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Massey Energy Company (NYSE:MEE)

Q3 FY08 Earnings Call

October 31, 2008, 11:00 AM ET

Executives

Roger Hendriksen - Director of IR

Baxter F. Phillips Jr. - EVP and Chief Administrative Officer

Eric B. Tolbert - VP and CFO

Don L. Blankenship - Chairman, CEO and President

Analysts

Shneur Gershuni - UBS

Jim Rollyson - Raymond James

Michael Dudas - Jefferies & Company

John Bridges - JP Morgan

Brian Gamble - Simmons & Company

Brett Levy - Jefferies & Company

Luther Lu - FBR Capital Markets

David Gagliano - Credit Suisse

Paul Forward - Stifel Nicolaus & Co., Inc.

Laurence Jollon - Barclays Capital

Garrett Nelson - Davenport & Company

J.D. Kritser - Steelhead Partners

Pearce Hammond - Simmons & Company

Mark Caruso - Millennium Partners

Operator

Good morning and welcome to the Massey Energy Company's Third Quarter 2008 Earnings Conference call. Today's call contains copyrighted material. It may not be recorded or rebroadcast without Massey Energy Company's express permission. Your participation in our call implies consent. Please disconnect if you do not agree with these terms. Roger Hendriksen, Massey Energy's Director of Investor Relations will now provide opening remarks. Please go ahead, Mr. Hendriksen.

Roger Hendriksen - Director of Investor Relations

Thanks Doug and good morning everybody. We appreciate your taking the time to join our call this morning and we appreciate your continuing interest in Massey Energy.

As you know, we distributed our third quarter press release after market closed last night and it is posted on our website and has been furnished to the SEC on Form 8-K.

The members of our management team who will be speaking with you this morning are Don Blankenship, Chairman, President and Chief Executive Officer; Baxter Phillips, Executive Vice President and the Board Member and Eric Tolbert, Vice President and Chief Financial Officer.

Before we begin, I need to remind you that the statements made in this presentation which are not historical in nature are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. And these are based on current factual information and certain assumptions which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control. Information concerning those factors is available on the company's 2007 annual report on Form 10-K and other periodic filings with the SEC. In providing projections and other forward-looking statements, the company does not make and specifically disclaims any undertaking or obligation to update them.

So with those legal formalities out of the way, I'll turn the call over to Baxter Phillips

Baxter F. Phillips Jr. - Executive Vice President and Chief Administrative Officer

Thank you, Roger. Good morning and thank you for joining us. It has been one year since we first announced our major expansion plans, and I'd like to start this morning with a quick overview of our achievements and progress.

In just the past 12 months, we have opened 15 new mines and added 7 new underground mining sections at existing mines. We have added the Inman resource group with the new processing plant that is expected to begin operating by Thanksgiving. We have added over 12 miles of new belt structure and a new loadout at our Mammoth resource group. We have disassembled, relocated and redeployed a large electric shovel at our Republic resource group to improve productivity.

The third quarter was one of the most intense in terms of expansion activities as we added a new mine and a new direct coal system at Mammoth, added a new mine to the Sewell seam at Green Valley and started new surface mines at Knox Creek and Nicholas Energy and the work continues.

The additional mines enable us to increase total production by 8% in the third quarter as compared to last year. We expect production to improve further over the next several quarters as we continue the expansion and as new operations move towards full productivity.

Overall, we are pleased with our expansion progress and are very pleased with the dedicated efforts of our members who have managed to complete the expansion work and still deliver solid operating results at the same time.

Now let me turn the call over to Eric for a discussion on financial details of the third quarter.

Eric B. Tolbert - Vice President and Chief Financial Officer

Thank you, Baxter. For the third quarter of 2008, we reported net income of $54 million or $0.64 per diluted share. Excluding the non-operating charges for our refinancing, the impairment of our investment in the primary fund and interest on the Wheeling-Pitt litigation, adjusted net income was $72.2 million or $0.86 per diluted share compared to net income of $21.4 million or $0.27 per share in the third quarter of 2007.

Produced unsold totaled $10.3 million in the third quarter, the same as the third quarter of 2007. However, as Baxter mentioned, tons produced increased by 8% over last year.

Our average produced coal sales realization of $64.59 per ton in the third quarter was $13.84 per ton higher than in the third quarter of 2007. Average prices were higher in all product categories with the increase most significant for metallurgical coal which was $26.28 per ton higher than a year ago, an increase of nearly 37%.

Average cash cost per ton for the third quarter of 2008 was $48.77 per ton compared to $43.26 per ton reported in the third quarter of 2007. Increased sales-related costs on the higher average sales realization accounted for approximated $1.40 per ton of the $5.51 per ton increase. Additional cost drivers included increases in diesel fuel costs and higher labor costs.

SG&A, a component of our cash cost per ton computation, decreased due to stock-based compensation accruals, reflecting the decline in the Massey Energy stock price during the third quarter.

As a result of our intensive expansion, cash capital spending increased to $230.3 million in the third quarter of 2008 compared to $60.1 million in the third quarter of 2007. Capital expenditures for the full year 2008 are expected to be in the range of $650 million to $700 million as our expansion projects continue through year end.

Depreciation, depletion and amortization was $65.2 million for the third quarter of 2008 compared to $60.9 million in the third quarter of 2007. DD&A is expected to be approximately $255 million to $260 million for the full year of 2008.

In August, we completed concurrent public offerings in which we sold 4.4 million shares of company stock and issued $690 million in convertible notes. The proceeds totaled $959 million excluding fees. A portion of the proceeds was used to repurchase $313 million in aggregate principal amount or approximately 93.5% of our 6.625% senior notes due 2010. Following these financing transactions, we ended the third quarter with $877.7 million in unrestricted cash and cash equivalents and short-term investments. This compared to $351.9 million at the end of June.

