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Executives

Beth Cook – Director, IR

Peter Socha – Chairman, President and CEO

C.K. Lane – SVP and COO

Analysts

Jim Rollyson – Raymond James

Jeff Cramer – UBS

Michael Dudas – Jefferies & Company

Jeremy Sussman – Natixis

Shneur Gershuni – UBS

Brett Levy – Jefferies & Company

Jeff Gildersleeve – Millennium Partners

Luther Lu – FBR Capital Partners

Jeffrey Lapin – Post Advisory Group

James River Coal Company (JRCC) Q4 2008 Earnings Call Transcript February 27, 2009 11:00 AM ET

Operator

Good day, everyone, and welcome to the James River Coal Company fourth quarter 2008 earnings release conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations, Ms. Beth Cook. Please go ahead, ma’am.

Beth Cook

Thank you and good morning. Welcome to James River Coal Company's fourth quarter earnings call. We released our earnings today and our current release is posted on our website and was furnished to the SEC on the Form 8-K. As we noted in the press release, we will be using an updated slide presentation during our prepared remarks. The slides have been posted to the company website and furnished to the SEC on an 8-K.

With me today on the call are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; and Jim Ketron, Vice President and General Counsel.

Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These forward-looking statements should be considered along with the risk factors that we note at the end of our press release as well as in our Annual Report on Form 10-K and other SEC filings.

I’ll now turn the call over to Peter Socha.

Peter Socha

Okay. Thank you, Beth. Good morning, everyone. As Beth mentioned, we do have slides. We have maybe 15 or 20 slides. We are going to spend – try to spend only 15 minutes on the slides and then go on to the Q&A.

Starting out on the slides, you can that we are benefiting today from the higher sales price. Our average sales price in CAPP so far in 2009 is about $90. There are carryover tons within that $90. Without carryover tons, our average sales price would be over $100. Right now it would be $101, $102, but it would be over $100. We are almost done with the carryover tons. We had a couple hundred thousand tons. And I think we have 30,000 or 40,000 left, which will be spread out over the next several weeks. But nevertheless our average sales price has gone up dramatically, as we thought it would.

Turning to current headlines, as you all know who followed us for a while, this is something we like to just try to put some things in there that maybe you have missed along the way. They are usually positive, but not always. But they are things that are happening around the world. Indonesia, this was news to me, but January 5th, Indonesia put out some new rules that will take effect on March 5th with borrowing letters of credit on all trade, including coal. And the people in Indonesia are not quite certain right now what the impact will be on their coal export.

South Africa, this was a recent projection from Eskom, the national utility there as of a couple of weeks ago. They will require an additional 75 million tons, going from 125 million today up to 100 million, but a fairly material change. And we think that will impact the market as we move through the next several years.

India, this actually came from C&O, for those of you familiar with Coal & Oil, this was a friend of ours there who came out with a projection also a couple of weeks ago that India will go from 508 million tons per year to 680 million and that they will require somewhere between 80 million and 100 million tons of additional imports. And quite frankly, looking at the world map and looking at the global picture in coal as I sit here today, I think this may be the most interesting thing going on.

People tend to – if you read the press you tend to think that there is no coal being built in the US, no coal fire generation there is, in fact. And I think certainly the early days of the Obama administration, despite the bank bailouts and auto bailouts and everything else, I think it’s been relatively positive for coal and for energy in general. So I think that this probably should improve as we go forward.

The fixed asset investment, for those of you who followed us for a while, you know that this is a metric that we look at very closely and the fact that it’s now turning up fairly materially so. Even though China has had some fits and starts during the last several weeks, they are spending quite a bit of money on their fixed assets and it appears as though that’s starting to have an impact.

Russia, the second largest producer, this was a note I saw just last week that they are cutting – dramatically they are cutting their production. And in Europe, people tend to think of Europe as has been coal fire generation is in decline. In fact, it’s not.

Turning to Central App supply, we think that the rate of Central App supply will fall to 200 million ton per year level by the end of this year. Just anecdotally, just being out in the field and talking to vendors as we’ve done, I thought what we feel like that may actually happen a little bit sooner. We do think it will be more weighted to the second half. In the first half of the year you still have met coal being supplied under older contracts. And until the new settlements are done starting in April, hopefully starting in April, some of that supply will stay online.

I did make a note here from a vendor. Last week was vendor week for me. I spent the week out in the field just sitting down with the vendors and having cups of coffee. And I had a couple of them make a very similar comment, but it appears as though in February there was a step-down in supply out of Central App. But we’ll see what the numbers look like as we go forward.

Turning to demand, we do think the demand from domestic utilities will come down somewhere between 10 million to 15 million tons. I have been out – in the last six weeks, I’ve been out with all of our major eastern utilities. There is some switching – some natural gas switching going on. And there is an impact of the economy going on. How you weight the two, I’m not really sure, but there is definitely some switching going on at the smaller plants. We are seeing it, and then what I did last weekend was I got out the EIA data for about 140 plants; 60 coal and 80 natural gas. It’s clearly there. But it’s interesting then that there is no clear pattern in that some utilities are switching quite a bit and other utilities are not switching at all. So I don’t know that there is any discernible pattern there to look at.

