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Cloud Peak Energy, Inc. (NYSE:CLD)

Q4 2012 Earnings Call

February 13, 2013 5:00 PM ET

Executives

Karla Kimrey – VP, IR

Colin Marshall – President and CEO

Mike Barrett – EVP and CFO

Analysts

Jim Rollyson – Raymond James

Brandon Blossman – Tudor Pickering & Holt

Meredith Bandy – BMO Capital Markets

David Gagliano – Barclays

Lance Ettus – Tuohy Brothers

Andre Benjamin – Goldman Sachs

Dave Katz – JP Morgan

Caleb Dorfman – Simmons & Company

Mitesh Thakkar – FBR

Chris Haberlin – Davenport

Lucas Pipes – Brean Capital

Joung Park – Morningstar

Richard Garchitorena – Credit Suisse

David Beard – IBERIA

Brett Levy – Jefferies

John Bridges – JP Morgan

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2012 Cloud Peak Energy Incorporated Earnings Conference Call. My name is Caris and I will be your coordinator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today, Ms. Karla Kimrey, VP of Investor Relations. Please proceed.

Karla Kimrey

Thank you, Caris. Good afternoon, and thank you for joining us today. With me is Colin Marshall, Cloud Peak Energy’s President and CEO, and Michael Barrett, Cloud Peak Energy’s EVP and CFO.

Today’s presentation may contain forward-looking statements regarding our outlook and guidance, economic and industry conditions, volume, prices and demand, LBAs, business development plans, regulations and energy policies, capital resources, and other statements that are not historical facts.

Actual results may differ materially because of various risks and uncertainties including those described in the cautionary statement in today’s earnings release and in our 2012 Form 10-K once it is filed.

Today’s presentation also includes non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor Relations section of our website at www.cloudpeakenergy.com.

I’ll now turn the call over to Colin Marshall.

Colin Marshall

Thank you, Karla. Good afternoon and thank you for taking the time to listen in to our fourth quarter and full year 2012 results. As usual, I’ll make some opening remarks before handing over to Michael Barrett, our CFO, to cover the financials and our guidance.

Throughout 2012 Cloud Peak Energy executed well both operationally and financially in a year that posed significant external challenges. The operations had a strong fourth quarter which got us to a full year shipments of 90.6 million tons from our three mines. Full year adjusted EBITDA of $339 million was at the top of our guidance, thanks to effective operation cost control and good performance from our logistics business.

During the year we were able to make some significant moves to better position our business for future growth, with the Youngs Creek purchase, the exploration agreement with the Crow Tribe, and soon-to-be-completed sale of our 50% interest in the Decker mine, and options for up to 21 million metric tons of port capacity in the Millennium and Gateway Pacific terminal projects.

Turning to our safety performance during 2012, Cloud Peak Energy achieved a 31% reduction in our MSHA All Injury Frequency Rate to 0.82 injuries per 200,000 employee hours worked.

During the quarter there were four MSHA reportable injuries, giving a total of 12 for the year. There were six days of MSHA inspections in Q4 that resulted in one substantial and significant citation with a fine of $2,106. For the full year, we were issued 24 S&S citations with fines of $24,721.

While I was very pleased with the improvements in our safety performance, we believe there is no reason for anyone to be injured mining coal. And we will all continue to work to achieve this.

As we have previously reported, we are proud to receive the Office of Surface Mining Good Neighbor Award for excellence in surface coal mining, which recognized the wide range of community environmental work undertaken by our employees.

Looking back at the fourth quarter and year, it was good to see how well the mines coped with shipment rates that varied significantly between the slow 20.1 million ton second quarter and the 24.4 million ton third quarter. Varying production rates makes cost control challenging given the high fixed-cost nature of our business. The operations did a good job of reducing use of external contractors and maximizing the benefits of our preventative maintenance programs.

I should add that we are very careful to not compromise the long-term integrity of our equipment, as it invariably costs more to catch up on neglected maintenance in the long run. Our operational performance reflects very well on the quality and dedication of our workforce, who continued to deliver the substantial cost savings and efficiency improvements that underpin our financial results.

The domestic coal market in 2012 was dominated by mild weather and the associated low natural gas prices early in the year. Natural gas prices increased from their May lows, reducing the amount of coal displaced by gas, particularly in low-cost PRB coal.

For the full year coal generated around 37% of U.S. electricity. Generation ranged from a low of 32% in April to 42% in November. Reduced rig counts and some winter heating demand helped support gas prices at levels above $3, which has stabilized coal burn and reduced PRB stockpiles to around 93 million tons at the end of November. This level is up around 14 million tons from November last year.

I believe there will be some recovery of the approximate 40 million tons of PRB burn that was lost in 2012. However, it will take some time for PRB stockpiles to reduce to a level around 80 million tons where we have previously seen price support. It is apparent that utilities are not buying coal as far forward as they have previously due to the current high stockpiles, low natural gas prices, and regulatory uncertainty. We will adapt to the change, as we have been doing for several years, and we will look to use the financial hedges to allow us to lock in some domestic prices ahead of utility contracting cycles.

2012 was a good year for Cloud Peak Energy’s domestic and export logistics business. We exported 4.4 million tons, of which 4 million were through the Westshore Terminal. Shipments were made to a new customer in Taiwan and we continue to develop relationships with additional trading partners.

Most of our 2012 exports were contracted in late 2011 when prices were around 20% higher than they are today, allowing our logistics business to make an adjusted EBITDA contribution of $57 million. We are pleased with the final export total, as the year included two outages to increase the Westshore Terminal capacity from 29 million to 33 million metric tons, and the reduced shipments in September – in December due to the damage to one of the two Westshore berths. Now the berth is back in operation after a remarkably quick repair. We believe we will be able to export around 4.5 million tons this year.

While export prices are currently soft due to increased production from Indonesia and Australia, Asian demand for thermal coal continues to be strong. Chinese thermal and metallurgical coal demand continues to grow at a rapid pace, leading to imports reaching 289 million metric tons last year. It’s worth remembering that it was only 2008 when China was a net coal exporter.

While current international coal prices, with the Newcastle benchmark around $95 per metric ton, give us little logistics margin it is evident many Australian producers are currently losing money as they close mines and cancel projects. The high cost inflation in Australia and Indonesia in recent years means our coal is no longer at the top of the international cost curve.

We were busy during year with several important business development deals that position Cloud Peak Energy well to grow our delivered sales to Asian customers. In July we completed the purchase of the Youngs Creek project just south of our Spring Creek Mine and last month we signed a previously-announced exploration and option agreement with the Crow Tribe just to the West of the Spring Creek Mine. We are now working on evaluating the best way to develop the considerable coal resources in this one location. The timing and scale of mine development will largely depend on the development of new export terminal capacity.

