated Fourth Quarter 2013 Earnings Release Conference Call. Today's call is being recorded.
At this time I would like to turn the call over to Jennifer Beatty, Vice President of Investor Relations. Please go ahead.
Jennifer Beatty
Good morning from St. Louis.
Thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act.
Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements.
We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. I would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.
On the call this morning, we have John Eaves, Arch's President and CEO; Paul Lang, Arch's Executive Vice President and COO; and John Drexler, our Senior Vice President and CFO. John, Paul and John will begin the call with some brief formal remarks, and thereafter, we'll be happy to take your questions.
John?
John W. Eaves
Good morning. Today Arch reported fourth quarter EBITDA of $38 million which reflects the impact of rail issues and geologic challenges.
As you know, our quarterly shipments in the PRB were negatively affected by weather and rail carrier shortfalls that have continued into the first quarter. We do expect rail performance to improve over the course of 2014 as crews and power added back to meet demand.
That should allow us to make up the majority of our PRB shipments that we are suppose to have moved during the fourth quarter. More importantly the rail constraints and favorable weather to date could have real implications for coal markets this year.
U.S coal power-plant stockpiles fell more than 35 million tons in 2013 and the cold weather across much of the country in January likely accelerate this liquidation. Stockpiles at PRB-served customers are the lowest in the country and involving the weather 60-day mark in December.
Some of our customers have raised concerns about potential stockpile shortages if these trends continue. Even more intriguing as what is happening in the natural gas market.
So far this winter, 1600 BCF has been drawn from natural gas storage. This represents a withdrawal rate is 45% above the five-year average and in late during the 2012 winter they put a black cloud over the U.S.
thermal markets for the past two years. Electric generating capacity is doing a bit stressed due to the pickup in demand, steel prices particularly in the northeast is skyrocket.
Of course we share our customers concerns about the potential lack of grid reliability and fuel diversity, a current policy seem to be dictating. We believe no one in this country should have the choose between heat or electricity.
We anticipate in much more balanced and dynamic market in 2014 with the PRB benefiting meaningfully. In fact spot prices for PRB are up more than 40% since early 2012.
The same however can’t be set for the metallurgical markets. We currently anticipate a challenging environment for the bulk of 2014, one promising sign is that demand remains reasonably strong.
Unfortunately, global supplies outpace that demand depressing price. Longer term we do see bright future for U.S.
coal in the international market, but we expect lower metallurgical export volumes in 2014. At Arch, our fourth quarter met volumes fell short of our expectations due to geological challenges at Mount Laurel.
In his prepared remarks, Paul will discuss our current outlook for Mount Laurel and while we should expect comparable level of output at the mine in 2014 versus last year’s we worked through adverse conditions in the current panel. For the full year 2013, Arch sold 6.8 million tons into the met market prices just under $190 per ton.
And despite the geologic challenges we have encountered at Mount Laurel in the back half of the year, we estimate our cash cost and produce met volumes represented around $75 per ton in 2013. Showcasing our ability to make strong margins despite ongoing weaknesses in the met face.
In 2014, we expect the Leer mine to run at a 3 million ton a year annualized with roughly 70% of that output targeted for the coking coal market. About half of those tons are already committed in the market today.
For the full-year 2014, we are targeting total met sales of around 8 million tons. That level reflects the impact of production, reduction and cutbacks we have made last year.
And matches the second half 2013 run rate of 6 million tons, plus the additional of the Longwall production at Leer. Certainly that level of met output is below our current capacity of around 10 million tons, but it’s also a accurate forecast in light of current market condition.
Longer term, our ability to tap into the expected growth in seaborne metallurgical coal demand, I think major focus for Arch. And we expect the Leer mine to deliver a strong return on our investment given its good quality and strategic access to seaborne markets.
Another area that we're watching closely is the international thermal market, which could potentially move higher if export supplies are further constrained. In 2013, Arch shipped approximate 11.5 million tons overseas, down slightly from our record 2012, it still strong by historical comparison.
As you know our West Elk mine in Colorado is heavily focused on the export market. As 50% of the mine’s output were sold in the Europe, Latin America and Asia in 2013.
That penetration has been helpful as it has helped to offset a soft demand for Colorado coal domestically. However, as economic price hedges roll off, we have elected to reduce output at West Elk to a run rate of roughly 4 million tons per year in order to preserve the reserve base.
By retaining the flexibility at the mine to respond quickly when international prices moved up further. While we expect our export shipments to decline in 2014, we are making a strong inroads in to building our overseas network.
Last year we opened an office in China and grew our global customer base by 30. In the first half of 2014, we have lined our PRB coal to ship through the Gulf as European coal demand remain strong.
The expansion of rail direct port capacity in Houston this summer should further facilitate this movement. Over time ability to direct PRB coals into the seaborne coal trade in a more significant way and it will be a key driver for our company.
Finally, I would like to highlight Arch’s major achievement in the company’s core value metrics. In 2013, we delivered another strong year for safety and environmental performance, having further improved upon our performance is obtained in 2012.
In addition, several mines West Elk, Coal Creek and Hazard, all reached major safety milestones last year. I would like to applaud the efforts of our employees to maintain a strong commitment to safety environmental excellence every single day.
While we saw continued improvement in some key pillars last year, we also experienced a decline in 2013 earnings due to a softer pricing environment, particularly on the metallurgical side. Currently we are expecting similar headwinds for 2014.
Our goal this year will be to tighten our belts to further reduce cash outflow and to increase operational efficiencies. We will stay focus on managing our capital spending, cost and commitment and continue to look for ways to optimize our asset portfolio.
In December, we successfully extended debt maturities until 2018 and further enhanced our financial flexibility. John Drexler will highlight those initiatives in his prepared remarks.
As we look ahead, it’s important to remember that is coal markets recover so coal prices. This in turn will improve our financial performance and drive shareholder return.