The next slide on natural gas, we definitely think that natural prices are having an impact here. Natural gas drilling rigs have come down. They have come down hard. But as we note here at the bottom, it really depends on where they are. The Haynesville, Marseilles, Fayetteville, and Barnett Shale are just incredible, incredible production coming out of those wells. So you could cut their drilling count dramatically even from here. And if the remaining rigs were all in the shales then there would probably be more supply of natural gas. We don’t think that’s the case. We think that they are pretty well – the cutbacks are pretty well dispersed and that the natural gas companies are looking hard at this. But it is something that’s very interesting.

The South Atlantic Inventories is just an update of a slide that we had used in the past just on Genscape data. It shows that while they are quite a bit below normal, down this year, I think this year will be very telling on which calls faster, demand or supply. And I think there will be a timing difference between the two.

The Chambers decision, I’ve got a lot of calls on Chambers since the decision came out. What we did was we just took both decisions and we took what in effect were my markups on both decisions and just posted them to our website. So to the extent that you want to actually read the raw data and the raw decision, they are there. I would encourage you particularly on the Judge Chambers decision, the original decision. We talked about this.

I want to say with Mike Dudas at either a conference or one of our calls that buried within the Judge Chambers decision on pages 38, 39, you really get a crop of what the case is all about in that. In effect, what the Judge was saying is he is affirming that the Corps has all of the discretion that they need and it’s all valid but that they don’t think about things that he thinks they ought to think about. And that’s very, very clear on pages 38 and 39. Then if you go and you read the Appeals Court decision, you could tell that that’s in effect what they did was they said, no, Judge, you can’t – if you say the Corps has discretion, you can’t tell the Corps that they have to look at things that you wanted to look at.

As far as market analysis and strategy on what we are doing this year, coal prices are soft. I don’t think – as a matter of fact I know they are not as soft as the traded prices. They are you may read every day. We do know that’s a fact. But there is a discrepancy right now between the bid and the ask, even in the physical market between the utilities and the coal companies.

We have very little coal available early in this year. We are pretty well sold out. Our remaining coal is industrial stoker coal and some high quality steam. We are in active discussions with customers on those coals right now. So it’s not as though the market has just gone completely quiet. It definitely has not. We’ve reduced our purchase coal and our contractor coal. You will see that in our guidance in a minute. We reduced overtime coal production. We’ve pretty well taken out Saturdays whenever we can and we will continue to do that. We have very, very flexible mine operations.

The high-cost mines for us that needed to be closed, we closed last year. So we are not really in a mood today where we are going to start and continue to close mines or keep closing mines. We think that our productions are – our production is flexible enough that we can adjust the dials and levers and adjust to the market as we need to. And our contract position does give us quite a bit of flexibility. We don’t have contracts that are unique to a mine or unique to a load-out. We are allowed to ship on any mine or any load-out.

And with that, I’ll turn over to C.K.

C.K. Lane

Thanks Peter. I want to talk a little bit about safety. We had one of our best safety years that we can find in 2008. We use an industry average benchmark of our NFDL rate. For 2007 we were at 4.42 and for 2008 we were 2.37. So that’s really a number that we are real proud of right now to be able to reduce our NFDL rate on safety. We are also focused on our lost time accidents. We reduced those by 57% from 2007 to 2008. We have completed 16 of the underground refuge safe havens, and we have received so far to date eight of our underground rescue chambers that we have ordered. So, a good year for us in safety and we’ll try to keep the focus to continue that.

On the labor front, we are seeing labor availability improving. There are more people in the jobs market looking for jobs, but the skilled labor positions of electricians, continuous miner operators, rig [ph] boulders, and other positions like that are still very hard to combat. Our turnover has trended downward in the fourth quarter. We’ve started watching that pretty closely and we are seeing that rate go down quite a bit. We will continue our training programs. We have programs going on every week at our locations. There is a cost associated with this, and we are seeing that in training some of the new hires that we are able to bring on. But hopefully that’s all focusing toward improving our labor force and the level of experience that we have in our labor force.

We updated our slide on raw materials. Looking at the period from July to February of 2009, July 2008, we think some significant drops in diesel fuel and in explosives, which most everyone has seen and also in steel. We’ve seen some other items, bits, miner parts and belting continued to show some increases. One thing to note, you have to be careful on how you look at steel going down and roof bolts because due to the new regulatory requirements where you were able to use a standard four or five-foot bolt that may cost you $2.50 [ph] each. Now we’re already having to use a lot more exotic supports such as cable bolts and metal straps. And a cable bolt can cost you $20 a piece. So while roof bolts in general go down on a unit price, the mixture of what you use can really affect your cost there.

Just an update on some of our projects. We did restart our Hog Trough highwall miner operations with a new highwall miner contractor. If you remember in the fourth quarter we changed our miner contractor there. We completed development of our Lick Branch surface mine. This mine is a replacement mine for our Bear Branch mine. Log Creek surface mine at Triad began production in December. This is startup production. Our Flat Creek surface mine at Triad will mine out shortly and move to this operation. So it’s a replacement mine also.