In December, we announced a deal to sell our 50% interest in the Decker Mine to Ambre Energy. As part of the deal we have put in place some mutual over strips and entered the boundary corporation agreements, water access, and land transfers. We expect to close the deal in the near future when Ambre will replace our reclamation bonds and grant us an option for up to five million metric tons of capacity at the Millennium Bulk Terminal.

They will then make us a payment of AUD 57 million by the end of March or issue a note for AUD 64 million payable upon their next major fundraising. This sale allows Ambre to continue with their plans to develop the Decker Mine and it allows us to concentrate on developing the Spring Creek complex.

Today we announced an option agreement with SSA Marine granting us up to 16 million metric tons of capacity at their proposed Gateway Pacific Terminal. This exciting terminal project, which would be capable of loading cape size vessels, is currently going through its environmental impact statement scoping and is anticipated to begin shipments in 2018.

These two agreements, along with our existing position at the Westshore Terminal, mean Cloud Peak Energy is very well placed to increase exports with significant positions in several major terminals and projects. While we continue to explore additional terminal options that will be able to come online before Gateway Pacific or Millennium, at the same time we are increasing our support to organization and efforts that promote the benefits increased coal exports would bring to Washington, Montana, and Wyoming, with high-paying stable jobs, increased tax and royalty revenues.

It is interesting to note that contrary to what several vocal NGOs would have you believe, a recent more information survey showed that 74% of people polled in the Pacific Northwest supported the proposed terminal projects, and in an Oregon Public Broadcasting poll showed 2:1 support for coal exports in the Northwest.

It is apparent that many people would like to share in the economic benefits increased coal exports will bring to them and their families, and understand that many of the objections to coal exports appear to be coming from a few well funded groups who object to fossil fuels, and coal in particular, without any regard for the economic benefits they bring. We continue to be optimistic that after thorough review the ports will be approved and that the concerns currently being raised by opponents will be addressed.

One export related issue that has recently been in the press is the application of federal royalties to coal that we and others sell to affiliate logistics companies, which then arrange delivery and sell to both domestic and international customers.

While I am very comfortable that we are applying the current regulations correctly and paying the appropriate royalty, it is clear that opponents of U.S. energy exports are trying to introduce another layer of regulatory uncertainty into our business. We will be making the case to elected officials that we, like many other energy and export oriented industries, require a fair and consistent regulatory environment to allow us to continue to invest in our business and make long-term logistics commitments. Energy exporters – energy offer a great opportunity to grow employment and address the nation’s balance of trade and should be supported by a balance regulatory framework.

With that, I’ll hand over to Mike.

Mike Barrett

Thanks, Colin. As Colin said, Cloud Peak Energy delivered operationally and financially in 2012 despite the tough external environments. We responded to weak domestic coal demand by reducing production and controlling our variable costs and capital expenditures. We continued to focus on our logistics business to deliver coal to both domestic and international customers, and we maintained our strong balance sheet while growing our asset base and expanding our future export potential.

Our fourth quarter adjusted EBITDA was $89 million, resulting in full year adjusted EBITDA of $339 million compared to 352 million last year. You’ll see from our earnings release that we are now presenting our results in three business segments. Our Owned and Operated Mines segment includes the mine site sales of coal from our three Owned and Operated Mines. Our key metrics of tons sold, realized prices per ton and costs per ton for this segment are calculated consistently with those same metrics in our previous releases.

Tons sold for our Owned and Operated Mines were 90.6 million compared to 95.6 million in 2011, a reduction of five million tons as we matched production to the weak domestic market. For the fourth quarter we sold 23.6 million tons compared to 25.2 million tons last year.

While our fourth quarter was in line with the overall lower year, it was also compounded by shipments from Spring Creek being slowed as Westshore completed their upgrade work in October and November and suffered the damaged berth in December and January. As of last week, the berth is now back up and running and we are seeking to catch up shipments over the rest of the year.

Despite the weak market, our consistent contracting strategy enabled us to slightly raise mine site realized prices to $13.19 per ton from $12.92 in 2011. With the spreading of fixed costs over fewer tons, costs per ton increased to $9.57 for the full year from $9.12 last year. We were able to limit this cost increase by focusing on reducing variable costs.

Condition monitoring and planned maintenance programs continue to allow equipment lives to be lengthened and reduce maintenance costs without compromising equipment integrity. Costs were also managed by reducing the use of outside contractors, matching hiring to production, and completing maintenance and capital projects using our own labor.

The combination of these factors resulted in adjusted EBITDA for this segment of $283 million compared to $319 million last year. Switching segments, our Logistics and Related Activities segment includes the results of our logistics and transport services, where we deliver coal to domestic and international customers.

In 2012, we delivered 4.4 million tons to international customers and 1.4 million tons to domestic customers. Domestic deliveries were 0.2 million tons higher than 2011 as we were able to deliver some additional Antelope coal to domestic utilities.

International deliveries were 0.3 million tons lower than last year as we curtailed shipments through the more distant port of Ridley and focused on the closer port of Westshore. This enabled us to reduce our costs of deliveries and improve our margins on these delivered sales.

Our Logistics business also benefited from higher international realized prices in 2012. Most of our 2012 international deliveries were contracted when Newcastle benchmark prices for internationally delivered coal averaged approximately $116 per metric ton compared to approximately $100 in 2011.

Our internationally-delivered coal realizes approximately 60% to 70% of this benchmark price based on its comparative quality and transportation costs. Adjusted EBITDA for our Logistics segments was $57 million compared to $25 million in 2011. The 2012 result includes $11.2 million of gains on financial hedges that we realized primarily in the last quarter of 2012.

Current Newcastle benchmark prices are around $95 per metric ton. At these prices our Logistics margins are significantly reduced, and as a result, we have currently only priced 1.7 million tons of our planned 4.5 million tons in international deliveries for 2013. We are holding off pricing the remaining 2.8 million tons to give every opportunity for prices to rise.

As of the end of the year, we had approximately 0.5 million tons under financial hedges for 2013 with a mark-to-market asset value of $9.3 million, which will help mitigate some of the impact on our earnings if international delivered prices remain low.

Finally, we have a Corporate and Other segment, which comprises the results for our brokering business, our share of the Decker Mine, and unallocated corporate costs. Adjusted EBITDA for this segment was basically zero in 2012 compared to $8 million in 2011, primarily due to lower broker activity in 2012, and declining production and increasing costs of the Decker Mine.

Turning now to our balance sheet and cash flow, we finished 2012 with total liquidity of $778 million, comprising $278 million of cash and short-term investments and our undrawn revolving credit facility of $500 million. In 2012 we generated cash flow from operations of $247 million. Our original CapEx guidance was $70 million to $90 million and we were able to manage this to $54 million, although this was an unusually low year.