With actions we have taken at 2013 to enhance our liquidity position, we are confident in our ability to navigate through this market cycle and reshape Arch into a stronger, more competitive global resource provider. With that, I will turn the call over to our COO Paul Lang, for a discussion of Arch’s recent operating performance and outlook for 2014.
Paul?
Paul A. Lang
Thanks. As John mentioned, I would like to discuss our operating performance in 2013 and highlight areas of focus for 2014.
In 2013, we meaningfully reduced our costs in the Powder River Basin, achieving a 5% reduction in unit cash cost on a year-over-year basis, despite a challenging fourth quarter. We benefited from several major process improvement initiatives that reduce control the costs, coupled with additional volume that allowed us to run Black Thunder more efficient than last year.
Moving forward, while the demand outlook for the PRB is improving, we currently anticipate operating our mines in the region at level on par with 2013, absent any rail service issues. Given the supply and demand fundamental that we see, we expect our customers to further liquidate their stockpile during 2014, which could create tightens in the market over the next year.
In our Bituminous Thermal segment a operating performance at the West Elk mine and the elimination of Canyon Fuel’s impact, allowed us to meaningful reduce fourth quarter unit cash cost versus the third quarter. Looking ahead, we anticipate a step up of costs in 2014 compared with the fourth quarter of 2013 and we expect West Elk to operate and reduce production levels.
In Appalachia, we reduced our cash cost by 4% in 2013, even though we cut our volumes by 20%. We have been actively realigning our portfolio in the region to concentrate production on our lowest cost mine and to shift our output towards higher margin metallurgical markets.
As a result metallurgical coal made up almost half of our tons sold in Appalachia last year. That’s up 10% from 2012.
Heading into 2014, we expect our metallurgical volumes represents an even greater percentage of our sales mix in Appalachia, even while our costs trend lower. At Mountain Laurel, we currently expect our output to be roughly in line or slightly below 2013 levels.
As you know, the mine height in the Cedar Grove is thinner than in the Alma seam, with the mine transitioned from 2012. In addition, geologic issues in the current mining panel have slowed the advance rate of the longwall.
Collectively, these items have reduced our output at the mine. With that though, we believe we are currently in the heart of the adverse condition now and we expect improvement as we progress with this panel and transition to a new one in the second half of 2014.
It’s encouraging that the quality of coal being mined at Mountain Laurel in demand, thus we feel that managing through this environment is preferred path, versus cutting the panel short and not mining and selling the tons.
In addition, we continue to finalize permits and engineering on the other low-cost reserves in the Tygart Valley area, adjacent to Leer. These reserves can be developed over time should the market condition warrant.
Overall, we believe that the metallurgical side of our business combined with the strong PRB franchise creates a compelling long-term value for shareholders. Our asset portfolio will provide a significant growth potential as markets correct, and the balance needed to manage volatility, inherent in this industry.
Turning now to capital. We have reduced our capital spending program in response to weak market conditions, even while successfully completing the Leer mine development.
For 2014, we expect to further reduce capital spending by more than a $100 million versus 2013. Within this spending level, we are still maintaining our existing operations, including land payments, for replenishment of reserve base.
Lastly I want to touch on our sales commitment. On the metallurgical side, we are targeting higher sales volumes in 2014, due to incremental tons from Leer.
Two years ago, 30% of our metallurgical sales were blend of low-vol and high-vol A coals. This year our percentage of high quality coking coals will be close to the half of our sales mix.
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As of now, we have roughly half of our 2014 metallurgical coal volumes left the place. Although the benchmark price is low at the movement, we have a cost structure that allow us to participate in the market.
We also believe that the current prices are unsustainably low, which will reduce significant capital cutbacks cross the globe and very little if any reinvestment in reserve placement. On the thermal side, we continue to sell into an improving market in the PRB and expect customers to enter the market to supplement their needs as they see their stockpile decline fairly rapidly.
For 2014, we are roughly 85% committed based on our current volume run rates. And currently have about half of our tons committed for 2015 delivery.
In addition, we anticipate that our sales portfolio in 2014 will be weighed down our lower realized prices on export sales. At the same time, these sales are allowing us to continue to cultivate important relationships in the global market and help us meet our minimum throughput environments on port and rail contracts.
With that, I will turn the call over to John Drexler, Arch’s CFO to update our recent financing activities and current liquidity position. John?
John T. Drexler
Thanks, Paul. As John mentioned in his prepared remarks, we took actions during the fourth quarter to further bolster our liquidity and extend debt maturities.
These proactive steps will helps us navigate the current market cycle by providing us greater flexibility. We now have more than $1.4 billion of liquidity with $1.2 billion of that in cash for highly liquid investments.
No meaningful maturities of debt until 2018 after successfully refinancing our 2016 notes without increasing our interest costs and significantly relaxed financial maintenance covenants. We have suspended or eliminated most financial maintenance covenants that pertain to our $250 million revolver until June of 2015, when a relaxed senior secured leverage ratio covenants steps back in.
During the interim, only a minimum liquidity covenant remains in place. While our leverage is currently higher than our long-term target, we have implemented a very flexible capital structure with a high level of pre-payable debt that will allow us to de-lever the balance sheet as coal markets correct and our cash flows improve.
During the quarter we also recorded a $12 million charge related to a settlement of legal claims between the UMWA and Arch stemming from the Patriot Coal bankruptcy. As part of the settlement, we will make a $6 million contribution to Patriot [indiscernible] in both 2014 and 2015.
This settlement concludes all disputes between the parties. In addition with Patriot emergence from bankruptcy in December, we completed the acquisition of the Guffey metallurgical coal reserves for $16 million.
Capital spending for the fourth quarter totaled $74 million with the Guffey acquisition. For the full year our revenues declined by over $750 million reflecting the weak pricing environment, but our cost declined by nearly $500 million.
Thanks in part to a strong focus on controllable cost in our operation. Capital spending also came in on target even with the opportunistic reserve purchase.