We finished the development of a replacement mine for our Freedlandville East surface mine at Triad, and that mine has started production in the first quarter. We’ve continued to work on the development of our Freedlandville West underground mine at Triad. This mine in the future replace our Freedlandville underground mine there. And we also started our face-up and almost complete with our new mine that replaces our Mosley Spur mine at Bell County. So a lot of stuff going on, but these are really just replacement times where our mines that are mining out continue our production level about where it’s at now.

Just in summary, regulatory and skilled labor issues continue to impact our cost and production. On the permitting side, both state and federal are beginning to impact surface production and underground production. The Chambers decision, it’s very positive. We are pleased with the decision. But the question is how long will it take that decision to filter through the Corps and actually start issuing permit.

We are seeing some significant backlogs of permits at both federal and state level. MSHA is still an issue. They came out just in the last month with their final rules on communication system, refuge alternatives and flame-resistant belts. MSHA is having stakeholder meetings around the State of Kentucky now. We are all trying to sort through the implications of what that means.

On the 404 permit, there is a fairly significant backlog of permits in the local Corps office for the State of Kentucky that we hope with the Chambers decision we’ll start moving. And we are also seeing the state with a backlog of permits. It’s basically due to staffing issues related to retirement at the state level in the permit reviewers. So, a lot of positive things going on, but skilled labor and the permit issues continue to be a big focus to watch and see where we shake out on that.

And with that, Peter, I’ll turn it back over to you.

Peter Socha

Okay. Guidance, I’ll try to cover the guidance fairly quickly. We normally, as we’ve talked about before, we normally come out with guidance in December. We held off this year because of the markets moving around so much. And so we felt like we have a little bit more visibility and a little bit more confidence in our numbers. So we held up, and I think it was the right thing to do.

Today we are happy to give out with guidance of adjusted EBITDA of $190 million to $200,000, and earnings per share of $3.30 to $3.80. On CapEx, we have talked about this, our normal run-of-the-mill, steady-state year will be $55 million of maintenance capital. This year we will have about $10 million of safety. And then we will upgrade our existing equipment fleet. We’ve started that already. We’ve seen great results from it by putting both rebuilt and new equipment in the mine. It cuts down on our maintenance cost and it does increase productivity in the mine by quite a bit. But during the last couple of years when we have been obviously short of cash, we have not been able to do that as much. So C.K. and I (inaudible) to do that this year.

On our cash cost, you can see what we did was we took the Q4 2008 cash cost of $56.15, inflated it for our higher sales prices that we expect this year to end up with $60.00. There are some things that push cost up and there are some things that push cost down. And obviously I know Jim Rollyson is going to ask this question, but we’ve chosen to just take the Q4 and inflate it by the royalty amount only. Our guidance by segment, you can see there $7.4 million to $7.6 million on tons with a $60 cash cost.

And with that, we are ready for questions and answers. Christina?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question will come Jim Rollyson with Raymond James.

Jim Rollyson – Raymond James

Good morning, Peter.

Peter Socha

I knew you were out there.

Jim Rollyson – Raymond James

Let’s talk about costs.

Peter Socha

I told you he would do this to us.

Jeffrey Lipton – Post Advisory Group

If I look at your 2008 costs in Central App on average, 52.5 plus or minus, and you take your kind of $90 type number for Central App prices which are mostly booked for assuming you end up averaging close to there, then you end up at kind of a $57.50 type of number. So – in your guidance I guess you got about 2.50 less in costs, which gives you about a 5% inflator on core underlying costs from ’08?

Peter Socha

Yes, but keep in mind what happened during the course of the year, Jim, and I’ll let C.K.– C.K. will step on me if I get it wrong. But – I mean, we saw the productivity impact during the course of the year. You are looking at an annual number. And that’s why we took the Q4 because the Q4 really reflects the inspector regime kind of the way it is right now. And rather than – and that was from debate. Actually we had some discussions on whether or not to use the annual or the quarter. And C.K. and I just felt like quarter was more reflective of where productivity is today. But in fact, I don’t know whether I would say we will assume a 5% inflation. Yes, I guess you can. I mean, it’s certainly the math works out that way. But we look at it, say that there are – the things that push up the costs obviously is going to be MSHA and the productivity. It’s going to be less absorption on fixed costs because we are haircutting the production back. Weight is in training. We gave weight increases in October, C.K.?

C.K. Lane

Yes, it’s October 1st.

Peter Socha

In October. So those will be fully reflected this year. And then you just have safety costs that are non-capitalized, but safety costs. Those push things up. What push things down obviously are the lower turnovers. We are keeping them in. So they are becoming more experienced than the productivity is picking up. Raw materials, C.K. mentioned raw materials, and then the newer equipment. So what we’ve said is that net-net those are our approach.

Jim Rollyson – Raymond James

Got you. That makes sense. You noted the recent indicators in – and I guess the markets suggest that the actual what you could sign coal for today is still a bit better than the stuff we watch on NYMEX and close in all the tree rags. Order of magnitude, are we talking a couple dollars difference, $5 difference, $10 difference, what are you thinking based on the roadmap?

Peter Socha

We have ordinarily – you know, I’d give you some color there. We had discussions with a couple of utilities this week and we are still in those conversations. So I’m going to – if you don’t mind, I’ll pass until May on that one.