Of the third quarter 2008 total of $877.7 million, $666 million is in cash and in cash equivalents and $211 million is invested in the Reserve Primary Fund money market fund which is classified as short-term investments. We also had $101.2 million available to us under our asset-based revolving credit facility.

Following our refinancing, our total debt increased to $1.485 billion at the end of the third quarter 2008 compared to $1.104 billion at the end of June and approximately $1.1 billion at the end of December 2007. Our total debt to book capitalization ratio decreased to 58.3% at September 30, 2008 compared to 58.5% at December 31, 2007. Total net debt to book capitalization declined to 32.5% at September 30 versus 45.1% at December 31, 2007. The decline was largely the result of the equity that we issued in August.

Also, in our last conference call, I mentioned that an additional appeal bond related to the Wheeling-Pitt litigation might be necessary and it has been determined that no additional bond will be required until the Wheeling-Pitt case is resolved by the U.S. Supreme Court.

Now, let me turn the over to Don.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you, Eric. Before we take your questions, let me take a few minutes to share my thoughts on the third quarter results and our outlook for the rest of the year.

We were very pleased with our third quarter results overall, particularly in the context of everything we had going on with the expansion activities. Project rollout has gone very well. We are pleased with what we have accomplished to this point. We have more expansion projects ahead in the fourth quarter and in 2009, but we have put some of the most difficult and intense activity behind us. Even with all the expansion work, we were able to increase adjusted EBITDA by 81% and increase adjusted net income by 51% over last year. Had we received the rail service we needed, the quarter could have been even better.

Rail transportation remained inconsistent throughout the quarter as it has been for years and we ended the quarter with nearly 2 million tons of coal in inventory. We continue to work with the railroads to try to improve the situation. We are adding additional coal ship points, that is Martin County Coal, Inman, Coalgood and Mammoth, improving our ability to service barge river shipments without rail and increasing the number of docks at which we load barges. In addition, we have implemented a program study to improve our train loading rates.

Historically, the railroads have utilized these types of Massey shipping infrastructure enhancements to reduce their capital resources versus to increase volume. We're working very hard to present [ph] this from happening this time.

Another key to the third quarter was our improving product mix. Our expansion has enabled us to produce and ship more metallurgical coal and our strong position in the Central Appalachia market gives us product diversity, product quality and shipping access to participate in export markets. During the third quarter, we increased met coal shipments by 25% and our export shipments including met and thermal coal increased by 133%.

Looking ahead, we expect our new operations in Mass [ph] to enjoy continued and increasing advantages in terms of productivity, product mix, the efficiency, infrastructure and sales-related expenses. We're also looking forward to 2009 and even more so to 2010 revenue enhancements that will result from older or lower price contracts running out and then being replaced by new contracts.

The fourth quarter is lining up to be a good one, particularly compared to prior fourth quarters and the fourth quarter of last year. That being said, it is always difficult to predict with any level of certainty what the markets will be like in the future. We cannot predict that level... the level of impact the current financial crisis might have on coal prices or coal demand beyond 2009.

Domestically, thermal coal inventory levels at Southeastern utilities remain below the five year average. They have been below average since April in spite of significantly reduced burn rates.

On the supply side, permitting in timeframes, the increasingly tight labor market, litigation and capital requirements all combine to constrain coal production in the Eastern United States. Developing countries are likely to continue their increasing use of coal as their primary energy source. The world's largest developing nations will require coal to generate the electricity their people and industries needs. In addition, over 18 coke oven projects are in the works around the world to support anticipated increases of steel production.

We see the projections that the rate of growth in China, India and other developing countries may slow somewhat as a result of the current financial market constraints. I really believe global demand for energy, significantly coal, will continue to increase.

Our expansion and quality reserve base have positioned our company to take advantage of the strong global market. However, if the market is less strong, our cost advantages and market diversity have also positioned us for a weaker market wherein we would expect to take advantage of potential acquisition opportunities.

We have lowered our forecast for 2009, 2010 prices and volumes as a result of our current expectations for a moderate weakening of the coal markets. If market conditions soften, marginal met coal may move back into the steam market and impact average price per ton on our total sales. However, you should also note our decreased cost per ton projections for 2009. This is a result of coal's generic built-in hedges to declining economic conditions. In a soft market, turnover declines and material cost for fuel, explosives and steel products would also likely decline, resulting in lower costs.

We are enthusiastic about our opportunities to continue to improve shareholder value in either market scenario over the next several quarters and the succeeding years. As of today, high quality met coal remains in high demand and pricing has been stable at high levels. The duration of an economic downturn will be critical to pricing for high quality met coal in the international market this spring. If the downturn continues for more than the next two quarters or so, it could begin to have a negative impact on coke production and the demand for high quality coking coal.

While we are tempering our expectations, we remain comfortable in our market position, our operating strategy and our level of forward sales commits. We believe the combination of our price contracts, solid production, quality reserves and diversity of markets will enable us to create increasing shareholder value even if economic conditions decline somewhat from current levels.

This concludes our prepared comments and we'll happy now to answer your questions.

Roger Hendriksen - Director of Investor Relations

Doug, are you there to queue up?

Question And Answer

Operator

Yes, I am. [Operator Instructions]. Our next question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Shneur Gershuni - UBS

Hi, this is Shneur Gershuni. I guess my first question, I just wanted to sort of go over your view about costs over the next year and so forth. Do you feel that they are moderating? Can you kind of give us some color with respect to how much is related to lower input costs, lower turnover versus the run up in Hempshire [ph] inspections that have been going on and so forth? And if you can talk about your experience with Hempshire [ph] and you've managed to handle a little better than some you peers.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well I don't know for sure that we've handled it better than our peers, but I think we have it baked into our numbers, so it's... even though it's impacting us, it's not surprising us. We find it to be pretty consistent in the Southern West Virginia in underground mining that the number of violations, inspection days and, if you will, the harshness has certainly elevated. We are making a very concerted effort to deal with it both with technology and manpower and creativity. And I think that we're doing a fairly good job of doing that, although we think some of it is misplaced focus that maybe perhaps could be better placed somewhere else by the government.

