Executives
Elizabeth M. Cook - Director of Investor Relations
Peter T. Socha - Chairman, Chief Executive Officer and President
Coy K. Lane - Chief Operating Officer and Senior Vice President
Joseph Czul - President - Logan & Kanawha
Samuel M. Hopkins - Principal Financial Officer, Chief Accounting Officer and Vice President
Analysts
James M. Rollyson - Raymond James & Associates, Inc., Research Division
Michael S. Dudas - Sterne Agee & Leach Inc., Research Division
Lucas Pipes - Brean Capital LLC, Research Division
Shneur Z. Gershuni - UBS Investment Bank, Research Division
Justine Fisher - Goldman Sachs Group Inc., Research Division
J. Christopher Haberlin - Davenport & Company, LLC, Research Division
Caleb M.J. Dorfman - Simmons & Company International, Research Division
Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research
Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
Lance Ettus
James River Coal (JRCC) Q4 2012 Earnings Call March 7, 2013 10:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the James River Coal Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Beth Cook, you may begin.
Elizabeth M. Cook
Thank you, Mimi, and good morning. Welcome to James River Coal Co.'s Fourth Quarter and Full Year Earnings Call. We released our earnings this morning, and our current release and investor presentation are posted on our website and were furnished to the SEC on Form 8-K. With me on the call today 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 Joe Czul, President of Logan & Kanawha.
Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These 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. Now I'll turn the call over to Peter.
Peter T. Socha
Good morning, everyone. Thanks, Beth. I appreciate it. I was driving into work this morning, and I was thinking about our comment, our first comment in the press release in the close that I know all of us in the industry are glad that 2012 is over with, and I was sort of thinking back on what the year looked like, and it was really, from a coal industry perspective and from a James River perspective, it was just as an unbelievable year of events coming together if everyone sort of reflects back to natural gas prices collapsing in March and April because of the winter that didn't show up, and then thermal prices, particularly eastern thermal prices, collapsing in April and May, and then metallurgical prices collapsing in July and August.
So with the whole confluence of things coming together that really made it just a terrible, terrible year for all of us in the coal industry, really not just in the U.S., but also internationally. And as we move forward into 2013, it's actually looking a little bit better, the met market has come up off the bottom and have shown some real life. The thermal market is bouncing along sort of some up, some down, but bouncing along, and I'll talk about going out and seeing the utilities in just a few minutes.
Natural gas prices are good, but not bad. They're better, but they're not really good yet, but they're certainly better than where they were. The U.S. economy seems to be doing a little bit better than it was and Europe appears to be stabilized.
So yes, overall, we're pretty optimistic heading into 2013. We made a lot of changes, as you can see. We changed both in operations and in SG&A. C.K. and his team have just ripped into the cost structure of the company. A lot of these were painful changes, but we had to do -- we had to adapt to the new reality, and the new reality for us is going to be that we're going to have 3 main elements to the business. One will be the met business and the international met business, in particular, that will run out of West Virginia and through L&K. Two will be the thermal business in Kentucky that is specialty coals. It'll be a high-value add. It'll be high-quality, thermal coals that can go either domestically or internationally. It will be the PCIs, and it will be the industrial stoker coals. And then we have Triad out in Indiana, which just keeps plugging along, and we've been very happy with that asset since we acquired it.
You can see on Slide 1, we kind of highlighted some of the changes that we made as I mentioned. We didn't talk about SG&A here, but we also did things on the SG&A lines as well. That's more recent. That was more of a January, early February activity, and one thing I did not put on this slide, and I thought about it at 6:00 this morning, and that is the tons that we sold, I should have put it on the slide and on the press release. I asked Beth if we could add it, and she gave me a Heisman and said, "No, too late. We're locked and loaded." But we did sell during the quarter -- we did price during the quarter 1.6 million tons at $96.97 a ton. As you might guess, that was mostly metallurgical coal. It was about 80-some-odd percent met coal, and the balance was a combination of thermal, PCI and of stoker, but we're very happy to get that done.
As I put in the red box down here at the bottom, I've bent all the mine operations this quarter. I have never been happier with how our mine operations are right now and how they're set up. I have never seen them as focused and I've never seen them doing things that they need to be doing. So I'm very pleased with that. It's a tough thing to do. I mean, what we did and what every one of our mine presidents and mine superintendents did is very difficult. What's going on in the coal history is devastating, just devastating to the communities that depend on coal, the communities in West Virginia, the communities in Kentucky, the communities in Indiana, in Pennsylvania, it's just devastating to these small towns. And our guys live in these small towns. So it is difficult in what we're doing. It's difficult what all of us are doing, but it's something that we needed to do. We needed to adapt the business model. We've done that and now we're moving forward. So C.K., would you please go through?