CapEx totaled $297 million in 2013, which includes over $100 million for the completion of Leer. With that work project now complete, our capital spend in 2014 will be significantly reduced.
Turning now to current expectations for full-year 2014. We are forecasting the following guidance most of which is reflected in our earnings release disseminated earlier today.
In the Powder River Basin, we expect cash costs in the range of $10.70 to a $11 per ton. The midpoint of this range is slightly higher than our 2013 actual results and contemplates the impact of lingering rail issues as well as potential increases in sales-sensitive costs.
In Appalachia we expect cash costs of $63 to $67 per ton, a reduction of $2 per ton year-over-year. This range anticipates the impact of Leer’s lower cost structure.
In our Bituminous Thermal segment, we expect cash costs in the range of $25 to $28 per ton. This range anticipates lower output at West Elk during 2014.
In other financial guidance, we expect reduction in capital spending in 2014 of at least $100 million. Our 2014 CapEx range is between $180 million to $200 million, which includes the third of five $60 million annual LBA payments for the South Hilight reserve.
DD&A in the range of $430 million to $460 million. Total interest expense between $385 and $395 million.
We note that our cash interest costs will be between $360 million and $370 million in 2014. The incremental expense that attributable to the Leer development transitioning to production in a subsequent reduction in the capitalization of interest.
SG&A between $122 million and $130 million representing a reduction versus 2013 due to our ongoing efforts to lower cost as well as the benefits of realigning our corporate function following the sale of Canyon Fuel. In addition we expect to record a tax benefits for the year in the range of 30% to 50%.
Finally, I would like to comment that as some of our previously hedge transactions in the international market roll over, we are taking a hard look at our minimum obligations with various port and rail operators. It’s simply may not be in Arch's best interest to ship the tons at this time, while the direction of global demand and pricing trends will dictate whether we meet our minimum obligations in subsequent quarters.
We remain confident on in our export strategy and its ability to drive long-term value for our shareholders. However, in light of current market conditions, we expect that we could incur charges of approximately $10 million per quarter on these minimum obligation contracts in 2014.
While we continue to see challenges in the near-term in metallurgical markets, thermal fundamentals continue to point the meaningful improvement over the course of 2014. Accordingly we have taken proactive action this past quarter and year, that will position us to respond as market recover.
With that, we are ready to take questions. Operator I will turn call back over to you.
Operator
Thank you. (Operator Instructions).
We will take a question from Michael Dudas of Sterne, Agee.
Michael S. Dudas – Sterne, Agee & Leach, Inc.
Hi good morning gentlemen. Jennifer?
John W. Eaves
Good morning Michael.
Michael S. Dudas – Sterne, Agee & Leach, Inc.
Regarding the Leer output so the $3 million annual rate, are you still targeting in to Q1 for the full run rate and remind us again the not a met versus thermal that comes out of that mine. And how that’s can be position contract-wise relative to the U.S.
and national markets.
Paul A. Lang
Michael this is Paul. So far we have been pretty pleased, the start-up ran pretty well on schedule and the ramp up is also pretty well going on as we expected.
We still think Leer is going to run that kind of $3 million nominal ton rate with about 70% of it be in metallurgical.
Michael S. Dudas – Sterne, Agee & Leach, Inc.
My follow-up question would be relative to your improved outlook it seems in the U.S. thermal market.
Certainly with the weather helping in the PRB do you expect a meaningful turn in inventories greater than anticipated by March’s end. And I think also looking on the east have you seen any indications of thermal pricing out of Appalachia picking up a little bit given some of the gas and some of the demands on electricity generation.
Thank you.
John W. Eaves
Hi Michael this is John. I think if we look at the inventories overall for 2013 we ended about 148, which is the lowest we have been in 6 or 7 years, which we find encouraging if you look at the PRB customers within that space, they were sub 60 days.
So, we think with the weather we continue to have natural gas prices at elevated levels. They will see by the end of January when we get real numbers, that number could be down in low to mid 50’s in terms of days supplied for PRB customers.
So, I think things are going in the right direction there. We’ve certainly seen a recent uptick in activity in the PRB.
We have seen an improvement in pricing. I think your question on Central App certainly natural gas prices this morning were up $5.15, $5.20.
I think if you look at that compared to Central App coal you would think that Central App coal could compete but I think without sustain pricing of $5 to $5.25 on the natural gas. I think it’s going to be difficult for Central App to compete.
We really haven’t seen a whole lot of activity in Central App to date. If you look at those inventory you are still well above where they need to be.
So, I would tell you we had production out of Central App in 2013, it’s about 128 million tons. Our internal forecast were showing that about 113 million or 114 million for 2014.
And our forecast for natural gas where somewhere in that 350 million range. So, we continue to see pressure on Central App thermal coal as we move forward.
Operator
We will go next to Lucas Pipes of Brean Capital. Your line is open.
Lucas N. Pipes – Brean Capital LLC
Good morning, everybody.
John W. Eaves
Good morning, Lucas.
Lucas N. Pipes – Brean Capital LLC
I first wanted to touch first on the met coal side, so if I go back to 12 months ago, I think you were guiding to 8 million to 9 million tons and then over the course of the year things have changed a little bit. Could you remind us what exactly took place there and why this year you think you can beat your guidance?
Paul A. Lang
Lucas, this is Paul. I’ll start with that.
We are forecasting net volumes of 7.5 million to 8.5 million tons per year, which I think reflects production cutbacks we made in 2013. I think the best way to look at our volume guidance is to take the run rate for the back half of 2013, which is above 6 million tons include the step down at Mountain Laurel and add back here in the Leer long while impact.
Certainly this is below our capacity and that’s a little bit of argument but currently we try on that capacity of around 9.5 million to 10 million tons. But I think it’s true it’s been – we forecasted where we did given the market conditions.
John T. Drexler
Lucas this is John. When you think about 2013 and 2012 we proposed a number of mines about eight or nine coal mines, a lot of that was thermal production.