As far as turnover, I think that we've worked very hard to be the employer of choice. I believe we are that both over the last 20 years in terms of job security and in terms of not fully funded pension plans and current rate of pay and other benefits as well as work scheduling and so forth. So we feel very good about our package, if you will, of total employment. It's been a chore getting there and we have had to adjust our thinking on that numerous times in the last several years, but at least at the current time, we believe we are the employer of choice.

We'll see declines, as you know, in diesel fuels, steel products, explosives and so forth. It's hard to predict where they will be. We do have about 60% of our diesel fuel hedged for next year, but we didn't hedge it until we were down to about $1 below what was in our plan numbers. So that alone will amount to $1 and $1.5 cost reduction over our prior guidance. And we expect that on the other 40% that we will further reduce our diesel fuel cost absent the turnaround in the oil prices.

Low cost mines I think are part of the issue. We... know a lot of our CapEx is going toward things like the belt system at Mammoth, the new plant at Inman and so forth. Those projects will reduce trucking anywhere from $30 million to $40 million a year '09 over '08 in combination. So those things are going to help us along with lower commodity prices and we hope a more stable labor market caused both by our employment package and by a change in the overview or the labor market in general.

Shneur Gershuni - UBS

If I can have a follow up, I just wanted to talk about the capital plan. We noticed you've got guidance out for CapEx for 2009 and so forth. I guess my questions are kind of two-fold. One is where do you feel the labor situation is with respect to being able to meet the plan? And then secondly, what kind of costs have you baked in into your costs to assume all the peak costs, and there is a chance that CapEx will come down or is there material risk to the upside to the CapEx numbers throughout the course of next year?

Don L. Blankenship - Chairman, Chief Executive Officer and President

First of all, we believe the CapEx number we have out there is the right number at this time. And actually, I don't expect it to come down. I see in some of the write ups that that's being questioned. But essentially, this CapEx, you launch it and it goes and for the next eight months or so, the Coalgood project, the Inman project and the cleanup effort at Mammoth and a lot of these mine start ups are in motion and they're going to occur. And I think that they're all good because those mines will be very competitive coal mines and will improve our market position not only on '09, but going forward. So we feel good about that. So our level of CapEx I think is appropriate. We'll generate more cash than that for sure. So we're not doing any damage to ourselves.

And I've said several times before if we continue at this pace for the next eight months or so and we do get into steeper downturns than we expect, then we will use the new equipment and so forth to avoid ongoing CapEx in late '09 and through '010. So we feel very good about the plan at this stage.

Shneur Gershuni - UBS

And just staffing levels for the new plan?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well we're doing quite well. We're on target. We've enhanced our package. We've added probably 200 experienced miners in the next like six, seven weeks. We never know when we are going to hit another wall, but at least we're bringing on the people, the equipment and the expansion at the pace that we've projected at bringing on. It's been difficult, but so far we've made it. I feel pretty good about the fact that the next 100, 200 people will be brought on outside of our core area. In other words, they will be outside of Southern West Virginia and East Kentucky and in our new operation at Coalgood. So I think it will be a little bit easier to get the next 200 than the last 200, and then we'll be well on our way then.

Shneur Gershuni - UBS

All right, perfect. Thank you very much Don.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Jim Rollyson with Raymond James. Please proceed with your question.

Jim Rollyson - Raymond James

Good morning guys.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning.

Jim Rollyson - Raymond James

Hey Don, if you go back to last year, you guys were locking up your thermal coal, basically, at the time I guess because you're worried about where prices might be heading. And unfortunately, things have turned out to be a bit better. I've noticed you haven't really signed up, it doesn't look like, any additional thermal coal at least for '010. And just kind of wondering what your thought process is on not locking anything up yet.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, we've been in the situation of course where we've had a lot of commitments for '09 and a lot of people are looking for '09, '010 to be transparent. We've been blocked a little bit, but I feel very good about '010 because I think there will be another shakeout of supply, and I think supply is extremely constrained. And as we noted in our opening comments, the inventories are still down. I don't know sometimes how you beat the market intelligence because we obviously missed it in '09, and we've acknowledged that for sometime and... but we believe that the combination of supply constraint and low inventories and working through this financial crisis that we're in good shape for '010. And if we have to roll back 3 or 4 million tons of thermal coal in order to support the market, it won't be a meaningful impact on earnings.

Jim Rollyson - Raymond James

Got you. And then for a follow up, your thoughts on kind of the outlook for the export market has been pretty strong this year. Obviously, had a lot of expectations for that to go even higher in 2009. But in light of everything going on today, what are you guys thinking?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, we're a little bit concerned about them. And you've got vessel, freight rates and the dollar, particularly the Aussie dollar cutting against us. But we're still several months away from prime negotiating season. So we don't know how that's going to go. As we noted in the opening, there is a lot of coke ovens being constructed around the world and a lot of those projects are continuing to go forward despite the crisis. It's too early to tell where it's going to be, but certainly, if you looked at the strength of the dollar versus the Aussie dollar and the freight rates, you couldn't deny that it might have significant impact on export net prices. On the other hand, two years ago, we were accustomed to $80 prices and then we saw $300 prices. And we have moderate process in between those two numbers in our forecast. So we feel pretty good about our forecast.

Jim Rollyson - Raymond James

Good observations. Thank you.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Michael Dudas with Jefferies & Company.

Michael Dudas - Jefferies & Company

Good morning gentlemen.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning Mr. Dudas.