We spent $129 million on LBA installment payments; $7.4 million on investments in our Logistics business; and used cash on hand to fund the $300 million Youngs Creek acquisition. In February we organized an Accounts Receivable securitization program with capacity of up to $75 million. This program now introduces further flexible low-cost additional liquidity to our balance sheet.

Our balance sheet remains strong. We have no debt maturities due before 2016 and our leverage remains robust at 1.8 times for gross leverage and 0.95 times on a net basis.

Switching now to our guidance for 2013, we expect to sell between 87 million tons and 93 million tons from our three mines. The upper end of this range reflects the opportunity to sell some tons in-year. We expect to deliver approximately 4.5 million tons through the port of Westshore to our Asian customers. However, if the currently depressed pricing for international-delivered coal continues, then we expect lower realizations and limited margins this year in our Logistics business.

We expect adjusted EBITDA for the year of between $230 million and $300 million. The lower end of this range assumes a continued weak domestic and international pricing environment and potentially lower domestic demand. The higher end of the range assumes a stronger pricing environment, demand recovery, and the potential for additional deliveries to Asia.

We expect interest expense will be in the range of $40 million and cash interest paid will be similar to 2012 at around $53 million. Interest expense is lower than interest paid, because we capitalize a portion of interest related to long-lived development projects. We expect depreciation, depletion, and accretion expense of between $110 million and $120 million. Across the industry these costs are increasing as we all mine into, and hence deplete, the more recently-acquired, expensive coal leases.

Capital expenditures generally have a long-term average run rate of around $1 per ton in our business. We expect the 2013 capital expenditures will return to around this level and should be between $80 million and $110 million. We anticipate that SG&A costs will increase approximately in line with general inflation. Our committed federal lease payments for 2013 are $79 million and then $69 million for 2014 and 2015, respectively, down from $129 million in 2012.

We expect the sale of our interest in the Decker Mine will close during the first half of this year. As we exit the business, Ambre will assume our 50% share of the reclamation liabilities, reducing our reclamation liability by $74 million and further strengthening our balance sheet.

The closing and receipt of the cash element of the consideration remains subject to financing by Ambre. As a heads-up, when the deal closes it will result in an update to our tax receivable liability in that quarter.

Finally, as Colin mentioned earlier, we saw increased quarterly variability in 2012. We expect to see that variability again in 2013. As normal, our first quarter shipments and results will be reduced by the freezing of the Great Lakes, which slows Spring Creek shipments. But this year the damage to the berth at Westshore will also reduce delivered sales from Spring Creek. In addition, international-delivered prices are low, which will impact our logistics business until the prices improve.

To wrap up, we continue to maintain a strong balance sheet with available liquidity of $778 million, ample headroom under our debt covenants and no debt maturities due before 2016. This enables us to focus on running the operations efficiently and allows us to look for opportunities to invest in growing the business even in tough market conditions.

With that, I’ll hand back to Colin.

Colin Marshall

Thanks, Mike. It should be no surprise that our 2013 guidance reflects the current difficult market conditions that I believe will not improve before midyear. We would like to have sold a few more tons going into the year, but we’re not willing to sell significant tonnage at prevailing prices.

During the last quarter we only sold 1.7 million tons at an average price of $10.94 per ton, which was not very inspiring. In total, new sales, carryover and index tons fixed during the period increased our fixed contracted position by 6.1 million tons at an average price of $11.20.

With our 89 million tons contracted position, we are well placed for 2013. For 2014 we currently have 57 million tons committed, of which 44 million tons are under fixed-price agreements with a weighted average price of $14.49. We will look for opportunities to contract more tons through the year as utilities send out RFPs.

Even with the damage to the Westshore Terminal, we expect to ship 4.5 million tons of coal this year – to export 4.5 million tons of coal this year, and as Mike said, are holding off fixing price as long as possible to allow us to take advantage of any end-year price increase.

We are increasingly using financial hedges to allow us to lock in prices for sales to exports customers when we choose, rather than when Asian customers traditionally settle contract prices, shortly before the year of delivery. We plan to build up this position as we lay in hedges for a portion of our deliveries, up to three years ahead.

To sum up the year, our business has performed very well and is in good shape for 2013. Hopefully, domestic stockpiles will decrease enough to allow prices to rise by midyear and international prices will move up soon, too.

Regardless of pricing we will continue to focus on the things we can control such as safety, costs, and capital, to ensure our business remains strong. The moves we have made to grow our export business have gone very well with the Youngs Creek and Crow agreements which will allow us to build an export-focused mine complex around our existing Spring Creek operations, and the Millennium and Gateway Pacific Terminal agreement which will give us options over significant capacity at the two major Washington projects to add to our Westshore position. We have a strong balance sheet and we’ll continue to look for opportunities to grow the value of our business.

With that, we’ll be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson – Raymond James

Good afternoon, guys.

Colin Marshall

Hi Jim.

Jim Rollyson – Raymond James

Another good quarter. That’s great to see and congrats for not booking coal at below your costs, like some of your competitors. On the front of cost, you gave us some directional commentary just in regards to stripping ratios. Can you maybe give us a little bit of magnitude of maybe relative to 2012, how much do you see costs on a per-ton basis trending upward? And is that mostly related to stripping ratios? Or is that some of the just general inflation stuff as well?

Colin Marshall

Well, Jim, as we normally say, look, our costs go up due to general inflation. Obviously, people in healthcare, costs go up more than underlying inflation. And then every year we do have more work to do. There are a couple of additional things this year where we’ve moved to a new pit at Cordero Rojo, which will extend the holes a bit there. So in the ebb and flow of things, we’d still stick to that underlying trend up in costs that we’ve described before, of the underlying mine costs going up somewhere between 5% and 8% is – I think we’re still on that trendline which we’ve been on for a fair while.

Jim Rollyson – Raymond James

Yes. That’s helpful. You had a very busy year last year in terms of acquiring things, making some pretty big moves and setting up to get rid of Decker. As we look into ‘13, your balance sheet is still in pretty darn good shape. And just curious if there’s a lot of other things out there, you think, are yet to come for you guys this year? Or is this going to be a little bit of backing up and dealing with all the things you’ve been doing and just focusing on the business? Just curious what you think.

Colin Marshall

I suppose, what I can see is an awful lot of work to try and support the terminal project development, which is already underway. So we’ll certainly be doing a lot of that. As far as any other M&A, being apart from saying, look, we’ll always look at whatever comes along and try and evaluate if something would actually – we believe add value, we’ll always look at any opportunities that come along. But it’s amazing. You look forward and can’t see much, and then before you know it, you’re looking at different things. But the trick is to try and only get excited about the ones that you really believe will add value, like the Youngs Creek and the things we’ve managed to do in 2012, which I’d have to say, I was really pleased with.