But there was met production in that as well. It had cost structure that we didn’t think it made sense and as we look at the market this year, we think that midpoint of 8 million tons is the right level given what we see, what we committed domestically and really where our costs are.
So, we are going to continue to monitor the international market. I mean I don’t think if any real secret with benchmark pricing first quarter $143, you’ve seen stock prices dropped below that.
So, the anticipation for second quarter could be another step down in the benchmark pricing. And we just want to make sure that we got our portfolio positioned, where we can generate positive cash margin in this difficult market.
At the same time, we position when the market does move in the right direction, if we can respond and capitalize on that. So, we do think we’ve got the company well positioned in that regard.
Lucas N. Pipes – Brean Capital LLC
That’s very helpful. And just a quick a follow-up.
In terms of the quality of met coal that you have committed which say that’s kind of your average type of blend where is that, which works the higher side?
John W. Eaves
Well, I think it’s pretty well split between our higher blend and our lower blend. It’s somewhere right around 50%.
Lucas N. Pipes – Brean Capital LLC
Okay thank you. And then just lastly in terms of your covenants, could you remind us you did refinancing in December.
Could you remind us where you stand what is coming up there, and then maybe also give us an overview of your letters of credit and where they stand against any sort of covenants that you may have?
John T. Drexler
Hey, Lucas, this is John Drexler. Yes, we were very pleased with the refinancing we were able to do in December, really focused on two major areas.
We wanted to enhance our liquidity. We wanted to expand debt maturities and we were able to achieve that.
Your question specifically is related to financial maintenance covenants. As a reminder, when we look at our $1.4 billion of liquidity the only component of liquidity that has exposed the financial maintenance covenants and the only component of our debt structure is the revolving credit facility.
It’s a $250 million facility that is undrawn. We have a minimum liquidity requirement, $550 million.
There are no other major financial maintenance covenants until of June 2015 when a senior secured leverage ratio steps back in its relaxed leverage ratio. So we feel good where we stand with that.
In relation to your question on letters of credit, we have about $115 million – 100 plus million dollars of LC. We have an AR Securitization Facility as well.
Those letters of credit were drawn against that, AR Securitization Facility. So we feel we’re good about how we’ve bolstered the liquidity for the company, extended maturities and only have a very small portion of our debt structure exposed to financial maintenance covenants.
Operator
We’ll take our next question from Paul Forward of Stifel.
Paul S. Forward – Stifel, Nicolaus & Co., Inc.
Thanks. Good morning.
John W. Eaves
Good morning, Paul.
Paul S. Forward – Stifel, Nicolaus & Co., Inc.
Yes, just following up on that last question. Well, it’s obviously pretty much a buyer’s market for coal assets in the U.S.
in 2014. Having done the refinancing and pushed out the debt maturities and so on, do you feel that you’re not likely to be all that active as a seller of assets from 2014 that you’re really not under any sort of kind of need to raise liquidity this year?
And what do you think as far as any potential kind of further slimming down of the portfolio this year?
John W. Eaves
Yes, Paul, this is John. Certainly John Drexler and his team have done a great job in enhancing our liquidity.
Surely the company is well positioning. So I think really our strategy has been consistent over the last couple of years.
We’ve said that if we have assets in our strategic to executing our long-term plan if somebody else values more than we value ourselves that we’d consider monetizing those assets. That opportunity presented itself in 2013 with the Canyon Fuel monetization and we think that was a very good transaction for the company and allowed us to put $400 plus million on the balance sheet.
As we go forward, you’re right. We’re not compelled to do anything.
We continue to look at our portfolio to make sure that we’ll get the right assets in place. If you look at what we’ve done in terms of our diversity, exposure to the thermal marketing, exposure to the met market, access in terms of infrastructure to access the global demand we do think we’re well placed.
And so, we’re not in a position in fact to do anything. Again, if somebody comes in and wants to talk about some assets that we don’t think are particularly critical to executing our long-term plan we consider that, but we do think in terms of liquidity and our portfolio we’re in very good shape currently.
Paul S. Forward – Stifel, Nicolaus & Co., Inc.
Great. And Paul Lang question here.
On Mountain Laurel, just want to ask about over the next kind of two to three years that Mountain Laurel, how much longer do you see now that the long Laurel will keep operating before you transition to rim and pillar operation and as you look past the current become problematic geology is there potential for that geology to reoccur as the long wall proceeds into other panels.
Paul A. Lang
Yes, Paul, Mountain Laurel obviously with a change from the element of the Cedar Grove, take a step-down in production. In this particular panel we are in the third panel, a three panel district and I think we talked at the last call we had a partying that was swollen right on us.
Yeah that continues to get worse as we got in to the higher cover portion of the panel. Fortunately we’re kind of in the worse part of this district and we feel like we’re starting to come out of it.
As far as reserves down the road, I think as we said in the past, you have to kind of reset your view of Mountain Laurel that is more of in that 2 million to 2.5 million kind of an operation. And we think the long wall got at least beyond our five year planning period.
Operator
We will move next to Curt Woodworth of Nomura. Your line is open.
Curt Woodworth – Nomura Securities International, Inc.
Hi good morning.
John W. Eaves
Good morning Curt.
Curt Woodworth – Nomura Securities International, Inc.
I was wondering if you can elaborate a little bit on some of the rail constraints that you guys saw on the PRB and do you think that, that would be an issue in terms of expecting volume recovery in the first part of this year?
Paul A. Lang
This is Paul. In the fourth quarter we saw pretty dramatic decline in the Powder River Basin due to rail issues.
And I think the railroad has been pretty public about it. They had service issues due to the weather and volume in other businesses.
And it probably cost us 2.5 million tons to 3 million tons. And as John said, the majority of that will be made up in 2014.
See, I don’t think this is kind of a new normal for the basin. Over the years, I think we have all seen ebbs and flows of rail service and I think the railroads are taking steps to get back to where they were.