Jim Rollyson – Raymond James

Okay. Well, then –

Peter Socha

Ordinarily I would help you out, but I mean we are right in the middle of conversations with a couple of utilities.

Jim Rollyson – Raymond James

Okay. The coal you have left is almost 900,000 tons in Central App, kind of break down stoker and steam specifically? And what happened to the met project, just shelved until market gets better?

Peter Socha

No, it’s producing right now and we are producing it to ship on test burns and on lab burns. And we will ship some of it on the steam market if we can make a margin on it. But certainly it slowed down would be the way to describe it. It would probably be the best way to describe it.

Jim Rollyson – Raymond James

Right. Then the mix of stoker and steam –?

Peter Socha

The mix is probably 40/60; 40% stoker, 60% steam.

Jim Rollyson – Raymond James

All right. Last question, you guys obviously are in a position this year, cash flow and balance improved quite dramatically, I hope, over the course of the year. I was a little surprised maybe by the year-end numbers you posted on how things were relatively tight on liquidity, given that you had raised some equity during the quarter. Kind of how that’s got end up so close?

Peter Socha

I mean, you end up – you're in the fourth quarter, so you are low production any way. So it’s a cash burn. Fourth quarter is always a cash burn. And then in anticipation of this year, we did take delivery on some new equipment. So we’ve got new equipment in there. We’ve got a cash burn quarter. And quite frankly, we were taking anything low priced, pushing it into the fourth quarter.

Jim Rollyson – Raymond James

Got you. Great. Thanks.

Peter Socha

The lowest price contracts all got done – for us, all got done in the fourth quarter whenever possible.

Jim Rollyson – Raymond James

Thanks, Peter.

Peter Socha

Thanks, Jim.

Operator

And our next question will come from Jeff Cramer with UBS.

Peter Socha

Cramer.

Jeff Cramer – UBS

Hey, good morning.

Peter Socha

Oh, yes.

Jeff Cramer – UBS

Thanks for the comments. Actually just going to focus on the import front right now, could you just talk about what you guys are seeing?

Peter Socha

Nothing. Nothing. Very little on the import side. I was actually – I was at two out of the three export terminals yesterday. Exports are holding up probably better than some of the more dire predictions. I mean, there were two ships loading while I was there yesterday morning. That’s probably just a coincidence. But imports are still finding – or I should say, coal that would ordinarily be imported into the US is still finding a better home somewhere else. Actually we were at one of the import terminals about six weeks ago. And there was coal on the ground, but not a lot more to that.

Jeff Cramer – UBS

Got it, thanks. And then just shifting to the balance sheet kind of things, you mentioned that the revolver right now is $35 million gross liquidity. Is there still a $10 million minimum liquidity requirement? Okay, and it goes –

Peter Socha

It goes away trailing 12-month EBITDA $75 million at sunset [ph].

Jeff Cramer – UBS

Got it. So you’ve got $25 million right now plus any cash you guys currently have?

Peter Socha

That’s correct.

Jeff Cramer – UBS

And does that mean you’ve paid down the revolver then? I think there was 18 out at year-end.

Peter Socha

Yes, and I don’t want to give an interim balance sheet report. I’d rather wait and just go out with the Q when we do it.

Jeff Cramer – UBS

Got it. And then as far as the cash that you guys are generating this year, what are your plans?

Peter Socha

Right now, probably just to hold on to the cash. It’s been so long since we had any, to just hold on to liquidity, invest in our mines that we have today. We will look at some things opportunistically around us. But quite frankly, I’m happy with the assets we have. I’m happy – I'm thrilled with the people we have. And I think we will just let the cash build up and then decide. There are a lot of choices. I mean, obviously, one thing I want to do is strengthen the balance sheet. I’ve said that in any number of forums. But we haven’t seen – we are not on stage today where I can say, well, gee, look at all the excess cash we have, let’s go out and decide what to do. And we’re still in February. Receivables are way up, but cash isn’t.

Jeff Cramer – UBS

Okay. And just I guess on the LC, I know they are pretty expensive. Is there any way to refinance those?

Peter Socha

Yes, we are looking at that. Yes, that’s on – that's on my list of things to do early in the year.

Jeff Cramer – UBS

Okay. And then the contract that currently you do have in Central App, the 6.6 million tons, is that way toward a particular time of year? We have to think of that as quarterly over the course of the year?

Peter Socha

So, as I said – you know, the first half of the year we’re pretty well sold out, but we still have – it's still spread out. I mean, we have a fair amount of flexibility on when we ship them, so we can move things. I wouldn’t say that it’s all within two quarters or anything like that. It’s pretty well spread out. It’s just right – as it happens right now, we are comfortable with where we are for the first six months. And then we are just going to run quarter to quarter and we will look at where the market is and we will look at how operations are going.

Jeff Cramer – UBS

Okay. And last question, just on the tonnage guidance you provided, I guess could that have been a bit higher this year if demand were in a different situation right now?

Peter Socha

Absolutely, yes. We haircut it. That’s a voluntary haircut.

Jeff Cramer – UBS

How much would you say by?