Jim Rollyson – Raymond James

Yes. Well, you’ve certainly done some several nice deals. Just on the terminal capacity issue, it looks like you’re going to represent a pretty big chunk of the – about a third of the SSA Marine Terminal, if and when that gets done. You’re pretty small in comparison at the Millennium Bulk Terminal. Is there any way for you guys to boost your potential allocations there, or is that locked up?

Colin Marshall

Who knows? We didn’t have an allocation there a while ago. So now we’ve got 5 million tons. So I think the cup is half-full. We’ll just have to see how things develop.

Jim Rollyson – Raymond James

All right. And last one, just curious your thought on if you think anything comes out of this witch-hunt from the couple of senators on export royalties, and if something were to happen, what your thoughts on your strategy would be?

Colin Marshall

Well, our strategy, as I’ve said in my remarks, is to make sure we actually explain our position that we certainly believe we’re paying the appropriate royalties at the moment. And our belief is that obviously, there are some people who believe that actually raising the taxation of exported coal would be a good idea.

We need to try to talk to people to make them understand the pros and cons of that, and that we certainly think it would be a bad idea and would reduce the total wealth coming to the U.S. and coal production and exports.

But obviously, deep down there are some people who think that reducing coal production in America is a good thing. So we’re not going to convince them. We’re just going to have to go and talk to people and spend time making sure they understand we’re certainly – we’re not doing anything underhand. We’re paying out the correct royalties; we’re very confident of that, and that we want to try and let America benefit from the coal it’s got and the potential to export it, which certainly would provide jobs, revenue, and help with the balance of trade. Which – there is quite a few people who will listen to those arguments because they make sense to them.

Jim Rollyson – Raymond James

Also nice to have some non-federally-owned coal.

Colin Marshall

That’s a little bit of it.

Jim Rollyson – Raymond James

Great. Thank you, guys.

Operator

And your next question comes from the line of Brandon Blossman of Tudor, Pickering and Holt.

Brandon Blossman – Tudor Pickering & Holt

Good afternoon guys. Karla?

Karla Kimrey

Good afternoon.

Brandon Blossman – Tudor Pickering & Holt

Let’s see, how about Youngs Creek? Colin, just obviously multiple paths here, but in terms of thinking about port development, CapEx on the ground for Youngs Creek, and then signing up long-term contracts, how do you guys think about those three prongs of work, strategically?

Colin Marshall

Okay, well, we’re obviously evaluating the Youngs Creek deposit. We’ve got the – which had been well worked on before, and we’ve got the 280 million tons under the mine permit. We will be doing the work with – of the 1.4 billion tons with the Crow Tribe to understand that. And obviously, we’ve got the Spring Creek reserves already.

So we will be looking at them as sort of one complex to understand the best way of developing them. We’re obviously working. The timing of that will take several years because it just takes a long time to get permits and all the rest of it put in place. But it actually does mesh with the potential timing of the port. So whilst we will be looking for opportunities to get a few shipments out or any additional terms we can in the meantime, the big ports that will actually trigger the development of those – of significant developments are actually a few years out, which actually gives us time to do the work we need to do.

In terms of contracts and long-term contracts, we’re obviously spending a fair bit of time talking to our Asian customers and developing our relationships, obviously, our reasonably long-standing ones with the Korean utilities. As I said, we’ve got a new customer in Taiwan, which is good. And we’re also building up a deeper network of traders we’ve dealt with. So we’re doing all those things. The important thing is there is actually time to do it. We’re not in any desperate rush because it will take a while to get all these things to come together. But we can do it prudently and try to make a good job of it.

Brandon Blossman – Tudor Pickering & Holt

All that is great to hear. And then just specifically in the next three-plus years, as you develop those properties, I assume relatively light CapEx associated with that?

Colin Marshall

Certainly within three years, yes. It takes a couple of years just to get a permit. And obviously the timing of the ports is – I think 2018 is the current assumption for Gateway Pacific. So we’ve got a while to do that work.

Brandon Blossman – Tudor Pickering & Holt

Great. Very helpful. And then just a quick detail question, carryover tons from 2012 into 2013, any material changes there in the quarter?

Colin Marshall

Well, the ones that were carried over from 2012 to 2013 were part of that 6.1 million that – if you look at the numbers, we effectively went to contracts and about 6.1 million tons moved to fixed price. A few of those were carryover but nothing too much. And this is sort of net price of that whole lot, including the coal we sold, was $11.20.

Brandon Blossman – Tudor Pickering & Holt

Thanks guys.

Colin Marshall

Thank you.

Operator

And your next question comes from the line of Meredith Bandy with BMO Capital Markets. Please proceed.

Meredith Bandy – BMO Capital Markets

Hey, good evening. Or afternoon, I guess. So I hate to beat this on the head, but – so if we look at – maybe if you could just step back and give us some of the vision for this export facility and the mines that go with it. Would the mines just be matched to the port capacity and would that be matched like the 16, or the 16 plus 5? And so the timing would be similar to the port, I guess we just said. And then on a CapEx per ton basis, what is the cost to build a mine in the Powder River Basin now?

Colin Marshall

Okay. In terms of the timing, it will come – it will be generally driven by the terminals, though those deposits and particularly some of the coal on the Crow, we believe has low sodium, which would actually maybe allow us to increase domestic sales a little bit.

In terms of the – I can’t give you a specific number on the CapEx to develop those, because I don’t know exactly how we’re going to develop them. The thing I do know is that because we’ll be able to build them as satellites to the Spring Creek mine, we won’t be the cost of a Greenfield project to be more like a Brownfield project, maybe with the rail spur, if we get down to near Youngs Creek and the Crow reservation, if we get a – if when the ports come on and we can step up to tens of millions of tons of production, but we really have to wait and see how it develops.

The thing I’m comfortable about is we’ve got lots of options, and developing certainly a Brownfield rather than a Greenfield is going to be lower CapEx once we finally work out how to do it. And given the time we’ve got, we’ll be looking at second-hand drag lines or equipment. We’ll actually spend some time making sure that we optimize things. We’re not in a desperate rush, which can lead to your CapEx being at the top end of your range rather than the lower end.

Meredith Bandy – BMO Capital Markets

And then just in terms of the near-term CapEx, I guess you had a little bit of a bump in the CapEx going from ‘12 to ‘13, and so if you could explain that. And also what is a normal CapEx just for the three existing mines?

Mike Barrett

Yeah, certainly, Meredith, its Mike here. I’ll try that one. If you look back at our CapEx run rate over the course of the last three or four years, you can see that on average we’ve been around about $1 per ton. But it has jumped up and gone down in specific years. So 2011 was a much higher year. 2012 was a much lower year. And that reflects some of the additional capital that we spent in 2011. And it also reflects the fact that we were able to extend some of the equipment lives through the end of 2012, which meant that we were able to push some projects from 2012 into 2013.

