UPDATE 3-Arch Coal posts loss, cuts production target again

* Q2 11-cent/shr loss vs year-ago 78-cent/shr profit

* Revenue drops 29 pct

* CEO sees signs of life in economy, coal

* Shares rise 3 pct (Adds CEO from conference call, analyst comment; updates shares)

By Steve James

NEW YORK, July 24 (Reuters) - Arch Coal Inc (ACI.N) posted a second-quarter loss on Friday and cut its production target for a third time this year as weak demand and coal prices hurt sales and forced production curtailments.

The loss was wider than Wall Street expected, and the miner's shares fell initially, but were up 3 percent at $17.38 in afternoon trading on the New York Stock Exchange.

Arch said it believed the coal industry had reached bottom during the current economic downturn, and it expects better business conditions for the rest of this year.

"We are beginning to see signs of life in the economy," Chief Executive Steven Leer told analysts on a conference call. "We are bouncing along at the bottom and not climbing out, but it's not getting any worse."

Leer said "green shoots are apparent" in the markets for steel-making metallurgical coal, now that U.S. steelmakers -- who had cut production in the economic downturn -- have boosted operations to above 50-percent capacity.

Arch, one of the Big Four U.S. coal miners, produces both steam coal, which fuels power plants, and some metallurgical coal.

But Warren Cheng, metals and mining analyst with Macquarie Capital, said that given Arch's relatively low exposure to the metallurgical coal markets, he had an "underperform" rating on the company's shares.

"We have a negative view of the near-term outlook for the domestic thermal coal market," he wrote in a research note. "The key takeaway... is that fundamentals continue to worsen for domestic steam coal... as volumes were lower than we were expecting."

Despite Leer's upbeat outlook, Arch lowered its sales volume estimate for this year to between 114 million and 118 million tons.

In April, the company had lowered its target to a range of 116 million tons to 120 million tons after earlier reducing it to between 120 million and 127 million tons. Last year Arch sold 137.8 million tons of coal.

The second-quarter net loss came to $15.1 million, or 11 cents per share, compared with year-earlier earnings of $113 million, or 78 cents per share, the St. Louis-based company said. Revenue fell to $554.6 million from $785.1 million.

Analysts on average were expecting a loss of 6 cents per share on revenue of $646.04 million.

Arch said it expected full-year earnings per share of 25 cents to 55 cents, with adjusted earnings before interest, taxes, depreciation and amortization in the $403 million to $462 million range.

Currently, analysts expect profit of 40 cents per share for 2009.

During the second quarter, Arch sold 27.4 million tons of coal -- down from 34.4 million tons a year earlier. The average sales price fell to $19.43 per ton from $21.04 while the average cost per ton rose to $16.26 from $14.75.

Looking ahead, Arch said it would further curtail production at its West Elk mine in Colorado due to lower quality coal currently being mined. The company now expects West Elk to produce between 3.5 million and 4.0 million tons this year instead of about 6.5 million tons. (Reporting by Steve James; Editing by Lisa Von Ahn and Tim Dobbyn)