Peter Socha

I wouldn’t. Actually I wouldn’t. I don’t know whether I want to go out publicly with that or not. Let me think about it, but – let me think on that one. If I do – on webcasting – Rolly [ph] has got a conference in a couple weeks and I can webcast it there.

Jeff Cramer – UBS

Got it.

Peter Socha

Okay.

Jeff Cramer – UBS

All right. Thanks, guys.

Peter Socha

Thanks.

Operator

And our next question will come from Michael Dudas with Jefferies & Company.

Peter Socha

Mr. Dudas.

Michael Dudas – Jefferies & Company

Good morning, gentlemen and Beth.

Peter Socha

How are you?

Michael Dudas – Jefferies & Company

Wonderful, thank you. Pete, elaborate on your initial remarks about the new administration, how it’s helpful with coal.

Peter Socha

Yes, I’ve just been – I've been pleasantly surprised. I mean, I’ve watched the bank stuff and Geitner and everything else, and obviously, they have struggled to find their footing there. But Dr. Chu at the Department of Energy, the people at the EPA, I think that there is a general recognition, and this goes back to the MIT study that we’ve talked about before, we call the future of coal. If you read that study, what it says is – it’s just in the summary, what it says is that coal will have a future in the energy mix of the US because you can cut out every coal plant in the US, and China and India and the developing economies will continue to grow rapidly. So, the key is to develop the carbon capture and storage technologies here, deploy them here, and then give them or license them or do whatever to the developing economies around the world. And that’s how you address the climate concerns, the environmentalist concerns. And at least to me, just in the little bit that I’ve read, it appears as though that is a view that is shared by the new Obama administration, that you’ve got to develop the carbon capture and storage technology or the clean energy technology here in the US and then deploy it around the world. I’ve been relatively encouraged by that.

Michael Dudas – Jefferies & Company

Given your discussions with some of your vendors and the discussions with your customers over the past four to six weeks, could you characterize where the most one or two major concerns that each party is looking at trying to figure out what ’09 or actually over the next five years might bring?

Peter Socha

Yes. On the utility side, I would say natural gas is probably right up there and then the uncertainty on cap-and-trade. From the more senior levels of the utility certainly the uncertainty on cap-and-trade or carbon tax and just the unknown. It’s the unknown. On the vendor side, last week was a great week. I met with ten vendors. I think seven were disposable supplies and three were equipment. And I think it’s the –obviously, it’s the uncertainty of what the market is going to be and how much mining is going to go on, both surface and underground. They have just seen the economy come down hard. They have seen coal prices come down hard. And so there is the fear – again, there is the fear of the unknown, but in a different context. But last week was a very, very enlightening week for me. I loved it. And the guys – you know me. I mean, the guys I was trying to meet with are the guys that were out in the pickup truck driving around everyday.

Michael Dudas – Jefferies & Company

Could you remind us what your view is for investment opportunity in Illinois Basin?

Peter Socha

Pretty big. I mean, right now, Illinois Basin, I don't know other than our footprint at Triad. I don’t know that I would go outside of that, but we have a lot of opportunities within the Triad footprint that we will develop over the next – certainly over the next couple of years. But this year for us is more of a, what I would describe as a recuperative year, you know, build out the cash flow, build out some cash balance, get the equipment back up into a state of affairs where we want it, look at some things, keep an eye on some things, and if the price is right and the structure is right, go ahead and do them. But this is very much going to be a recuperative year for James River.

Michael Dudas – Jefferies & Company

That’s all I have for you. Thanks for your thoughts.

Peter Socha

Thanks, Mike.

Operator

And our next question will come from Jeremy Sussman with Natixis.

Peter Socha

Hi, Jeremy.

Jeremy Sussman – Natixis

Hi, Peter, how is it going?

Peter Socha

You would start on regional headquarters today?

Jeremy Sussman – Natixis

Unfortunately not.

Peter Socha

Sorry.

Jeremy Sussman – Natixis

No, I see. But anyway – you gave us a nice color on the import/export situation. How about stockpiles in general?

Peter Socha

All over the map. Some – it's been interesting there has been absolutely no consistency in meeting with those utilities. And as I said on the gas switch, some are definitely switching and some are not switching at all. I would describe stockpiles as the same way. Some are very flush and others are I would describe them as below normal, below where they want to be. So I think when we look at the aggregate numbers, obviously if you look at the Genscape data, it aggregated still below, below where they want to be. But there is a wide variety within that group. More so than I’ve ever seen.

Jeremy Sussman – Natixis

Interesting. And then just to clarify in terms of the Illinois Basin, you’re expecting basically flat production going forward? The Log Creek expansion really just replacing some tonnage, is that correct?

Peter Socha

Yes, yes.

Jeremy Sussman – Natixis

Okay. And then in terms of the guidance, definitely very helpful. Any fluctuations in quarters that we should be aware of other than what you mentioned on pricing?

Peter Socha

No. Other than normal seasonal stuff, no.

Jeremy Sussman – Natixis

Okay. And then maybe getting into this a little bit, I know you were in India recently and you gave us a little bit of color on that. I think you said 80 million to 100 million tons of imports is what you’re going to – is what they expect there?