I looked at the numbers for January compared to the fourth quarter and we got one carrier that’s up from 24.5 trains a day to 25.5 trains a day and the other one is up from 29.7 to 32.6. So, the basin as a whole is up about 7% and that’s not the entire gap we lost in the fourth quarter, but clearly that’s a good step in the right direction.
Curt Woodworth – Nomura Securities International, Inc.
Okay, thanks. And then just a quick question on Leer for the million tons that you have committed, can you tell us what the pricing was like on that?
John W. Eaves
Curt, I think because we continue to be in negotiations with our customers we’re a little hesitant do that. I would tell you that we found very good reception domestically as well as internationally for that product and given the cost structure and the quality we feel real good about where we are headed.
But just a little bit reluctant to throw out enough, that we’ve kind of gotten through the negotiating period.
Operator
We will move next to David Gagliano of Barclays. Your line is open.
David Gagliano – Barclays Capital, Inc.
Hi great. Thanks for taking my questions.
On the 53 million tons of 2015 PRB volumes that are now committed in pricing. Can you just breakdown the timing of when those volumes are priced and committed?
Paul A. Lang
David, I don’t think I have that in front of me.
John W. Eaves
I mean, Dave we continue to layer in business that we’ve been active in doing and we had those opportunities during the quarter to do that. I think if you look back over the last couple of weeks, we’ve seen a step up in PRB pricing, and again, we continue to participate in that business.
So, I think you have to figure as we move out given this environment we are in with declining inventory, high natural prices that we are seeing improving PRB prices the 2014 and 2015.
David Gagliano – Barclays Capital, Inc.
Okay, all right. On the export thermal volumes and these the throughput issues.
I’m just wondering, what’s the volume tied to those minimum throughput exports and are those volumes included in the full year sales volume expectations the 124 to 134 and also when do those minimum throughput requirements wind down, does this continuing into 2015?
Paul A. Lang
Those agreements there is at least probably a dozen of them, they’re kind of all across the board as far as term volumes and that I think they range anything from one year duration to a 10 year duration.
John W. Eaves
Dave this is John, when we entered into those agreement I mean obviously we look at demand growth over the next five to 10 years we think the biggest part of that is going to be in the global marketplace. And we wanted to make sure that the Company is well positioned to take advantage of that as we saw that demand evolve and doing that we know that there is going to be ebbs and flows in the international market.
And we happen to be in a pretty difficult environment in terms of international sales, but if you look back over the last couple of years, we have exported about 25 million tons over the last 24 months. Revenue approaching $2 billion and we couldn’t have done that without entering in these type of agreements.
So, as Paul said, we will continue to evaluate the international opportunities with the domestic opportunities, and it very well maybe in the case in 2014 as we are seeing the PRB continue to improve that we make the decision to sell coal domestically and go ahead and pay the LDs. And those are decision that we will make as we move forward.
I mean Paul and his team did a great job in mitigating on our LD exposure in 2013. And if you think about where we started out in 2013, where we ended up there was a material improvement in the management of those LDs.
Operator
We take our next question from Mitesh Thakkar with FBR Capital Markets. Your line is open.
Mitesh Thakkar – FBR Capital Markets & Co.
Good morning everybody.
John W. Eaves
Good morning.
Paul A. Lang
Hello Mitesh.
Mitesh Thakkar – FBR Capital Markets & Co.
My first question is for John. John, you have done a great job extending maturities and putting liquidity on the balance sheet over the last two years or so.
When you look at 2014, what are some of your key priorities as far as balance sheet is concerned?
John T. Drexler
As we look at 2014 I think we discussed this in our prepared remarks. We are very much going to be focused on what we think can control.
We are going to be continuing to focus on cost control, managing the liquidity and reducing CapEx. So, as we sit here today we put in place very flexible debt structure, but one that clearly is going to withstand the downturn here.
But as markets improve as we move forward as earnings and cash flow improve we have an ability to de-lever. As we sit here today, we think that we see that here on the near-term horizon we are going to be somewhat hunkered down as we manage through this.
But we feel that we put the balance sheet in the position to manage that well, but equally important if not more important as the market does improve as our cash flows improve as we go from the position of having protective liquidity on the balance sheet to having excess liquidity. We can put that to work and de-lever we think that’s very valuable proposition for the Company and its stakeholders.
Mitesh Thakkar – FBR Capital Markets & Co.
Great thank you. And just Paul, again on the PRB cost just a little bit of color here, when you look at the slight increase versus 2013, you mentioned in your prepared remarks that there is a royalty component which you are assuming might go higher because of the pricing recovery.
Can you kind of tell us how much of that component is on the overall increase?
Paul A. Lang
Yes, Mitesh, I’ll give you a little bit of color. As I said in my opening remarks you have kind of a look back where we came from 5% decrease in cost in the Powder River Basin equate it almost $60 million of cash cost savings last year.
We have a range we gave for 2014 of $10.70 or $11. It’s slightly higher than the midpoint of last year.
But I think it also contemplates some of these lingering rail issues continuing through the first quarter as well as potential sales sensitive, you look at that increased in just out contracted prices versus last year. Frankly, you could argue we are pretty close to flat when we take out sale sensitives.
All that being said, I expect cost in the PRB to be lumpy because the rail service in the first quarter, Mitesh we remain committed to controlling costs particularly the PRB, and as John said is one of our main focuses for 2014.
Operator
Our next question comes from Meredith Bandy of BMO Capital Markets. Your line is open.
Meredith Bandy – BMO Capital Markets
Hi, everyone. Thanks for taking my question.
And first is just obviously you’ve done a great job in controlling the CapEx. I was wondering, if you could tell us, how long you think the $180 million to $200 million sort of level is sustainable and what is the current capacity assuming no major CapEx above that?
Paul A. Lang
Meredith, this is Paul. As you said we’re forecasting between $180 million and $200 million and that includes land reserves.