So as a result of that, you can certainly see that some of the CapEx has been deferred from 2012 to 2013. As we’ve said again and again, we are very, very conscious about equipment integrity, so we really only do that on the basis of condition monitoring, which does make it a little bit hard sometimes for us to be able to give the guidance at the start of the year.

We certainly look at the way that the equipment is operating. We monitor the performance of equipment. And then we determine whether we are able to push some of those jobs into following years. So as a result of that, we have moved some CapEx from the low year of 2012 into an increased year in 2013. We’ll obviously monitor that CapEx very, very carefully through 2013 and there may be some opportunities as we get later in the year to further push some projects. But we’ll really judge that as we go.

We’re certainly very conscious to make sure that we’ve got the balance sheet and the ability to keep the gear in very good condition, though. So that’s why we’ve got the guidance where we have for 2013.

Meredith Bandy – BMO Capital Markets

Okay. That makes sense. And last ticky-tack point, the next couple of years of lease payments?

Mike Barrett

Yes, certainly, it’s Mike again. For 2013 committed lease payments of $79 million, for 2014 and 2015, $69 million each. And that finishes our committed lease payments at this stage. Obviously, there’s a number of other leases that will come up for bid in that period of time, and we will assess those as we get to them.

Meredith Bandy – BMO Capital Markets

Okay. Thank you very much.

Operator

And your next question comes from the line of David Gagliano with Barclays. Please proceed.

David Gagliano – Barclays

Hi, thanks for taking my questions. I wanted to drill down a bit more on the export thermal business. And thank you very much for breaking out the Logistics segment, by the way. It’s very helpful. If we exclude the onetime gain, the $11 million for the year, how much of the $46 million in 2012 EBITDA is directly tied to the thermal coal export business? That’s my first question.

Colin Marshall

I’m not going to give you the exact number. I’ll say the majority of it, though; a large majority of it.

David Gagliano – Barclays

Large majority. Okay, so then – if prices are down $20 ton, is it as basic as saying, if you go through the math, it’s probably – let’s call it a margin per ton of $10 on 4.4 million tons, somewhere in that range? So if prices are down $20 at ton, is it as basic as saying that you need a $10 per ton improvement in international prices for that business to be profitable again moving forward? Is that...

Colin Marshall

Okay. I think the way to look at it is, we’ve said that we tend to get 60% to 70% of the Newcastle port benchmark price. So $20 on the price is $12 to $14 per ton of our coal at the port. And then I think we’ve also said that at current prices, you can work out that – well, we told you we’re not making much margin on the Logistics business. We actually made the domestic margin which we’ve shown in the other segment.

But the main thing there is that the other price – the other – the Asian and the other guys are actually folding whereas we were saying, well, this isn’t much fun but we’ve actually got a business here. And just as we did in 2008, when we stayed in the business the last time that the prices were down, we’re maintaining those relationships and those contracted positions and using the hedges when prices are bit better, to make sure that we can stay through the cycle and make money when they do go back up.

But I think – we’re well-positioned with that. At the current prices we’re not making much money out of it, but as you’ll certainly see as the quarters go on, if there is no price change. But it’s still a good – we’re not losing money, which is the important thing, because we’re well positioned and staying in with those deliveries for the times when the price will go back up.

David Gagliano – Barclays

Okay. I guess really what I’m getting at is how high does the international price – how much more in improvement or however you want to frame it – how high does the international price need to go for you to commit the remaining export thermal business beyond the 1.7 million that is committed?

Colin Marshall

Oh, I see what you’re getting at. I think that we’ll have to commit it, because we want to ship our tons. We have take or cut pay commitments with the port and with the railways. So we will commit it. The main thing is that at current prices we are actually making some margin. We’d just like to hope for – you hate to wish things on other people, but if it rained a bit harder in Australia that would be handy and give some time. The international prices can move quite quickly. So there’s no point in locking up the whole year at what we believe is a low point in the cycle. If the price is fair at 95, we will sell the coal at 95 because we want to – that still makes sense. But we want to try to give it the chance to go up if we can.

David Gagliano – Barclays

Okay. I’ll just move on from there. Last question; talk a bit about, if you could, the appetite for the 2014 – if there is any right now – for the 2014 coal out of the PRB for the domestic utilities. Is there any appetite? And if so, what is the pricing environment like for meaningful 2014 PRB volume at this point?

Colin Marshall

Well, I think at the moment as you normally – I think we’ve been asked this before. We always say in the winter there’s not much between November and through to about February or March. There actually aren’t that many RFPs around. There’s a few coming out. And people are obviously – I think utilities are waiting to see whether – what their position is for 2013 as they come out of the winter. And then they’ll be assessing what they sort of know they’ll buy for 2014 from – I’ll say, March onward. And we will be seeing RFPs there.

And when the current price is, as I’m looking at a piece of paper here for 8800 for next year, it’s about $12. That’s where the market is at the moment. We’ll see how that develops. There’s a lot of coal the utilities have yet to buy. They haven’t seemed to reduce their purchases. But the burn is back up. So I suspect there’s a chance for price support and movement upwards once those – certainly once the stockpiles come down a bit. But I think people are – this is traditionally a slow period, and there aren’t that many RFPs out there at the moment for 2014. But that doesn’t mean they are not coming because those utilities have to buy quite a bit of coal yet.

David Gagliano – Barclays

Okay, perfect. Thanks very much.

Colin Marshall

Thank you.

Operator

And your next question comes from the line of Lance Ettus with Tuohy Brothers. Please proceed.

Lance Ettus – Tuohy Brothers

Hi just a quick question. You have now two contracts for two different west coast or proposed west coast coal ports. Just want to know – I know you haven’t given out exact details, but I guess relative to what you’re doing in Westshore, how much do you think shipping through these terminals will save you on a per ton basis?

Colin Marshall

Well, in terms of the exact – I think for your sort of thinking and everything, I’d probably think that the economics shouldn’t be wildly different to Westshore. The rail distance isn’t much different. And obviously, the operators, the developers will want to make a return on their capital for the ports.

And then the other point is that obviously the Millennium one will be into Panamax vessels which will have the Panamax discount. So I think in terms of given how far out they are, the work is yet to be done, I think if you thought of the economics of those ones it’s similar to Westshore for Gateway Pacific and just allow for the Panamax freight differential on Millennium, and your, probably, sums will come out right.

Lance Ettus – Tuohy Brothers

And how much is that Panamax differential?

Colin Marshall

I think we said about $5 a metric ton.

Lance Ettus – Tuohy Brothers

So that is $5 a metric ton. I’m sorry, is that favorable or unfavorable?