Michael Dudas - Jefferies & Company

Don, over the past... since you've analyzed and gone through some budgeting process I guess over the past few months and given your or your company's interpretation on how Chambers may rule out, are you more confident in your... the company's ability to mix and mix shift mining and product to achieve your targeted goals in 2010 if permitting becomes much more difficult for your company?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I mean that's one reason that we're looking harder at the freight and capital and that we're wide open on these projects that Chambers did come out and we're going to be in a position to more underground and we'll have underground mines developed with one section and then it will be quick to build two. So we're looking at that as mitigation and we have worked hard as I've noted in the previous calls to comply with the environmentalists complaints, if you will, about the process that we went through to get the permits the first time. So we're not sitting out and waiting for a circuit decision; we're trying to actually comply with most of the additional requirements that might be put on us. So we're trying to mitigate it by winning the case, first of all, trying to win it in terms of being ready for whatever the outcome is and making sure we're ready to go underground if we need to. And I think that we're in better shape than anybody else could possibly be in a Central App to deal with whatever happens.

Michael Dudas - Jefferies & Company

And you think that's going to be another reason why the 2010 contract volumes for maybe you and other companies in the industry are probably a little bit delayed because of how the buyers and the sellers see how this shakes out?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, I think that buyers have obviously been watching the market drop and they've been, if you will, content to wait and see where it goes. And quite frankly, we do has some scrubbers on that are dispelling some of the volume. And then you have the financial crisis. So I imagine people don't particularly want to either build up inventories in the short term or get too committed too soon. So we think we're playing it about right, although we have proven that we can't outsmart this market. We have to beat it with cost execution and we're in it for the long term and we're going to do our best to be at market. But we're not trying to outsmart it, so.

Michael Dudas - Jefferies & Company

And my follow up, Don, is the market certainly is somewhat disconnected relative to equity prices and the fundamentals potentially in the market. How would you characterize the differences today into 2009 and 2010 versus the last decline we've seen in coal prices and equities back in 2005 and 2006? What are two to three major difference is that, similarities or differences relative to how better the industry is set up and how better Massey is set up too to benefit?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think first of all, the changes in the equity market are obviously more driven by macro issues across the entire market than they are by coal in particular. If you look at some of our numbers or our competitor numbers going forward, it's obvious that the valuations are skewed by things beyond the coal industry. I think that we are in great position. I mean we are accustomed to having to operate off the $7 margins. I mean I think we'll be operating off of $20 and $30 plus margins for a loss [ph]. So we are going be very strong. I think the industry in general, as they use up reserves and Massey increases its reserve position, are a little bit more constrained in their ability to keep their mines in real minable coal. So I think our advantage versus our competitors continues to enlarge. But obviously the entire industry's evaluations are questionable when they get down to one-half, two times EBITDA.

Michael Dudas - Jefferies & Company

Thank you, Don.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of John Bridges with JP Morgan. Please proceed with your question.

John Bridges - JP Morgan

Good morning, Don, everybody.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning, John.

John Bridges - JP Morgan

Hi. Sorry to hear about the Primary Fund, but I just wondered when you think you are going to get the balance of that money and is there any risk related to that balance.

Don L. Blankenship - Chairman, Chief Executive Officer and President

There seems to be risk anywhere, but we don't think there is any risk. And Eric, do you have the exact timeframe?

Eric B. Tolbert - Vice President and Chief Financial Officer

Well with an announcement last night by the Primary Fund, we expect to get approximately $109 million today by wire and the remainder of it, we've looked at the maturities of the fund, they expect to distribute the remainder of the balance as the underlying investments mature, John. We expect most of the funds except for maybe about 25% to be received through the end of this year given the maturity schedule, and the remainder to be received in the first nine months of 2009. So that's the schedule we are looking at.

John Bridges - JP Morgan

Is there a listing of what's in there anywhere?

Eric B. Tolbert - Vice President and Chief Financial Officer

There is. I believe on the reserve funds website, they actually have... or at least we have been able to get a listing of what the underlying investments are, underlying debt funds balance.

John Bridges - JP Morgan

Okay. And as a follow up, sorry, following on the risk idea, some people have been talking about pushback from contract authorities if coal prices are significantly weaker in the next year or two. Don, any thoughts on those sort of risks. You've been through a fee cycle in this business?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, I think that there is always that risk. I don't look for as much as pushback on contracts as I do that people will slow down their coking and they won't have any place to put the coal and they may at... delay taking it or something if it turned down and gets that acute. But it would be normal to expect some of that. We've tried to put some of that in our ranges. When you are talking $78 to $82 and multiply 4 times 47, there is $168 million of variation in there on just a few tons. So we think we've allowed for a little bit of that. But the magnitude of it certainly depends on whether we get these financial markets turned around. The banks are loaning money and we get back to normal or not.

John Bridges - JP Morgan

Well, we are doing our best. Thanks Don. Good luck.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Brian Gamble with Simmons & Company. Please proceed with your question

Brian Gamble - Simmons & Company

Yes, good morning guys.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning, Brain.

Brian Gamble - Simmons & Company

You guys mentioned in the prepared remarks that most of the difficult expansion work was behind you. I was hoping maybe you could detail a little bit more on what's going on currently and then what work continues to be done first, second quarter next year so we kind of get a feel for how the tons are going to continue to ramp up to that production rate you have given for '09?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Some of more difficult parts of these expansion efforts are the developments when you start moving dirt there and putting down air hose. And it's a lot of contract work that's really outside our direct ability to control, like construction of a prep plan or again air shafts and slopes and so forth. And much of that at our Gayendot [ph] Lowville mine is done. We are lining that shaft now and the plant at Inman is pretty well constructed. The tying together of the mines at Mammoth and the completion of that build is done. We do have steel delivery at Coalgood and that plant's going up. So we're... I guess when we say that the worst is done, the things that are outside of our control are pretty well behind us if that makes any sense. Sometime we don't know if we're going to get the permit exactly on time or get to steel or so forth, get the equipment, which I know has been a concern over the audience on here now. So we feel like we're making good progress and have gotten through some of the hurdles that might have been greater and less controllable then.