This is down $100 million from last year. Going forward, we will not going to have as much of a benefit as we’ve had the last two years from idle equipment, which we still have this year particularly in the east.
In either case it’s kind of rough rule of thumb for you, I think a number of somewhere between $1 and $1.50 on maintenance CapEx is probably a pretty good target for us. But I won’t say, if you’d ask me this question three years ago, I would have given you a higher answer.
Frankly, we’ve gotten better running the company on lower CapEx and the market stays where it’s at or gets worse, I think we can adjust it now and will.
John T. Drexler
Meredith this is John. Just a follow on to that, just to give kudos to Paul and his team, we’ve done a lot of good things in terms of capital management, cost management, and I think a lot of these things have been driven through process improvement initiatives, and not one time hits that we think once the market gets better those go away.
I really think Paul and his team have put together cost initiatives, have been with us for a long time so as we see the markets improved we would expect to maintain those margins pretty well.
Meredith Bandy – BMO Capital Markets
Understood. On the first part if you don’t have a great deal of more CapEx what would you say if the capacity of our – is it close to where we are today?
Is there a little bit upside to that capacity?
John T. Drexler
Well, I certainly think that we got capacity in the Powder River Basin, which we have indicated, with very little if any capital, it’s just time and the decision to do that. We’ve also been very open that we had no plans to do that until we see a sustained improvement in pricing and we’re certainly pleased with the direction we’re seeing in pricing right now, but not willing to make that commitment.
We’re pretty comfortable with the run rates that we’re forecasting for 2014. In terms of the East, I mean the industry that we – we have the ability to do some more met, if we sold the Met market improve, I am not sure I’ll see that at least over the next quarter or two.
We just take a little capital, if probably we could take it down. I think we could move that volume in reasonable manner, if we saw a sustained improvement in the met markets.
Operator
And our next question comes from the Caleb Dorfman of Simmons and Company. Your line is open.
Caleb Dorfman – Simmons and Company
Good morning.
John W. Eaves
Good morning.
Caleb Dorfman – Simmons and Company
I guess Paul, just going back to the issue PRB cost could you sort of a give us a bridge for the cause in Q4, how much of it is attributable to the normal seasonal decline and Steven how much of them was attributable to I guess, to drop off, it’s a rail issue and could you stand on the maintenance issue, how much of that increase in cost is driven by that in – that going to be continuing issue looking into 2014 and beyond.
Paul A. Lang
Okay, let’s – I think if you add back the two and half or the guidance in Q4 we obviously thought that it was going to be a minor step-up in maintenance expense. And what didn’t care the way over the past I think you add back to 2.5 million or 3 million tons to our numbers in a reasonable incremental cost to that – I think we’ve would hit pretty well better on the guidance for the quarter.
So, as far as the impact of the fourth quarter very little bit of that attribute to what I would call surprise or maintenance cost, price or maintenance issues.
Caleb Dorfman – Simmons and Company
So what type of maintenance impacts do you think you will have in 2014 and 2015 or is it you just typical seasonal maintenance that you needed to getting it?
Paul A. Lang
These are schedules that’s making it’s outages in the PRB’s. So, I wouldn’t characterize in the pricing.
Operator
We’ll take our next question from Brian Yu of Citi.
Brian Yu – Citigroup Inc.
Great thanks. First question I just wanted to go back to what David has asked earlier that $10 million in transportation LV’s would you have the associated tonnage and then perhaps a split east versus west?
John W. Eaves
Yes, we are trying to break that out, Brian I mean we try to give you a little guidance here in terms of how to model it and I got it indicated. We plan to do everything we can to mitigate that and we’ll continue to evaluate those opportunities internationally versus what we have domestically and make the light business decision.
Brian Yu – Citigroup Inc.
Second question just on the micro-cost structure you said in the prepared remarks averaging mid-70s in 2013, what’s baked into your expectations for 2014?
John T. Drexler
Yes, we really want to give you an indication, I have given some of the challengers that we’ve had particularly in Mountain Laurel in the fourth quarter. Our ability to manage our cost in difficult market conditions including a cash margin in this environment really haven’t given any indications for 2014 other than our guidance for the East and you can see, we had a step-down of about $2 mid-point of $65 which is a blend of our thermal map.
And we feel pretty good about that at this early suddenly stage in the game and we’ll continue to trying to manage that but we feel about good about $65 mid-point to the 2014 season.
Operator
Our next question comes from Jim Rollyson of Raymond James. Your line is open.
Jim Rollyson – Raymond James
Good morning everyone. John, may be a big picture of question you guys usually are good prognosticators.
On the met business you pretty much indicated short-term still pretty tough. What do you think it takes to get things turned around, I mean we are clearly everyone’s talked about how over supply the market is and we know some of the new projects coming on between Leer and BMX and some others.
And then looks like steel demand is going to be up in the 3% plus range again just kind of curious what you think it takes to start getting prices headed in the right direction.
John T. Drexler
Yes, let me break it up in two parts I think short-term if you think about what we are seeing in the market today Jim, I mean you’ve got in the Australian dollar continuing to weaken it’s about 87 or so in the last day or two, you had about 30 million tons of incremental volume come on in 2013 primarily at Australia on the met side, you probably got a little bit coming up this year call it 5 million to 10 million. So those volumes have to get absorbed in the market and then back to your point of demand growth, we are seeing about 3% plus growth this year.
We think those times will get absorb, but when you look longer-term we’re continuing to forecast steel consumption growth then allow those projects particularly in Australia have dropped off the drawing board. So we think this thing balances out and actually could go into an undersupply pretty quickly.
So what needs to happen in the short-term I think you need to probably had some more volume come out of the market, we see about 30 million tons plus or minus of oversupply in the seaborne met market right now, given that level in 300 plus million ton market wouldn’t take that much to rebalance that, but as we move into the year people probably had met volumes drop off at the end of 2013. They are seeing some challenges at least for the next quarter or two in the benchmark people could make the decision to go ahead and pull that production off.