Peter Socha

Yes, actually I was – the India trip got cancelled because of the terrorism stuff. So I ended up not going, but I did go to South Africa a couple weeks ago and met several of the people I was supposed to see in India. But yes, 80 million to 100 million is the number for imports by 2012. It’s actually current number. Mike Dudas and I had been with a guy from India back at the end of January. He was kind of in the same 80 million to 85 million number. And that’s current. That’s based on the current economy. That’s not a May ’08 projection or anything like that. And what’s just absolutely fascinating to me, Jeremy, is where is it going to come from. I mean, if you look at Indonesia, there are a lot of credible forecasts for Indonesia right now. Let’s say that exports will remain flat to maybe up a little and the primary driver there is domestic demand, how much their domestic demand is increasing, and so that their coal production will stay within Indonesia.

Australia, we have some of the infrastructure projects in Australia that would be expected to increase seaborne supply are being delayed by the capital crunch. They are being pushed out. So Australia is probably the most likely source. South Africa, absolutely not, absolutely not. They exported 62 million or 63 million tons last year. The port is expanding. I guess in July they will commission – they will commission the Richards Bay, the expansion of Richards Bay. The 91 million tons, the railroad and the coal companies are not there. I spent some time with the CEO, CFO of the railroad down there, and we have long-term contracts, meaning like 10, 20, 25-year contracts. They are not going to spend the money to expand their shipments to the export terminal. The export terminal is huge, but the railroad doesn’t have the capacity. And the railroad won’t build the capacity without long-term contract. The coal companies don’t want to do long-term contracts. And so there is the stand-off between the two of them. But even then, you are talking about 15 million – let's just say the railroad – somehow magically the railroad and the coal companies get together, they sign the contract. If you’re looking at going up by 15 million or 18 million tons. Okay? That takes you from 80 million on the low end – 80 million for India down to 62 million. Well, where is the 62 million?

Jeremy Sussman – Natixis

Yes – no, I agree. How about in terms of the timing though, is there a –?

Peter Socha

2012.

Jeremy Sussman – Natixis

Right now –

Peter Socha

Yes. They will need 80 million tons a year by 2012 and that’s based on plants where they are pouring concrete today.

Jeremy Sussman – Natixis

Got you. Okay, great. Thanks very much.

Peter Socha

Thanks, Jeremy.

Operator

And our next question will come from UBS, we will hear from Shneur Gershuni.

Peter Socha

Hi, Shneur.

Shneur Gershuni – UBS

Good morning, Peter. How are you?

Peter Socha

Very well. How are you doing?

Shneur Gershuni – UBS

Good. Lot of my questions have already been answered. Just kind of one to go, re-circle to a couple of them. Just with respect to liquidity, can you kind of talk about seasonality of your EBITDA under the carryover tons kind of make the first quarter little bit more tougher than the rest of the year or is it going to additional seasonal pattern?

Peter Socha

I mean, it’s currently going from $100 a ton average sales price. The $90 makes it tougher than it would have been. But tougher than it would have been is still pretty darn good, Shneur, if you want to know the truth. I mean, a $90 average price compared to a $55 or $56, whatever the number was in Q4, I’ll take this kind of stuff all day long.

Shneur Gershuni – UBS

Okay. But I’m saying – we should be seeing a ramp in cash flow as the year goes on basically.

Peter Socha

Yes, I think that’s a fair comment.

Shneur Gershuni – UBS

Okay. And just with respect to your tons forecast, I noticed you noted it as unship, what are you looking from production versus actual purchases in the open market?

Peter Socha

Well, purchases in the open market will be very low. And that’s why we changed that. That’s a good pickup. That’s exactly why we changed that because tons purchased the last year was 243 or 234. This year will be a very low number. And actually – and this kind of gets to the anecdotal side of things, C.K. and I talked yesterday about maybe buying a little bit of coal. Our shipments in the next several weeks are very high just because of the way the utilities and the railroads are working. And C.K.’s first comment was, buy it from who? There is nobody left.

Shneur Gershuni – UBS

Utilities that are flush with coal.

Peter Socha

I don’t know.

Shneur Gershuni – UBS

Okay. Just a couple other questions here. You’ve done some voluntary cuts to your production and so forth. Looking out three, four years, kind of where do you see the run rate for your production for both CAPP and for the Illinois Basin?

Peter Socha

It took me long enough to get guidance out for ’09, Shneur. And you’re asking for ’12 and ’13. I don’t know. I don’t know. I mean, I guess at some point, we’ll come out with some framework of what we would like it to look like at that time. I do think there will be some opportunities this year to pick up some assets that we don’t have today. But I wouldn’t put those into a spitball number for you for 2012. I will tell you, my horizon today right now, both on the sales contract side and to a certain extent on the production side, is 2011 and 2012. So that’s a relatively good question.

Shneur Gershuni – UBS

Okay. And I guess one last question. You’ve kind of sort of answered it already, but can you talk about whether the trains are showing up and so forth? Has anything slowed down a little bit? Have any of the utilities tried to sort of move around or delay the delivery of any of the tons?