Colin Marshall

That’s unfavorable, unfortunately. So we get $5 per metric ton less because it costs more to transport it in a small ship.

Lance Ettus – Tuohy Brothers

Okay. Thank you.

Operator

And your next question comes from the line of Andre Benjamin of Goldman Sachs. Please proceed.

Andre Benjamin – Goldman Sachs

Good afternoon. First question, I was just wondering if you can give us a little color on the current run rate for the mines, as the fourth quarter volumes would imply an annualized rate above the high end of guidance. And how you’re thinking about things sequentially based on the discussion you’ve had so far?

And is there any flexibility based on the capacity at the mines? And if things got bullish by the summer, could you get above the high end of guidance?

Colin Marshall

Well, that would be a nice thing. I think, look we’ve shown last year that we went from 20 million to 24 million or 25 million – 24 million, 25 million ton rate in the different quarters. So there is some flexibility.

At the moment typically, as Mike was pointing out, we suspect the first quarter will be slower, because Spring Creek is always slower because of the freezing of the Great Lakes which a portion of their tonnage goes through. And also with the damage to the Westshore Terminal that is now repaired, that will slow down a bit extra.

Apart from that, I think we will – obviously, when we get to the end of the first quarter we will be able to tell you exactly what we did, but the first quarter tends to the slowest of the year. I think this year we’ve got an extra reason why we’re a bit slower, but we’ll have to wait and see.

In terms of how much we can catch up, well, let’s see where the demand is. I think I’d rather see the price go up first before I started cranking out extra tons so that we could sell into 2013 to 2014 and 2015 at higher prices. But let’s wait for that to happen.

Andre Benjamin – Goldman Sachs

Thanks. And then looking a little bit into the future, could you discuss your current assumptions for longer term domestic demand? You focused a lot on the export facilities, so if those do come on and the permits are received, do you look at that as 15 million to 20 million tons incremental to today’s volumes? Or would it be offsetting some domestic declines? And would you ever think of just not growing as much and just tightening both markets by just shifting some domestic coal into the international market?

Colin Marshall

Oh good, well we’re not going to tighten the international market. Obviously, we’re a dropping the bucket there. But I think in terms of the domestic, we’ll wait and see how it develops. I think – we think the we’ve said for a while is what’s the PRBs – fortunate to be the low-cost producer, we think that that means that the overall PRB demand won’t go down significantly. Also domestically, there’s very little – there’s no real obvious place you can get any significant growth.

So we look at the PRB and think avoid – apart from the noise from weather that we had last year, that it probably should stay sort of flat, and maybe a slight decline over a long enough period and definitely growth will come from export.

In terms of how that plays out, if that’s true that domestic isn’t declining, then yes, all the export would be growth. We might be wrong by – I don’t know – what would you say – 5 or maybe 10 – 5 or more million tons on the domestic, we’ll wait and see. But it’ll happen over several years, I think.

So I’d say hopefully it will be mostly growth. If not it will be offsetting – it will more than offset a bit of domestic demand decline I guess.

Andre Benjamin – Goldman Sachs

Thank you

Mike Barrett

Thanks.

Operator

And your next question comes from the line of Dave Katz with JP Morgan. Please proceed.

Dave Katz – JP Morgan

Thanks for all the color thus far, but my questions have been answered.

Colin Marshall

That’s the easiest one yet.

Operator

And your next question comes from the line of Caleb Dorfman of Simmons and Company. Please proceed.

Caleb Dorfman – Simmons & Company

Great. Thanks for taking my question. I guess you talked a little bit about the domestic contracting struggles right now and the high stockpiles. What do you think we need to see to get some more price support or to see the pricing get a little bit above that $12 range?

Colin Marshall

I think the – what I look at it – the key thing that we have looked historically is if PRB’s stockpiles get down toward 80 million tons, there’s always been a very strong correlation between that sort of area and price support. So what would get us there is – obviously there is actually quite a bit of PRB coal being burnt at the moment because gas prices are above that $3. That seemed to be a pretty critical number for when people were switching, and obviously at $2 they were switching a fair bit of PRB coal this time last year or whatever.

So I think, if they’re burning a fair bit of PRB coal. What we need is for their stockpiles to come down. We’ll see some numbers over the next few months, hopefully that will come down. Unfortunately will then – they should come down, those tonnages where production was the whole year. Unfortunately, then we will be going into the shoulder period. So my belief is it will be the summer before we really see any obvious price support. And hopefully it will be a hot summer like last year that will give meaningful burn, and also burn the gas to give that price support. So I think I’m looking for the stock piles to come down to say 80 million tons, but I think it’s going to take a little bit of maybe the midyear for the price to go up.

Caleb Dorfman – Simmons & Company

Great. That’s helpful. Obviously you always like to try to go into 2014 or the coming year always fully contracted. As you are looking at 2013, the stockpiles are high. Have you had any changes to that feeling that you will be able to get to that point or get to the 93 million tons, at the high end of guidance?

Colin Marshall

Well, look, I would’ve liked to have been sold over – in previous years we have been oversold going into a year. The reality is that with the stockpiles and what happened last year, we would have liked to have sold a few more million tons as of now. That’s not been possible and we didn’t want to – we didn’t feel that contracting some of the tons would have been prudent for us. We are okay with our position.

All we’ve got to do now – but if prices go up, yes, we will look for opportunities to sell in-year if there is – if they do appear. If not, then look, we’ll be closer to the middle or the lower end of our guidance, I guess. But this year’s obviously got a long way to go, and we are on an improving trend from certainly where we were middle of last year. So I think we’ll play it as we see it and try and optimize our business. And I’d like to next year be sold out in a stronger market. But we’ll just have to wait and see.

Caleb Dorfman – Simmons & Company

Great. Thank you, Colin.

Operator

And your next question comes from the line of Mitesh Thakkar with FBR. Please proceed.

Mitesh Thakkar – FBR

Good afternoon guys.

Colin Marshall

Good afternoon.

Mitesh Thakkar – FBR

And thanks for breaking up all the details and giving more color around the segments. Most of my questions have been answered but I still have one. How should we think about your contribution to those port development projects? I know you spent about $7.5 million in 2012. How should we think about going forward?

Mike Barrett

The capital number there – I think it shouldn’t be – it will be down from that. But we’ve...

Colin Marshall

We’ve invested different things that have gone on the balance sheet with different work on the ports. And I think going forward you’ll see – it’s in the CapEx number. It will be probably a lower level than that. But it is one of these things we need to be spending money in, and quite frankly to get the ports – if we spend a few million and get, what is it, 25-odd million – 20 million tons of capacity, then that will be the best capital we ever spend. So we’re making sure that we don’t under-fund those projects and opportunities.

Mike Barrett

And Mitesh maybe if I can add to that a little bit as well, we’re also putting quite a bit of effort in around some of the marketing business development activities from a government support area. So that’s adding $1 million or $2 million to some of the SG&A costs as well.