What we’ve tried to do at Arch is to manage our portfolio from a quality and a cost standpoint that 7.5 million to 8 million ton range we think is a good point for us right now, we can continue to generate cash margin, and we are bullish long term on the met markets, and that’s why we have been invested in Leer. If you think about our capital allocation is really the only capital growth capital we spent at the Company over the last couple of years.
We are excited to get that on. We do look favorably on the long-term market, but certainly in the short-term we got to manage that.
So we think we’re prepared to do that.
Jim Rollyson – Raymond James
Thanks for that color. That’s all from me.
Operator
And we’ll move next to Evan Kurtz of Morgan Stanley. Your line is open.
Evan L. Kurtz – Morgan Stanley & Co. LLC
Hi, good morning guys.
John W. Eaves
Good morning.
Evan L. Kurtz – Morgan Stanley & Co. LLC
Just hoping to dig in a little bit deeper on your ability to kind of ramp up tons in the PRB if the market begins to recover? Could you may be just provide some color on how much is you could gain just from going to fuller shifts maybe working some overtime versus actually having to invest and brining more equipment onto the site.
Paul A. Lang
Evan this is Paul. We probably have the highest amount of excess capacity, the higher quality in the basin.
As you look back two or three years that productive capacity we have 2011 or 2010 still employs that we did not cannibalize it. Over the past 20 months we’ve adjusted the mines production to meet the market.
I’d argue probably 2012 we went a little bit too far. 2013, we hit kind of a sweet spot of production and Black Thunder was able to run pretty efficiently even with the rail infrastructure.
And also I don’t think beyond that there was a huge amount of excess capacity innovation, I think there are people that can work little more overtime or rather few more shifts but I continue to say, noted last one of our conference calls, the PRB is changing from what it was 10 years ago when I was there. We’ve got.
We’ve got a huge amount of the ratio increase and it may impact some of this idle equipment is not difficult, but it’s not something you can do overnight. I think from our perspective to bring on any more equipment, it would take a different market than what we’re seeing right now.
If prices recover or pick up this year I think you are going to see a little bit of that. As far as terms of incremental production, I just don’t think in the end it's as big as people think it is.
Evan L. Kurtz – Morgan Stanley & Co. LLC
Okay. And just the high end of your range is that kind of what you think you could get to without bringing the equipment back, that’s just running forward with what you have there now?
John W. Eaves
Yes, I mean we – right now we’re looking at it. I said kind of basically a run rate not that far off last year, when adjusted for rail.
It’s our intend not to be much difference from 2013 to 2014.
Evan L. Kurtz – Morgan Stanley & Co. LLC
Got you. And then just maybe on follow up on cost, if I took the tons for this quarter, it kind of went pretty well with the first quarter of 2013 and coals were kind of in the mid tens at that point.
Is the rest explained for maintenance, can we got maybe a little bit more color about why the costs were ticked up a little bit here in the fourth quarter?
John W. Eaves
Yes, I think I’ve said earlier we had plans and I think you saw in our guidance we had expect cost go up in Q4 and some of these were long term plan maintenance deals. And we went ahead and do them despite the shortfall in production, shortfall in sales.
So you know as I said I think if you add back the volume you put us almost dead back where we gave guidance.
Operator
And we’ll take our next question from Lance Ettus of Tuohy Brothers. Your line is open.
Lance Ettus – Tuohy Brothers Investment Research, Inc.
Hi, guys. I just had a question on your potential to with the kind of rise in demand for PRB, potential to increase production there versus last year without kind of material increase in CapEx.
I guess what’s kind of, I guess your slack capacity.
John W. Eaves
I think Lance we kind of well hit that question pretty hard last and a quarter or two back. So as I said we still have the equipment in place when we are running high volumes in 2010 or 2011, so it’s not turn it all overnight, but it’s out there and we could do that much effort.
Lance Ettus – Tuohy Brothers Investment Research, Inc.
Okay, thank you.
Operator
Our next question comes from Timna Tanners of Bank of America.
Timna Beth Tanners – Bank of America-Merrill Lynch
Yes, hi, good morning everyone.
John W. Eaves
Good morning.
Timna Beth Tanners – Bank of America-Merrill Lynch
I guess I really just want to understand, first is just a clarification question, you’ve been through a lot. When you talk about the minimum obligation risk of $10 million a quarter, what does that imply for any potential volume hit?
John W. Eaves
I really don’t think it implies any hit on volume I think it’s the matter of making the business decision or whether it makes more sense to participate in the global market or sell in the domestic market and pay the LDs, I mean it’s that.
John T. Drexler
I think we’re in a little bit better position even when we were last year particularly with PRB, with the rise in domestic price, we’ll better off possibly just starting into domestic market pay LD.
Timna Beth Tanners – Bank of America-Merrill Lynch
That’s right.
Paul A. Lang
Timna our guidance range is contemplate from a volume perspective that impact of those LDs in there as well.
John W. Eaves
And again I mean we will continue to focus on mitigation on these LDs. If you look at the success we had in 2013, there’s no reason to think that we won’t have some type of success in 2014 and managing this.
So…
Timna Beth Tanners – Bank of America-Merrill Lynch
Got you, so you revert those tens to the market. Thanks.
You’ve talked a lot about the weather hurting rails and the Q4 environment does should have really bad weather into Q1, so is it, sorry if I’m little obtuse here, so we are expecting that those can continue into the first quarter or what weather impact can you characterize this?
Paul A. Lang
If you recall, the issue with PRB was a real early storm in early October that stalled up the trains for about a week in the PRB, so the rail impact was more the weather in Wyoming than it was on the East Coast. You know as I mentioned earlier we in fact have seen an uptick in service of about net 7% versus the fourth quarter, so not happy that we’re not all the way back to where we were, but clearly the railroads have made good progress.
