Rhino Resource Partners LP Management Discusses Q4 2012 Results - Operating Results Call Transcript

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 |  About: Rhino Resource Partners LP (RNO)
by: SA Transcripts

Rhino Resource Partners LP (NYSE:RNO)

Q4 2012 Operating Results Call

January 31, 2013 11:00 am ET

Executives

Scott Morris

David G. Zatezalo - Chief Executive Officer of Rhino GP LLC, President of Rhino GP LLC and Director of Rhino GP LLC

Reford Chad Hunt - Vice President of Technical Services - Rhino Gp Llc, President of Rhino Energy Wv Llc, President of Castle Valley Mining Llc and President of Mcclane Canyon Mining Llc

Analysts

Mark A. Levin - BB&T Capital Markets, Research Division

George Panageotou - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2012 Rhino Resource's Partners Operations Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host for today, Scott Morris, Vice President of Investor Relations. Please go ahead.

Scott Morris

Thank you, Cam, and good morning, everyone. Again, my name is Scott Morris, Vice President of Investor Relations with Rhino Resource Partners. Our operations update was issued yesterday, January 30, and is posted at the partnership's website at www.rhinolp.com. We also have a presentation posted on our website that provides information on our Pennyrile Riveredge Mine development in Western Kentucky.

Representing the partnership today are Dave Zatezalo, President and Chief Executive Officer; Chris Walton, Senior Vice President and Chief Operating Officer; Rick Boone, Senior Vice President and Chief Financial Officer; and Chad Hunt, Vice President of Technical Services. Before I turn the call over to Dave, I will read the following Safe Harbor statement.

This conference call contains certain forward-looking statements. Forward-looking statements may be identified by words such as expects, intends, anticipates, plans, believes, seeks, estimates, will or words of similar meaning and include but are not limited to, statements regarding the outlook for the partnership's future business and financial performance.

Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to various factors that are summarized in today's operation update release and are described more fully from time to time in the partnership's filings with the SEC. We refer you to these resources for additional information. Rhino expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a changing of fees or expectations or otherwise.

This call is a property on Rhino Resource Partners LP. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the expressed written consent of the partnership is prohibited. A replay of this call will be available from today at 1 p.m. until Thursday, February 7, 2013, at 11:59 p.m. Eastern Time. To access the replay, call (888) 286-8010 in the U.S. and Canada or (617) 801-6888 internationally and enter the confirmation code 30715486. The webcast will also be archived on the partnership's website for 1 year.

With that, I'll turn the call over to Dave Zatezalo, President and Chief Executive Officer. Dave?

David G. Zatezalo

Thank you, Scott. I'd like to thank those of you who have participated in the Rhino Resource Partners Fourth Quarter Operations Update Conference Call. I'm pleased to first announce that we've signed a multiyear initial sales contract to our Pennyrile property in Western Kentucky, and that we'll be beginning construction of this mine very shortly. For an explanation and clarification and amplification of that, I'd like to turn the call over to Chad Hunt, our Vice President of Technical Services, for his discussion and review of the Pennyrile property. So Chad?

Reford Chad Hunt

Thank you, Dave. As Scott mentioned earlier, we posted a presentation on our website that provides information on our Pennyrile property. As referenced on Slide 3 of the presentation, our initial Pennyrile sales contract is for 800,000 tons per year, with a major domestic utility customer. And we anticipate making additional sales in the near future. We believe this demonstrates the high demand for this quality of coal with its direct river access. The initial earthwork development is scheduled to begin in the first quarter of this year with the production targeted to commence in mid-2014.

We anticipate cash expenditures of up to $17 million in 2013, $22 million in 2014 to develop the initial production of 800,000 tons per year by 2015. Additional capital expenditures of $23 million are expected to increase production to 2 million tons per year by 2017. As mentioned on Slide 4 of the presentation, our initial sales contract runs through 2020, with a contract reopener in 2018. We believe this initial contract will provide us with positive -- with a positive and a predictable cash flow, with a projected EBITDA of $10 million per year with the potential to grow our production and EBITDA as new contracts are put in place.

We believe Pennyrile is a unique property because of its location, directly on the navigable Green River in Western Kentucky. And as you can see from the map on Slide 5 of the presentation, this provides a unique low-cost access to a large customer base, including export markets.

Slide 6 of the presentation details the excellent quality of the Illinois-based coal at our Pennyrile location. The property has a large contiguous reserve base with 32.5 million tons of fully permeated, proven and probable reserves under lease, with the opportunity to add an additional 15 million tons in the future. We anticipate this project will generate a long-term, stable and predictable cash flow, similar to our Hopedale and Castle Valley operations.

With that, I'll turn the call back over to Dave.