As to question on what's going on now, we've got to finish Inman up in the next few weeks. Of course, we'll have start-up problems and we anticipate that and then got to get Coalgood finished up in the first quarter. And we start up a lot of mine that are still dragging us down a little bit, although our production so far in October... productivity at least has been better than it was in the third quarter, but We still have a lot of people on our payroll that don't know our systems and don't execute as well as they should. And we are hopeful that we will improve that during the fourth quarter and into next year.

Brian Gamble - Simmons & Company

So the run rate looking at what Q1 will be over Q4, you're expecting another step upwards to get you the kind of run rate that would put you near or working towards getting near the range for next year?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes. One thing we're hoping helps us a lot, of course, Coalgood won't help us until late in the first quarter. But the thing we're hopeful will help us first quarter '09 and over first quarter '08 is that Mammoth will be on the Norfolk Southern rail where they were not before. The Republic show was wide open of course now, which it was not running in the first quarter last year. We'll get some shipments out of Coalgood in the first quarter. And so we feel pretty good about our timing, although I'm sure everyone appreciates, it's more difficult to project tons at new operations coming on than it is mature operations. But yes, we feel like that we're on pace and you do the numbers, of course, we're projecting about a 10% or 11% fourth quarter improvement over last year. And so we feel that we are on pace.

Brian Gamble - Simmons & Company

And then as a follow up, you gave your range for expected realizations for next year. Obviously, most of your thermal business is committed with a little bit of met left open. I was hoping you could either give us kind of a range for what you expect on the met side or if you would rather maybe give us a realization number from what you've already committed for the year.

Don L. Blankenship - Chairman, Chief Executive Officer and President

I'll let Eric speak to that some. That gets complicated. We are always nervous around those numbers both for divulging the numbers as well as the fact that these things change a little bit from time to time for various reasons. But I'll let you do it.

Eric B. Tolbert - Vice President and Chief Financial Officer

For the 2009 sold price numbers, it's approximately about $68 per ton across all... across everything. That does not include about 3 million tons which are under price collars. And those are just shy of $100, but, in terms [ph] of what we would include in our numbers. For the unpriced overall average, we have in our model across all products an average of about $159 per ton. Of course, that's fairly heavily weighted towards met, met qualities, but hopefully that gets you to where you wanted to --

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think what you should take from that, the 3 million tons that's collared would show in the conservative collar. We see that that number is very conservative and safe and then the 5 million tons that's unsold. Of course, it's a mixture of met and steam, but it should be safe as well and then the 39 million is pretty well fixed.

Brian Gamble - Simmons & Company

That's great. Thank you very much for the color.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Brett Levy with Jefferies & Company. Please proceed with your question.

Brett Levy - Jefferies & Company

Hey guys. You had guided quite some time ago to wanting to triple your met coal reserves. It seems to be somewhat consistent with your strategy at this point in terms of your optimistic view of the market. Is that something you're still going to pursue aggressively, and it would seem like the timing is kind of right for it?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well. We of course have always been in the industry known as the bottom fishers on acquisitions. But we're hopeful we'll have an opportunity to improve our reserve position in the event of a downturn and take advantage of our expansion in the event that the market... financial market turns around. But we are hoping at one point and projecting we'd get up to about 15 million ton met shipment rate. And of course we've made a small acquisition of a met mine this past quarter, which is one of the reasons our CapEx was up a little bit and we're continuing to look at both developments of reserves that we have of high quality met and/or acquisitions dependent on what's available.

Brett Levy - Jefferies & Company

And the follow is on the CapEx side, maintenance CapEx here looks pretty much like depreciation. Can you give a little bit of sense as to what maintenance would be for the company going forward?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I would say it is 15% to 20% over depreciation. But probably at this stage, given today's equipment prices and so forth, would have maintenance CapEx in the 300 to 320 range, 300 to 320.

Brett Levy - Jefferies & Company

Thanks so much guys.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Luther Lu from FBR. Please proceed with your question.

Luther Lu - FBR Capital Markets

Good morning guys.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Hi Luther.

Luther Lu - FBR Capital Markets

Just to follow up on Mike Dudas's [ph] question, I'm wondering if you guys can quantify a little about your monthly [ph] mining risk, 2009 and 2010.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Wedon't think we have any risk in 2009 and 2010 as was a respondent to some of the earlier question, we think can fully mitigate it if we had too. But there is risk there as you go beyond... into 2010 and beyond because it depends on exactly what the rule it was, the ruling, probably won't be a yes or no, it could be but it might well be something more complicated than that, so it's hard for us to judge what the risk might be. But in any event, we believe we can maintain our volumes. We may have to spend CapEx or divert or do different types of mining or whatever, but... and it will be expensive. But we don't think the risk is so great because we think it would be more than mitigated by price.

Luther Lu - FBR Capital Markets

And on the upside, I was wondering if you guys can separate the average cost for your underground production and surface [indiscernible]

Don L. Blankenship - Chairman, Chief Executive Officer and President

We don't like to get too specific on that, but underground production if you assume that we're almost half and half, our underground production would be the probably 10% over the average and the surface mine would be 10% under the average. So if you use 50, in other words, it might be 45 and 55.

Luther Lu - FBR Capital Markets

Okay, okay. And just how... wonder how flexible is your expansion plan. In other words, when do you... when Central App price drops a certain point, would you help [indiscernible] expansion plans.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well I think that over the next eight months, it's going to be what it is, because we believe that the projects we have coming on line are going to be reasonable returns in a bad market and great returns in a good market. So we will finish those off, then it becomes quite flexible, which means that when you get out there June '09, we have almost total flexibility as to whether we do the next round of expansions. So we have an opportunity to build two additional prep plants on already permitted sites which is unusual in central and depending on how our competition is doing to supply in the market, and how the market is behaving, we'll have to make a decision, whether to do those in the second half of next year or not. So, there's flexibility after June '09, there's much flexibility between now and June '09.