John W. Eaves
And as you look at our cost forecast for 2014 and then we got some of that lingering effect in the railroad in there with some of that sales principally but some of it railroad performance and we do expect it to get better over 2014 but it’s not going to happen overnight.
Operator
Due to time constraints, we would ask all participants in queue to limit yourself to one question at this time. We will take our next question from Neil Mehta of Goldman Sachs.
Neil Mehta – Goldman Sachs
Good morning thank you for taking the question.
John W. Eaves
Good morning, Neil.
Neil Mehta – Goldman Sachs
If you think about the potential for asset sales as you think about the different regions that you operate in, where do you think the potential sales are possible and where do you view, what do you view as strictly core and therefore challenging to it actually to monetize assets?
John W. Eaves
Yeah Neil it’s John, I don’t really want to identify any particular asset what I would tell you strategically it’s pretty clear the direction we are going, we continue to maximize our PRB position, we think in fact we are one of the highest BTU shippers out there, we continue to make a lot of progress on our cost, we continue to work on port capacity out of the West Coast, we are well positioned there. We did monetize our Utah assets last year, we’ve retained the West Elk mine in Colorado, the reason being ahead of cost structure and quality to be there and a much wider market in the previous product, so we do think that we can generate nice cash margins in that region and then when you come East, I mean obviously we put a lot of focus on the met market where we’ve been spending our growth capital and we think that the growth that we see in steel consumption over the next five to eight years is real and we want to participate in that, so if you look at our PRB, our met position kind of our two anchors and then if you look at Western bit certainly that is the region we think we can be very successful and we are taking more and more of that product in the international markets, currently with the softness in the international market is a little bit challenging, we think long term will be fine.
When you think about, when we get to the point where we de-levered our balance sheet and the growth opportunities I think that is two areas that we see one would be continued build out of our met supply, if you look at the reserve base that we had just in the Tygart Valley up there, we got about $170 million tons out there similar quality, similar cost and additional long-haul, additional CMs that we could build out as we see the met market evolve. We are also going to expand our PRB position and then we’re sitting on $700 million tons in Illinois which has low cost fully permitted ready to go, good quality but given the volume coming out of Illinois right now, we don’t think it is pulling to bring that production on.
So not only we’re well positioned with what we had today, I think organically we’re well positioned in terms of growth once we get our balance sheet de-levered and see the markets evolve.
Operator
We’ll take our next question from Brett Levy of Jefferies. Your line is open.
Brett M. Levy – Jefferies LLC
Hi guys. Right now the Powder River Basin 8800, is it $12.20 today, $13.94 a year out, $14.95 two years out, is it fair adjusted for your coal quality beside anything you’re booking for 2014, 2015 and 2016 from this point would be above those levels?
John T. Drexler
Brett, I’ll tell you, I was totally surprised with the movement in PRB price in the last couple of weeks. I’m trying to understand since the beginning of the year we are up about 46%.
I think there is a little bit of a disconnect between the indexes and physical and mostly because of the indexes, just not being traded too heavily. So at this time I feel pretty good about where we are in our contracting and I think we’re selling into a rising market.
Operator
We’ll take our next question from Justine Fisher of Goldman Sachs.
Justine B. Fisher – Goldman Sachs & Co.
Good morning.
John W. Eaves
Good morning.
Justine B. Fisher – Goldman Sachs & Co.
Do you guys have a relatively open position for PRB tonnage for 2014, I think in typical years it’s usually more committed now for that year when you guys report 4Q results in January. So is that because Arch just holding out on committing tonnage or is that because utilities have come to you for the 15 time frame, might be the $13.78 per ton that you booked but not necessarily for 2014?
Paul A. Lang
Justine, it’s Paul. I think, I have to look back the numbers.
I think we’re actually a little more heavily committed than we traditionally are for 2014 and 2015, the one and two year out. It’s pretty well described as we laid out last year be risky to some of our portfolio.
I can check that but I believe that is correct.
Justine B. Fisher – Goldman Sachs & Co.
Okay.
John T. Drexler
We’ve invested in the market and I suspect that Paul is right. I mean we’ve continued to participate as we’ve seen the market move up and I think if we look back we’ll probably be in better position for 2014 and 2015 than we’ve been in a lot of years.
Operator
We’ll take our next question from Dave Katz of JPMorgan. Your line is open.
Dave A. Katz – JPMorgan Securities LLC
Hi, I’m expecting we can just come back to the Bituminous thermal cost, I think you said the cash cost guidance for 2014 is $25 to $28 per ton, I was curious if that compares directly to the $20.65 that you saw in 4Q 2013?
John T. Drexler
Yes, Q4 was the first clean quarter without Canyon Fuel in it and it also contemplates taking West Elk some kind of a nominal 6 million ton range down to 4 million ton range.
Operator
And our final question comes from David Lipschitz of CLSA.
David A. Lipschitz – CLSA Americas LLC
Hi guys.
John W. Eaves
Hi Dave.
David A. Lipschitz – CLSA Americas LLC
Hi, Jim. Question for you back to the Western Bituminous you have talked about, what are the mines that you have added you did 2 point is that 2.3 million tons are something like that is that out of inventory that you are selling?
John W. Eaves
Well, you got to remember that segment also includes…
David A. Lipschitz – CLSA Americas LLC
Okay.
Operator
And at this time I would like to return the call to John Eaves, CEO for concluding remarks.
John W. Eaves
I would like to thank you this morning for your interest. The management team is been focused on the things that we can control.
We had a busy 2013. We enhanced our liquidity, monetized our Canyon Fuel assets.
We continue to improve on our cost structure and we improved our capital structure and managed our sales growth. During this typical market that’s what the management team will continue to focus on.
We feel good about where the company is positioned. We feel good about our exposure to the thermal market, improving PRB environment and the ability to manage our cost in a difficult met market and make cash margins.
So we do thank you for your interest and look forward to updating you during the April call. Good day.
Operator
Thus concludes our conference call for today. You may now disconnect your lines.
And everyone have a great day.