Mitesh Thakkar – FBR

Okay, great. Thank you very much, guys.

Colin Marshall

Thanks.

Operator

And your next question comes from the line of Chris Haberlin with Davenport. Please proceed.

Chris Haberlin – Davenport

Hi good evening guys.

Colin Marshall

Hi.

Chris Haberlin – Davenport

Can you just talk a little bit more about Q1? I know you said it is typically your lightest quarter in terms of volume. Is it fair to assume that volume in the quarter is fully priced? Or do you still have some open tons there that you have to price?

Colin Marshall

Gosh, that’s a good question. Look, if there’s any open tons, it will be minimal. The thing that will drive the quarter will be the shipments. And there what we’re signaling is that that’s always – or flagging – that’s always low, so be aware of that. And the other thing that we’ve said is that look, we’ve locked in, what was it, 1.7 million of our – the export sales. And we’ve said at the price we’re doing, there’s not a great deal of export margin in that. Hopefully that will move on for the rest of the year.

Chris Haberlin – Davenport

Okay. And then with the Gateway option, can you just kind of elaborate on what the cost to you all is associated with that option? Is there an up-front payment once we see a permit? Or is it just a throughput fee that you all will pay on tons as you ship?

Colin Marshall

Obviously, that’s a confidential agreement, so I won’t go into any great detail, but there is some payments to cover some of the work that’s being done that aren’t that significant. And then, obviously, there will be a throughput fee when the port is actually built. But the important thing is the actual numbers – because there’s an option to use – to be a customer of the port, it’s minimal capital for us. It’s insignificant compared to building mines.

Chris Haberlin – Davenport

And then does that option expire at any point. So, say within the next three years there’s no permit, does that option expire or is it extended until whenever there’s a permit?

Colin Marshall

I think it’s confidential, but basically the SSA Marine would obviously want us to use the port if they build it. So if they build the port, then we’ll – we want to use it; they need customers, so that should work out. But there’s no obvious reason why we’d – if it takes 3.5 years, we’re not going to cancel at three.

Chris Haberlin – Davenport

Sure. Okay. Thanks very much.

Colin Marshall

Thanks.

Operator

And your next question comes from the line of Lucas Pipes, Brean Capital. Please proceed.

Lucas Pipes – Brean Capital

Hey, good afternoon everyone. Colin, if I understood you correctly you said that if you don’t meet the high end of your sales guidance, your EBITDA would come in towards the lower end to the midpoint of the range. Is that correct? And just in general, could you maybe provide a little bit more color on the range? If in your EBITDA guidance, if things stay where they are today, where do you expect to shake out?

Colin Marshall

Okay, well, the range is the range. You can see the tonnage – obviously, that will – if we do 87 million that would drive us down to the bottom end. And I think to get to the top and, yes, we would need some in-year sales because we’ve only contracted 89 million at the moment. Actually to meet the middle we’d need a little bit of extra sales – an extra 1 million tons.

The big drivers will be the logistics, the export price if Newcastle goes up and the tonnage. If we get to 93 million and the Newcastle price goes up to $115 or $120 or something like that before we – and we’d have to lock in the second half tons at favorable prices and we get a bit of a domestic movement for the index, then you’d be towards the top end.

If none of those things happen or they stay flat, then we will be toward the bottom end.

Lucas Pipes – Brean Capital

Okay, that’s helpful. Just in terms of the PRB, obviously things have improved a lot with gas prices moving above the $3 range, but just when I go back historically it still looks a little bit lighter. Do you have any sense on why you haven’t seen more PRB burn?

Colin Marshall

We’re seeing a lot of PRB burned now. The trouble is the stockpiles are up. And there’s people with – because the stockpiles are up, there’s people – the utilities aren’t having to buy as much as they would into 2013. They can certainly see plenty of time to wait for 2014.

I think the other thing is there’s probably a few utilities that are saying, well now with my stockpiles I don’t need to fully fill up this year yet, because if gas prices were to go down again, they’d want the opportunity to switch. So I think all those factors will come to play. Obviously, they can also work quickly the other way if the gas burn does – when the gas burn goes up, obviously we are hoping for a real long, cold winter, which we haven’t got. We got a normalish winter.

If you get a good burn on the gas and the drilling rigs are coming off a bit, then there’s a chance we could overshoot. And that would – if at that time PRB stockpiles are down towards the 80 million mark, I think you could get some strong price movement. But I’ll take some – just some steady price improvement would be fine with me. And I think that – hopefully that – there’s reasons why that should happen around the middle of the year.

Lucas Pipes – Brean Capital

Great. And then just to clarify, on the 1.7 million tons that you’ve priced on the export side, are they in addition to that derivatives? And if so, could you maybe quantify that?

Mike Barrett

Lucas, it is Mike here. On the derivatives, we’ve got about 0.5 million tons of derivatives for 2013 deliveries. And when we marked those to market at the end of the year they had a value of $9.3 million. So if we close them out, if prices stay the same as they were at the end of the year, we would see a gain of $9.3 million.

Lucas Pipes – Brean Capital

That’s very helpful. Thank you very much.

Operator

And your next question comes from the line of Joung Park with Morningstar. Please proceed.

Joung Park – Morningstar

Hey guys, this is Joung. Thanks so much for taking my question. First question I had was implied in your forecast for $11 a ton for 8800 coal in 2013 is – I guess the forecast for PRB coal to increase to maybe the $12 per ton range by the back half, given that it is $10 a ton so far this year. Is that’s a correct way to look at it?

Colin Marshall

Are you – No. I think you’re reading much too much into that. We just used $11 to give you a number so you can do the calculations.

Joung Park – Morningstar

Okay.

Colin Marshall

We are just saying if you assume $11, that’s the answer you get.

Joung Park – Morningstar

Sure, okay. Second question is I think one of your competitors put out a presentation that shows that to reach parity with $3.25 gas, PRB coal would have to go up to, say, $15 per ton. What do you guys have as your own estimate of where PRB coal should be priced if you remove the inventory effects?

Colin Marshall

Quite frankly it depends; it’s all supply and demand. I think we have seen the coal all the way up to $17, what was it 18 months ago, a bit more. It’s all supply and demand. And it’s the difference between big numbers. So it can move quite quickly for or against you. So I’d certainly say the numbers we’ve seen – we’ve sold coal at $17 for – a year ahead, 18 months ago. So that can all – it’s clearly worth that. But as long as gas is over $3 and preferably toward four, we’re in good shape. Then it’s just a question of how much capacity is there in the PRB with the producers.

Joung Park – Morningstar

Okay. Thanks, Colin.

Operator

And your next question comes from the line of Richard Garchitorena with Credit Suisse. Please proceed.

