UPDATE 2-Arch Coal profit drops, stock tumbles 8 pct

* Q4 EPS 11 cents ex-items; Wall Street view 17 cents

* Revenue dips to $725.5 million

* Shares open down 8.3 pct (Adds CEO comments, outlook, production, sales data)

NEW YORK, Jan 29 (Reuters) - Arch Coal Inc (ACI.N) said quarterly profit dropped sharply, missing Wall Street estimates and sending the miner's stock down more than 8 percent.

The company blamed lower sales volumes and prices due to weaker economic and coal market conditions, but it gave an upbeat outlook for 2010.

"We expect coal markets to improve ... through 2010, fueled by growth in global and domestic economic activity, more normal weather trends and ongoing coal supply reductions," said Chairman and Chief Executive Officer Steven Leer.

Arch said it expects the first quarter to be its weakest operating period this year. Beginning in the second quarter, results should benefit from higher metallurgical coal pricing and volumes and a more favorable mix of customer shipments under existing contracts, it said.

St Louis-based Arch posted fourth-quarter net earnings of $1.5 million, or 1 cent per share, down from $62.3 million, or 44 cents per share, a year earlier.

Excluding charges related to the Jacobs Ranch acquisition and amortization of acquired coal supply agreements, earnings were 11 cents per share. On that basis, analysts were expecting 17 cents a share, according to Thomson Reuters I/B/E/S.

Revenue declined to $725.5 million from $729.9 million, missing analysts' forecast of $728.4 million.

Arch shares opened down $2.04, or 8.3 percent, at $22.50 on the New York Stock Exchange.

During the recession, Arch, like most coal companies, cut production as demand from power generating plants slowed. It said on Friday that it sold 125 million tons of coal in 2009, down from 137.8 million in 2008.

In the fourth quarter it sold 37.9 million tons, up from 29.1 million in the third quarter. But the average sales price fell to $18.01 per ton from $20.05.

"While coal markets remained under pressure throughout much of 2009, some signs of stabilization began to emerge during the fourth quarter," the company said in its earnings release.

The outlook for metallurgical coal -- or coking coal, used in steelmaking -- continued to improve, driven by increasing global and domestic steel utilization rates.

For steam coal -- or thermal coal, used by power plants -- Arch said electric generation trends turned positive in December, driven by colder weather and stabilization in the industrial sector.

The company estimates coal stockpiles at U.S. power producers reached a peak of 207 million tons in November but declined by about 12 million tons in December. It expects a similar draw-down in January. (Reporting by Steve James; Editing by Lisa Von Ahn and Jophn Wallace)