Luther Lu - FBR Capital Markets

Okay. And lastly, could you give us the 2010 contracted average realized mentioned [ph] price?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Approximately for sold price, it's approximately about $65 range and again, we have little less than a million tons on a collar as well.

Luther Lu - FBR Capital Markets

Okay, is that on met coal or on steam coal?

Don L. Blankenship - Chairman, Chief Executive Officer and President

It's mostly all steam coal. We have very few '10 met tons, so.

Luther Lu - FBR Capital Markets

Okay. Great, thank you.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of David Gagliano with Credit Suisse. Please proceed with your question.

David Gagliano - Credit Suisse

Hi, thanks for taking my question. I think a lot of it has been answered, but I just want to try and get your thoughts on sort of other side of the argument, with regards to the pricing outlook. Obviously, you just paint the picture here, you're still bringing on supply, others have brought on supply clearly demand visibility for both thermal as met as we do best, we've got 30 million tons on price that $65... or sorry 20 million tons price is $65, the other 30 million on price and your costs are going up. So obviously the concern at least in my mind is aren't you a bit concerned about when you get around the pricing, the remaining 30 million tons that your margins are that $20 to $30, but closer to that $10 or lower level. I was wondering if you could just address that. Thanks.

Don L. Blankenship - Chairman, Chief Executive Officer and President

The first thing about it is to make sure that like if you look at a $500 million 2009 CapEx budget and assume say 300 of it's ongoing, there is not a huge expansion number in there. But we believe that that $200 million is needed to diversify us geographically within Central App and to bring on some mines that we are comfortable will provide high margins. We're comfortable there in the next two, three quarters we'll generate more cash than that. And we're also comfortable that people that don't have cash and need debt to do their expansions will have to curtail theirs.

So essentially, we expect that some of our competitors will curtail expansion as they might have in line and therefore, our expansions will ultimately prove to be wise. So there is accounting... before these... if you were going to get $300 from met coal, you were talking about eight months' returns. Now you might be talking about two and a half years. But there's not too many places that you can take cash that's in the bank drawn 3% and get two and a half year capital returns on it. So we still believe that given our cost advantage and given the constraints on supply and given that we have launched these projects that they are entirely safe from any reasonable capital return.

David Gagliano - Credit Suisse

Okay. Just as a follow up, when do you think you would start pricing some of that 30 million tons for 2010? When should we start to see some of that getting blocked up?

Don L. Blankenship - Chairman, Chief Executive Officer and President

My guess is that it will be later given the financial crisis rather than earlier. So it will be first quarter '09, first and second quarter you will start seeing more of it. There are some bids out there from some utilities that could play a role centered in that. But basically, we think first quarter, second quarter, again, we thank everybody is sort of frozen in time, or at least to a great extent compared to prior years.

David Gagliano - Credit Suisse

Okay, great. Thanks, I appreciate the thoughts. Thanks.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Paul Forward with Stifel Nicolaus. Please proceed with your question.

Paul Forward - Stifel Nicolaus & Co., Inc.

Okay, thanks. Where do you see marginal cost for steam coal among your competitors and at what point, if we do go through a few months of continued soft patch on power demand, I mean at what point does... do the high cost mines have to start coming offline if they're not able to capture a certain level of pricing for steam coal? What's your view on that in this market right now in Central Appalachia?

Don L. Blankenship - Chairman, Chief Executive Officer and President

As you all know, I'll usually transparent specific numbers. So I'd probably say $65 to $70 for any sustained time begins to drive production out. But the thing that's so different about Central App, Pennsylvania, Illinois, Wyoming coal production is the disparity from mine to mine is huge. You've got some mines including within Massey and certainly a couple of our competitors have properties that are running steam coal probably in the half 30s. But you've got some mines out there that are real ugly that were brought on during this expansion that would drop off in the 85 range. But I think at 65, you certainly get quite a bit of drop.

Paul Forward - Stifel Nicolaus & Co., Inc.

All right. And you mentioned equities trading out there one and half or two times EBITDA. Do you... you made that one small acquisition of a met coal mine. Is there other stuff out there that you see as something that you could... some acquisition potential maybe among private firms that are looking really appealing right now or do you think the expectations are still too high for price for the private firms?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Right now, I probably would choose the latter. The expectations of private companies are still very high. I guess the market will tell us later on whether it's too high. But we don't think it's time yet to pursue acquisitions of peoples' properties that don't have them on the market. But as they come on the market or as the values come down a little further, we might. We get into currently almost everyone shipping business they have. And when you see the new April 1 export market or a few other things happen is somebody is having to go out because they got trapped without business, certainly, their evaluations will drop tremendously.

Paul Forward - Stifel Nicolaus & Co., Inc.

Okay. And maybe lastly, can you talk about any sort of limitations you might have on buying back your own shares if the private market is less appealing and your own shares, what sort of limitations do you have on that?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well we have... it's early to buy [ph] several hundred million dollars worth of our stock back. And of course in our Board meeting, week after next, I guess that will be the subject of conversation. But on the other hand, we like given the situation and being reminded by the reserve, we want to make sure we keep plenty of cash for possible acquisitions and to be 100% secure. So we are trying to find the balance between making sure that we are very strong on the balance sheet and very strong for whatever happens and at the same time poised to take acquisition. So it's a conversation that the Board will have and we'll leave that planning session week after next with a better idea.

Paul Forward - Stifel Nicolaus & Co., Inc.