Richard Garchitorena – Credit Suisse

Thanks. Just a couple of quick ones here. First, just on the domestic deliveries to utility and industrial customers, 1.4 million tons, have you priced any of that for this year? And how is that contracted typically, like annually or?

Colin Marshall

Well, that’s business that we’ve actually sort of had probably – gosh, I don’t know – for 15 or 20 years now, where often it’s not, don’t think of it as utilities. These are – we’ve done – our Logistics business has done – delivered deals for people like sugar beet factories, ethanol factories, people like that who can’t take a whole unit train of coal and don’t have their own unit trains. But we lease or – we arrange the transportation, lease the cars and we’ll deliver them smaller amounts of coal and charge the appropriate delivered price for all that.

Generally, though, as I said to a previous question, most of – the majority – I’d say the significant majority of the export, the Logistics business is actually the export. So we make some money on that, but not massive amounts.

Richard Garchitorena – Credit Suisse

All right. And then another follow-up just on the Corporate and Other, it was a lot lower this year basically relative to 2011. It...

Mike Barrett

Sorry, Richard, you still there?

Colin Marshall

I can certainly make an answer for why the Corporate is low, which I think was the question. In 2011 we had more of contribution from our brokering activities. And also from the Decker Mine in 2012, we’ve seen less tons go through our brokering activities and less contribution. And also the Decker Mine saw an increase in costs. So that resulted in less contribution from Decker in 2012.

So that’s really the answer for the Corporate and Other segment change, 2011 to 2012.

Richard Garchitorena – Credit Suisse

Thanks.

Operator

And your next question comes from the line of David Beard with Iberia. Please proceed.

David Beard – IBERIA

Hi, good evening gentlemen and Karla.

Karla Kimrey

Good evening.

David Beard – IBERIA

Maybe just talk a little bit about some factors relative to the price you sold forward in 2013. Was it higher BTU coal given that there wasn’t much carryover tons? Thanks.

Colin Marshall

In terms of the stuff we sold in the quarter, the 1.7 million we sold at $10.94, we actually sold a new contract. We bid around the market for the RFPs that came through. And that’s how much we got there $10.94. I don’t think there’s anything particularly significant about the mix of it.

David Beard – IBERIA

Okay. Thank you.

Operator

And your next question comes from the line of Brett Levy with Jefferies. Please proceed.

Brett Levy – Jefferies

Hi guys. As you look at your liquidity at this point, and I’ve asked this in the past, would you look at stock buybacks, bond buybacks, or are you just in liquidity preservation mode? Obviously, my thought is also any kind of asset acquisition or reserve acquisition probably would come at very attractive prices. As you look at your liquidity right now, what’s the first choice?

Mike Barrett

Brett, I think in today’s marketplace and given the uncertainty that we’re as an industry facing through 2013, the real focus is on making sure that we’ve got good liquidity in place, which we have, and preserving that liquidity. So that I think, is the key focus for us. That means that we’ve got good opportunity to take a look at if any opportunities were to come along in a marketplace like this. But really the key focus is to make sure that the balance sheet stays good and safe.

Colin Marshall

And I’d just add to that, last year we were in a great position to be able to buy Youngs Creek for $300 million of cash, which is the one that we obviously really wanted. So we’ve got that. We’ll look at other things as they come along, but they will have to be pretty attractive and make sure that we are comfortable with the financial position any acquisition would leave us in.

Brett Levy – Jefferies

But stock and bond buybacks are off the table at this point?

Colin Marshall

I think we have – we’ll maintain our liquidity at the moment. Never say never but I think we’ve got other fish to fry just at the minute.

Brett Levy – Jefferies

Thanks very much, guys.

Operator

Due to time constraints, we have time for just one more question. And that question comes from the line of John Bridges with JP Morgan. Please proceed.

John Bridges – JP Morgan

I’m honored again. Colin congratulations on the results. I just wondered – you mentioned 7%, 8% as an ongoing cost rise. How much of that is the strip ratio? Is that 1%, 0.5%?

Colin Marshall

Sorry, the range we’ve normally talked about for several years now is actually 5% to 8% of our underlying costs. And if you take the time to go back and look at it, not quarter-by-quarter but year-by-year, the underlying – taking out the royalties and all the rest of it, that seems to be the range we’re in.

Exactly how much is strip ratio and longer haul distance or whatever, it ebbs and flows from year-to-year, because last year at Cordero Rojo we were actually mining an area that was quite low strip ratio, but it was actually lower quality coal that we’d gone back to. This year we are going longer haul, opening a new pit. So that will be more expensive. But across the whole – all three mines and all the nine or 10 pits we’ve got, it’s a steady rise upwards. But if you just – I’d hate to say it’s one thing each year because overall it’s somewhere in that 5% to 8% range is the best way to think about it.

John Bridges – JP Morgan

Yes, I was just trying to get to the portion of it that was the strip ratio. Is that 1%, 0.5%?

Colin Marshall

I honestly don’t know. I just – in one mine it could be. Another one it will be reclamation or whatever. It’s not that simple. So I just look at the higher-up level and try and get confidence that we’re doing everything we can to manage those costs.

John Bridges – JP Morgan

Okay, great. And then just following up, you said you’ve got top cover now with higher cost guys out there. Is that higher costs players in Aus or some of the higher cost Indonesian material?

Colin Marshall

I think it is – in terms of where we were, it is clear, 2007 or 2008, we were just able to go into the international market when prices spiked and the other people were generally below us and certainly on the cost curves basis so. I think certainly with us there’s been – obviously the reports of the extraordinary cost inflation in Australia, both capital and operating, and then their extra taxation, we’ve been seeing those, anecdotally we have been coming – people have been talking about them.

But then I think what struck me is, as the prices have gone down in the last few months, how many Australian projects have been canceled and indeed, mines closed, where that didn’t – and we’re still making money. We might not be making much on the exports but – at current prices, but they are folding and we are still actually in the game. And that’s what struck me.

And the other point is there’s also been significant cost inflation in Indonesia as well.

John Bridges – JP Morgan

That’s very helpful. Appreciate it, and well done. Thank you.

Colin Marshall

Thank you.

Operator

At this time there are no further questions in queue. And I would now like to hand the call over to Colin Marshall for closing remarks.

Colin Marshall

Okay. Well look, thank you very much for your interest in Cloud Peak Energy. As you can tell, I’m proud of the way our company has performed in 2012 and the work we’ve done to increase our export focus, reserves and gain position in major port projects.

We’re in good shape in 2013, which is not going to be an easy year. Hopefully coal burn will recover from 2012 levels, allowing prices to rise, which we’ll benefit from in the second half of the year and certainly in 2014. So with that, we’ll look forward to updating you in April. So thank you very much.

Operator

And ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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