Peter Socha

No, not really. The trains have been right-sizing. I will say this. The trains – you know that we’ve almost never had problems with the train. For those of you who followed us for the last five or six years, we’ve never really had much difficulty with the trains. The trains have been right-sizing their business to the size of the shipments today. And there is always kind of a bumpy path while you’re getting there. But by and large we’ve been very happy with the trains.

Shneur Gershuni – UBS

Okay. And one final question, in your prepared remarks you talked about where you thought Appalachian production would get down to and so forth. Can you sort of talk to the private producers that we don’t really see their announcements in the public's place if you've seen or heard of a significant number of mine closures, and/or is it just more a function of taking Saturday shifts of and –?

Peter Socha

Yes. No, we’ve seen the mine closure side. We saw it in – gosh, it was either Thanksgiving or Christmas. C.K. and I were out at one of the mines for turkey. And I asked one of the foremen, I said, how is labor? He said, well, A, we’ve stopped losing people, and B, we’re getting a lot more applications than we did. And that was an indication that there were mines closing. That was really my first indication truthfully. We’ve seen that since then. We’ve seen our applications are up and fewer people leaving. So that’s usually an indication that the mines are closing rather than just cutting back on Saturday. C.K.’s comment about the scarcity of purchase I think also speaks to the fact that there are fewer of those players out there. I mean, his immediate reaction was where, I don't know where I’m going to get it because there is nobody out there. There are some people out there that have coal that we can purchase. But, A, they want a high number because they know what our contract looks like, but B, there is just fewer of them.

Shneur Gershuni – UBS

Right.

Peter Socha

They’re shutting down. I heard a number out there of 6 million or 8 million tons in Central App. Today – basically what I’ve heard in the last couple of weeks, certainly last week on vendor week, we’d probably be on the higher end of that range. I would say 8 million, maybe even up from that.

Shneur Gershuni – UBS

Great. All right, Peter. Thank you very much. Appreciate your time for commentary.

Peter Socha

Okay. Thanks, Shneur.

Operator

Our next question will come from Brett Levy with Jefferies & Company.

Peter Socha

Hi, Brett.

Brett Levy – Jefferies & Company

Hi, Pete. Hi, C.K. In terms of the spacing, obviously the EBITDA is not going to be exactly even. Can you give us a little bit of guidance in terms of when the prices started to get a little bit higher or little bit lower? And then also, I mean, I don’t know, there is a ton of plan disruptions or anything else like that, but anything that you can give us makes sense sort of through the four quarters that will help us quarter-by-quarter.

Peter Socha

Yes. I understand what you’re looking for. I mean, we’re shipping – we're pretty well done with carryover tons today, Brett. So most of the – most of March will be at the higher level. Yes, fourth quarter, I guess the only thing I could say, and C.K., feel free to offer up an opinion. Fourth quarter is normally the weakest quarter seasonally. You've got hunting season and you’ve got everything else, the holidays plus hunting season. But other than that, I would –

C.K. Lane

Fourth quarter (inaudible) hunting in the summer, the June, July months, you have a lot of the vacation schedules going on.

Peter Socha

So, I guess, Brett, if I was in your position on my haircut fourth quarter a little bit, and then if you wanted the haircut first quarter a little, you could, but I don’t know that you necessarily need to. But on second and third quarter, I would make equal.

Brett Levy – Jefferies & Company

All right. And then two smaller questions. First off, at this point, are you guys inclined at all towards committing anything more of 2010 or 2011 at today’s ridiculously low prices? Can you give a sense as to where the bid/ask is, if there has been any discussion about –?

Peter Socha

I was fine with you until you said today’s ridiculously low prices. That changes the answer to no. That’s a definite no. But we – the conversations that we’ve had have been at better numbers than that, both in our own discussions related to James River and a utility, but also what we know of what's been going on, on the solicitation side or other contracts. ’10 and ’11, yes, we have had some conversations on ’10 and ’11.

Brett Levy – Jefferies & Company

And can you give us –?

Peter Socha

I cannot go as far as a spread between the bid and the ask or the premium to OTC. As I said, we’ve been on the road one day this week with one of our utilities and we’ve been on the phone with a couple of others.

Brett Levy – Jefferies & Company

And then the last one relates to – you know, you guys have talked about de-levering and keeping the cash and that kind of thing. Obviously, you’ve got bonds kind of trading at 80% of par almost 18% and that kind of things. Where are your covenants, and sort of after you’ve cleared your covenants, where are you in terms of inclination towards buying back bonds?

Peter Socha

I was hoping I’d never hear another question on covenants. The covenants – the covenants are publicly out there. They are out there in the public domain. So they are there. On buying back debt, not yet. At some point we may look at that, but I’m not at that point yet. I really want to build up. My focus needs to be on the mine operations. Okay? Yes, the bonds have an 18% yield. But I think when I sit down and I run the numbers on spending an extra $2 million or $5 million or whatever the number is on the mines, whether it’s equipment, rebuilding one more piece of equipment for putting in another portal, we’re doing this, we’re doing that, I’ll bet you the return on investment for our shareholders is a multiple of 18%. So that probably will be my higher priority. On the other hand, I have said that I want to deleverage the balance sheet and buying back bonds would be one option to do that. But we are not at the point yet where we are at that fork in the road.