Okay, thanks.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Laurence Jollon with Barclays Capital. Please proceed with your question.

Laurence Jollon - Barclays Capital

Good morning. I just wanted to follow up. Not to be difficult, just on the SG&A number. I know you referenced it was lower at least on a sequential basis due to lower accruals for non-cash stock-based comp. It just seems to be very low at 3 million. I was just hoping for some more clarity there.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Eric can give you the clarity, but basically when the stock ran up to 96, it made the number, the accrual huge in the second quarter and then back to 35 or whatever it was. I remember at 30, it reversed that. So there is probably a $14 million or so.

Eric B. Tolbert - Vice President and Chief Financial Officer

It's actually... in terms in the second quarter, we were impacted negatively by almost $18 million and basically that were reversed out in the third quarter. We look at it on a part time basis and again in the second quarter, our cash cost were impacted by $1.70 per ton for the quarter and then the third quarter we were benefited maybe by the $1.80 per ton. Hopefully, that provides you little more clarity in how the swings, I think on the year-to-date basis, Or about on the run rate that you would expect because other than the spike and the share price of the end of the second quarter, each one of the quarters ending share prices have been in about $35 or $36 range.

Laurence Jollon - Barclays Capital

Eric, I mean what's kind of a good run rate SG&A on a quarterly basis putting aside any accruals? Was it kind of $15 million?

Eric B. Tolbert - Vice President and Chief Financial Officer

On SG&A right now, I think we're running about $20 million a quarter.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Whatever it is your date divided --

Eric B. Tolbert - Vice President and Chief Financial Officer

Yes, it's year-to-date $63 million year-to-date. So divide that by 3, it's about $20 million, $21 million. I think that's a fairly good run rate excluding the spikes in the share price.

Laurence Jollon - Barclays Capital

Thanks for the color. I appreciate it.

Operator

Our next question comes from the line of Garrett Nelson with Davenport. Please proceed with your question.

Garrett Nelson - Davenport & Company

Yes, thanks. My question regarded SG&A and it's just been answered. Thanks.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thanks Garrett.

Operator

Our next question comes from the line of J.D. Kritser with Steelhead Partners. Please proceed with your question.

J.D. Kritser - Steelhead Partners

Yes, you mentioned the valuations again in the industry being so low for most of your peers. And in that context, I just wanted to see how you guys think it can be rational to be investing CapEx dollars in growth projects when you have competitors trading at one times EBITDA over the last few weeks. I wanted to know if you guys have done any bi versus bill pipe analysis on buying reserves or building and building production as well. I can imagine that CapEx seem reasonable if you can buy people kind of even at a premium at the valuations we see today in the market?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes. I've asked that many of the boards of competitors with vendors [ph] or companies at the current valuation if you attempted to buy them, but... and of course it would be a bigger deal than we could pay cash for and our currency of stock would also be devalued. So it's not quite so simple as to compare $100 million or $200 million of capital spending to buy a $1 billion company that would probably run to 2 or 3 and you would have to use either new borrowed money at high rates or your stock as currency.

So that comparison I think you're is two different things two different distinct opportunities. The opportunities invest $200 million or $300 million and with 2 year to 3 year paybacks is good business, and not paying in particularly today and beats drawn 2% or 3% interest on the firms and of course the issue of buying a competitor who're successful at these types of in-house capital spending programs grow our margins and grow our stock-slash currencies then it makes us better able to buy competitors at more reasonable rates or discount.

J.D. Kritser - Steelhead Partners

I just think it seems that everyone is really eager to buy people when their stocks are up but when you're stock are up, everyone else's stock is going to be up when yours is down your competitors are down even more. So and I'm not sure to make sense to think in those terms?

Don L. Blankenship - Chairman, Chief Executive Officer and President

We feel like it is. Of course, we've not ever been in favor of buying other companies that have valuations. So we're not into that category. But certainly we have to run the business and these acquisitions are different things in our opinion. The way the market values a stock because of macro issues and projections and so forth is a lot different than investing money internally at high rates of return, higher than you could get on the money elsewhere and then trading these acquisitions as a separate activity. We certainly can't stop our CapEx spending in our growth in our management of the company to focus on buying competitors. So I think, again, they're separate.

Operator

Our next question comes from the line of Jacob Muller [ph] with AYM Capital. Please proceed with your question.

Unidentified Analyst

Good morning.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning, I'm sorry.

Unidentified Analyst

On the 15 million tons of the met tonnage that you're going to have ultimately, can you please run through the qualities, what you would consider high quality and gross over tonnage in that mix?

Don L. Blankenship - Chairman, Chief Executive Officer and President

We really haven't classified it that way. I can think through it as we're talking, but I can tell you that probably at least 70% of it would be some of the highest quality of met coal in Central App and the other 30% would not fall half and half between solid met coal and crossover coal. And so if I said that out of 15 million, 10, 10.5 would be solid high quality met coal, that would be in the met market at all times and the other 30% would be split between what I would call good, but met coal and then the other 15% might be crossover coal.

Unidentified Analyst

And from the available tonnage in '09 and '010, what percentage would that be?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I don't know that I'm prepared to respond. '010, it would be about the numbers I gave because we have not sold very much. The '09 unsold tons, there is a lot of high quality unsold tons in there. But whether it's just same percent or something different, I don't know. But '010, it would be about the numbers I gave out

Unidentified Analyst

I know it's kind of hard to figure pricing right now in the market, but have you heard any pricing whatsoever on high quality coking coal within the last week or very recently that you can use as a barometer of current pricing?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, but I don't think we want to get too specific about pricing discussions because we have ongoing pricing discussions in a number of areas. And of course January 1 is closing in on some of our domestic accounts, some it rather not be to too explicit.

Unidentified Analyst

And will that fall squarely within your guidance range, however?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, otherwise we wouldn't be guiding to it.