David G. Zatezalo

Thank you, Chad. Turning to our oil and gas business, which we also want to update. We continue to be pleased with the test results of wells being drilled by Gulfport on our Utica Shale acreage. The average initial production rate for the first 9 wells drilled by Gulfport was 3,849 barrels of oil equivalent per day, consisting of 787 barrels of condensate per day, 10.85 Bcf of natural gas per day and 1,253 barrels of non-gas liquids. There are currently 3 wells producing on our acreage, and we recorded our initial revenue in December of 2012.

We believe our Utica acreage provides substantial value to Rhino and is just beginning to add cash flow to the partnership. For example, based on a recent transaction, we believe our joint venture acreage is worth some $10,000 per acre, and we believe that it will be worth more as it is drilled out. In addition, we believe the royalty interest we retained in the property we leased earlier will provide us with additional volume.

For our coal operations, our strategy continues to focus on maximizing cash flow and to work to reduce our debt during this extended downturn in the coal markets. Our steam coal in Hopedale and Castle Valley remains fully contracted through 2013 and '14, and we have contracted to deliver approximately 380,000 tons of metallurgical coal for 2013 at acceptable price levels. Normal operations have continued at our Rhino Eastern joint venture, although weak market conditions have negatively affected net coal sales from this operation.

We've issued guidance for 2013, which was included in our press release based on our currently contracted sales. Any additional sales, any additional change in the market improvement, will provide upside to this guidance.

On behalf of the board and employees of Rhino Resource Partners, I'd like to thank you for your participation today. And operator, please go ahead and open up the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mark Levin with BB&T.

Mark A. Levin - BB&T Capital Markets, Research Division

Dave, a couple of quick questions. First, as it pertains to your guidance for 2013, can you talk a little bit about what the met coal price assumptions that are underpinning that? And also what the thermal coal assumptions are?

David G. Zatezalo

The met coal price assumptions, Mark -- I'm sorry, I don't recall that exactly. It is what we have contracted, which is less pricing than what we had contracted for this year. It's probably 20% to 25% less on a per unit basis.

Mark A. Levin - BB&T Capital Markets, Research Division

20% to 25% less on a per unit basis. Got it. Okay. And then just in -- generally speaking, as you kind of look at the same markets, Dave. I mean, obviously, we're in the middle of, I guess, the second year of a somewhat unprecedented bear market. How are you feeling about the steam markets through 2013? And then 20 -- and maybe what you see in 2014, as well?

David G. Zatezalo

Mark, I appreciate you bringing that up. Our guidance reflects steam coal sales only for what we currently have contracted. New contracting and new prices in that have not been at the level where we feel that is worth doing it. Many people were talking about an increase in the market in the second half of '13. I would like to think that would happen, but it's really going to depend on the price of natural gas, in my opinion. It's sort of -- I think you coined the phrase that it was capped by natural gas prices, and I agree with you on that right up. It will eventually improve because gas won't stay low forever, and especially as gas gains market share. So I do feel better about the future, about the back half of '13 and about going into '14. But currently, our forecasts provide only for that which we already have sold and contracted. So if that market improves, there should be a very fair upside there for us.

Mark A. Levin - BB&T Capital Markets, Research Division

Okay. And when you think about cost for a second, are you seeing any deflationary signs on the cost side, whether it's on the wages side or any other area -- any other component? Obviously, when you have prices as weak as they've been for the last couple of years, one would expect at some point to start showing up on costs. Are you seeing anything to encourage you on that front?

David G. Zatezalo

I'm not seeing what I would call deflationary prices. I would see -- I'd say that I've seen a slight reduction in rebuild costs and improvement in rebuild availability for shots [ph]. I think we're seeing almost no inflation of those costs, but I don't think I would see any deflation of it at this point.

Operator

[Operator Instructions] Your next question comes from the line of George Panageotou with Stifel, Nicolaus.

George Panageotou - Stifel, Nicolaus & Co., Inc., Research Division

Just a quick question on your Rhino Eastern. Fourth quarter was a production and sales a little bit below the typical run rates. Was that just reflective of the depleting Eagle #1 and the ramping #3, or was it weak markets? And how do you think that trends in 2013?

David G. Zatezalo

Well, Q4 was reflective of a weak market and people trying to -- people that were essentially pushing deliveries forward, George, in part. The results have some reflection in there of the weak market along with finishing of the Eagle #1 and the opening of Eagle #3. So it's attributable to everything you mentioned. 2013 of Rhino Eastern, we have a lower book of sales volume at lesser prices, and so we're going to mine less. Whilst [ph] we will do enough to be okay there, but we're -- unless the met market really improves, it's not going to be a banner year.

Operator

I have no further questions at this time. I would now like to turn the call over to Scott Morris for closing remarks.

Scott Morris

I'd like to thank everyone for joining the call today. And we will provide further information on our Q4 earnings call, scheduled February 28. Thank you.

David G. Zatezalo

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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