Brett Levy – Jefferies & Company

And once you’re zero on the bank debt, you can buy back bonds?

Peter Socha

It depends on what it’s replaced with, in the sense we’ll always have an LC facility. We have to have an LC facility. So it depends on what it’s replaced with.

Brett Levy – Jefferies & Company

But you’d have the covenant ability to buy back?

Peter Socha

I can’t comment on that. That would be – in my current facility, no, I cannot buy back bonds. But obviously, we would seek to either change or replace the current facility. And I can’t – I don’t know what new covenants would look like in a new facility.

Brett Levy – Jefferies & Company

Thanks a ton, guys.

Peter Socha

Thanks, Brett.

Operator

And our next question will come from Millennium Partners, we’ll hear from Jeff Gildersleeve.

Peter Socha

The mailman.

Jeff Gildersleeve – Millennium Partners

Peter, how are you?

Peter Socha

Hi, Jeff.

Jeff Gildersleeve – Millennium Partners

Well, everyone asked and the questions were answered. So thank you very much.

Peter Socha

Okay, take care.

Jeff Gildersleeve – Millennium Partners

I’ll talk soon.

Operator

And our next question will come from Luther Lu with FBR Capital Partners.

Peter Socha

Good morning, Luther.

Luther Lu – FBR Capital Partners

My question is, you mentioned that Central App production could fall by much of the 30 million tons this year?

Peter Socha

Yes.

Luther Lu – FBR Capital Partners

The question is, what would be the margin cost after that 30 million tons got cleaned out?

Peter Socha

Oh, gosh, I don’t know. I don’t know. I mean, I saw Steve Lear [ph] had some comments the other day. 60 million or 70 million tons at marginal cost above I think $65 or $70. Given the quality of the analysis that they do, I don’t think I would necessarily agree [ph] with that.

Luther Lu – FBR Capital Partners

Okay. So –

Peter Socha

I don’t know. I mean, we don’t have a huge staff. Look at all those things, Luther. We have I think 14 or 16 people at our corporate office, and we just hunker down and keep our heads down to try to focus on James River.

Luther Lu – FBR Capital Partners

Okay. And then let me ask you, in 2010, do you think the cost productions will go down or up?

Peter Socha

For the industry?

Luther Lu – FBR Capital Partners

Yes, for Central App.

Peter Socha

For Central App?

Luther Lu – FBR Capital Partners

In general.

Peter Socha

What do you think, C.K.?

C.K. Lane

I think there is a lot of unknowns out there. What happens with materials, the raw materials, and the regulatory and permitting environment is just something that is a big unknown right now. But I would think there is more cost pressures forcing costs up and down right now.

Luther Lu – FBR Capital Partners

And the industry as a whole, given the lever [ph] availability will get a little bit better, perhaps take some pressure off of labor costs?

C.K. Lane

I think the labor will get better on labor costs as the workforce starts to develop and gain experience. I think most people have seen their average age on the workforce drop. And can we get new employees trained before some of the older generation retires? That’s our big challenge.

Operator

Anything further Mr. Lu?

Peter Socha

You there, Luther?

Operator

Please press your mute function.

Peter Socha

Okay. Christina, you go ahead on. If Luther wants to come back –

Operator

Okay, we’ll do that. And our next question will come from Jeffrey Lapin with Post Advisory Group.

Peter Socha

Hi, Jeffrey.

Jeffrey Lapin – Post Advisory Group

Hi, how are you?

Peter Socha

Well, how are you doing?

Jeffrey Lapin – Post Advisory Group

Most questions have been answered, but just one on contracts for this year. Is there any concern that you may somehow get pushed to the end of the line if some of your customers have multiple sources and you guys are locked in on higher contracts? Or is there any concern that some of the contracts might either be delayed or broken?

Peter Socha

I mean, we have – the relationship we have with our utilities go back, in most cases, a decade through good markets and through bad markets. I’m not overly concerned by it. I also start from a fundamental view, and that is, when the market was – when the contract price was below our cost, we kept shipping coal. When the market shot up and we had every opportunity in the world to peel off tons and to stop shipping on lower price contracts, we didn’t. We kept shipping coal. And so utilities have a way of remembering things like that in a positive way. I hear what you’re saying, but we’ve almost never missed a train and we’re a very reliable supplier to them.

Jeffrey Lapin – Post Advisory Group

Thank you.

Peter Socha

Sure.

Operator

And at this time, that appears to be all the time we have for questions. I would like to turn the conference back over to Mr. Peter Socha for any closing remarks.

Peter Socha

Okay, great. Thanks, Christina. Thank you, everyone. We will – let me see what’s going on. We have – Rollyson has a conference in a week. I mean, New York, as we noted in the press release, Coal Trade next week, coal trades. And other than that, I think we are – we are certainly available by phone. If you have any questions, we will be happy to speak to you. If not, we will – I think our first quarter will be released on Tuesday, May 5th. So you may put that on your calendar. Thanks, everyone. Have a great day.

Operator

That does conclude our teleconference for today. We like to thank everyone for your participation and have a wonderful day.

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Source: James River Coal Company Q4 2008 Earnings Call Transcript
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