Unidentified Analyst

Thank you very much.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Frank Fisk with Pilot. Please proceed with your question.

Unidentified Analyst

Yes, hi. I guess just following up on that question, how should I even think of where met prices are today for Central App coal? I don't have a Bloomberg to look at and obviously... what's the price today or last week or what you think it is or that you can't even give that out?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I mean the prices that we've seen... first of all, it varies tremendously by product. But we've had negotiations where we have been up in the 300 and some range and we've had customers in the 170 to 200 some range. We've not seen numbers below that. So there's a big disparity. But the low side of those numbers are still very healthy numbers.

Unidentified Analyst

Okay. So then... I guess so if you were sell something for '09, that's why you're using the 159 lower than what you have just told me right, 300 to --

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes. The 159, what is it, Eric?

Eric B. Tolbert - Vice President and Chief Financial Officer

It's on all quality --

Unidentified Analyst

Yes, okay. And I guess you said you have 2 million tons in inventory right know; I think you said that before. Is that normal? Is that more inventory than you normally have?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, it's probably 700,000 more than we would normally have and more than we'd want. We have got 1.2 million at loadout. That's the reason that we... part of the reason we had to give the lower guidance and hit the bottom part of our range. We have been unable to get the coal and the rail cars and got them. So we are working very hard on that. But it's going have to go somewhere because they are still piling up and it's primarily rail service.

Unidentified Analyst

It's nothing to do with the customer not wanting it or not being able to price this as you can't get it out.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, it's been rail service entirely turning on.

Unidentified Analyst

Okay. And then lastly, I guess you were talking the industry in Central App costs are 30s to 80, the universe, a wide band. You mentioned some of your low costs are in the 30s. Are you also some high in the 80s or you guys are probably a little better than some of these smaller guys I would assume, right?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well on the thermal coal, we probably range from... I don't know... maybe 30 to 65, but we have some metallurgical coal mines that are in the 80s and maybe even 90s, so. But on the thermal side, I don't believe that maybe except for a roof fall takes them down for a month, we don't have any mines running normally in the low 60s.

Unidentified Analyst

Okay. Thank you.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Pearce Hammond with Simmons & Company. Please proceed with your question.

Pearce Hammond - Simmons & Company

Yes. Good morning, Don.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning.

Pearce Hammond - Simmons & Company

The question may seem a little off the wall, but if as widely expected, Barack Obama is elected President, there is some concern that he will have some... be more favorable to union formation and specifically with this card check rule. So my question is if he were elected President, could you see more unionization in the Appalachian coal fields' number one? And then number two, or you would not see it simply because the non-union labor is getting paid more than the union labor is at this point and the union is just not as popular as they once were? I'd love to get your thoughts on that.

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think that scary as it is, I guess to say if go to appear... sign a petition in your union, it's going to be hard to stop the unionization. I would hope somebody would challenge it in court even if they legislate it because you wouldn't know how to get the card signed and it will show up at your house yet. You have to sign it to get them going. So it's one of those things that we have been around for 20 some years we have had numerous union drives and sign the petitions. But yet they haven't been able to win an election behind the curtain. I think that today, as you alluded to, it would be interesting because the non-union pay as opposed to the past is 30% higher in some cases and more than 30%, probably 40% in some job classifications higher than union scale.

So keeping in mind, though, that joining a union doesn't mean that you go to the union scale; it just means you got to negotiate then about what the pay is. But certainly it would be factor. So I would think the check off provides a big risk to unionization not only in Central App but throughout the United States in every industry. And I would think that companies would have to find a different way to try to mitigate or counter it. And I think it would be very interesting given the disparity in wage rates to see what impact that had on.

Pearce Hammond - Simmons & Company

Thank you very much.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from the line of Mark Caruso with Millennium Partners. Please proceed with your question.

Mark Caruso - Millennium Partners

Hi guys. Just two quick questions. The first is if I remember correctly I think it was early October, you guys had been in the process of assigning or negotiating a multiyear met deal. And it looks like the '09 tonnage you guys booked 1 million tons, but 2010, between the second quarter release and third quarter release didn't move. So I was wondering if you can help me better understand that.

Don L. Blankenship - Chairman, Chief Executive Officer and President

The way I would address that I guess is that we believe that that tonnage is there and we're still doting Is and crossing Ts, and we want to make sure we didn't say something too positive. So we left it out because we don't have the Is dotted yet.

Mark Caruso - Millennium Partners

Got you. And the other question I had was as far as the tons you booked last year, if I remember correctly, I believe some of that was with Constellation and now they have been bought. I want to see are you still committed under the original terms of those deals in the 40s or is there opportunity for you to reprice those?

Don L. Blankenship - Chairman, Chief Executive Officer and President

No. We're still committed and that's what the numbers represent is that we are still committed to them. As far as I understand, we are just shipping them on schedule.

Mark Caruso - Millennium Partners

And last call, Don, you talked about kind of looking at the opportunity to may be reprice some tons that were committed [ph]. I didn't know, is that still possible as the financial markets impacted some of the other trading counterparties that you would have maybe been able to do that with in the past?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think the market turned upside down since the last call. We had two or three repricing extensions, loosening of collars. We had all kinds of discussions going on, some of which are still going on, but certainly much less. And not only has the financial market changed people views of things, it's also taken all their attention away from things. So we are seeing much less of that at the current time.

Mark Caruso - Millennium Partners

Got you. Thanks so much.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

There are no more questions. Now I'll turn the program back to Mr. Hendriksen.

Roger Hendriksen - Director of Investor Relations

Okay, everybody. Thank you very much for your participation and your good questions this morning. We again appreciate your interest in Massey Energy and we look forward to speaking with you again soon.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may disconnect your lines at this time. .

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Source: Massey Energy Co. Q3 2008 Earnings Conference Call Transcript
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