Coy K. Lane
Okay. Thanks, Peter. Focusing on safety first, we ended up finishing 2012 with an NFDL rate of 1.82. That's below the national average. You can see over our history how we have focused on that and the rate has dropped. We also reduced our S&S violations and our orders in 2012 from the previous year, and our mine 8 at Hampden is receiving the Mountaineer Guardian Safety Award today in Charleston, West Virginia. So we congratulate those guys on their hard work on that.
As Peter mentioned, in Central App, we have adjusted our operating plans at current market conditions. In Kentucky, the thermal mines were idle the week of Thanksgiving and also the week of Christmas. We did idle 5 underground mines. We reduced production at 3 surface mines, and we did idle 2 prep plants and 1 loadout. On the idle underground mines, we were maintaining those mines with just a small crew of men so that if the market does come back, we can bring those back on whenever we need to. In doing this, it reduced our workforce to approximately 400-plus employees and contractors, as Peter said, a very difficult thing to work through. We did focus on that in the November-December time frame. As Peter mentioned, we focused on the SG&A, and did reductions on that and changed some things around in the January-February time frame. The idle production capacity right now is about 3 million tons year to date. What we've done in 2012, we did continue to develop 2 mines, 1 met mine, 3B at Hampden and 1 PCI mine at Mine #89 at Blue Diamond. We also started construction of our Stacy Branch Surface Mine, the roads and the ponds, that's the 3 million ton mine at Blue Diamond. In the Midwest, our Freelandville East underground mine ended up lasting longer than we have thought it would with some additional reserves. They have completed mining and moved to the Freelandville West underground mine. They did that early the first quarter. The Freelandville West underground mine will be a 2-section mine, so it was already running with 1 section.
On the production for the surface mines, we adjusted to try to match the sales volume through idle days and reduced overtime, and we really try to watch our costs to match the reduced production. So overall, we've done a lot to change the company portfolio, still working on that as we go forward, but as Peter said, it was a very difficult project to go through for something that most of the companies have went through
And with that, I'll turn it back to you, Peter.
Peter T. Socha
Okay, Thanks, C.K. Joe?
Joseph Czul
Yes, thanks. Demand for metallurgical coal has generally held up well. So pricing seems to have bottomed out and we expect a gradual improvement in the price of met coal over the next few quarters. Turning to specific regions. Chinese buyers of met coal returned to the market in a meaningful way during the latter part of 2012. They've continued to purchase significant volumes of seaborne met coal. Now we do not currently sell our met coal in China, but we have observed increased and I would even call it surprising quantities of U.S. coal being sold into China. Should the U.S. be able to hold share in China, that being an important signal for the market and also an encouraging sign for pricing strength of U.S. coal.
In India, steel producers are experiencing only improving market for their product. Some of our customers have modest plant expansions coming online, and we expect those additions will translate into further demand for U.S. coal. We have been and continue to be relatively optimistic concerning U.S. coal in India. The market in the Atlantic Basin is not as strong, as customers in Europe and even Brazil continue to operate at levels below optimal operating rates, and they really do not perceive much increased demand in the near term. The price of met coal has not been this demand and this problem. Demand, as previously mentioned, has been pretty good. There simply has been too much supply. That said, even relatively modest interruptions in supply are being noticed in the market, as we have seen by recent weather events in Australia and production interruptions from less sizable suppliers such as in Mongolia. We also see that recent new entrants into the seaborne met coal supply have not achieved expected production levels, perhaps due to the depressed price of met coal. In particular, producers in Mongolia and Mozambique have reduced far less met coal than earlier projected.
Turning to the U.S. met coal scene, it's important to note that American met coal has held seaborne market share even in the face of a depressed market. U.S. producers have held or even expanded share in part by pricing their product below benchmark pricing. The U.S. market is quite fractured with numerous participants, and there has not been much pricing discipline. As the market for met coal continues to improve throughout the year, there is significant room for pricing upside, as we narrow the gap between U.S. met coal and benchmark pricing and at the same time as the benchmark pricing improves. The market for U.S. PCI and industrial coal continue to offer us opportunities and we are cautiously optimistic we can hold share in these areas as well. With that, I turn it back to Peter.
Peter T. Socha
Okay. Thank you, Joe. For those of you who have followed us for a while, you know that there are periods of time where I get out on the road a lot, and this has been one of those periods of time. If we're going to change the operating model and make changes to the mine operations the way that we are, it's just -- it's good to see the information into that that's coming from the market. So I like to go out and touch the market, feel it and understand exactly what's happening, not just this year, but what's happening in '14, '15 and '16. So this has been one of those periods. I've been on the road almost every week since the first of the year, and I've been happy to do it because it does give me a pretty good insight into what's going on.
Started out in the coal fields of CAPP and of the Illinois Basin. Those of you with us last year, remember, I flew out there. I could not believe how green the fields were, how green the grass was, as we are flying around both Kentucky and Indiana, where it should be brown and white, it was all green, and that, obviously, that was due to the warm weather. This year, it was brown and white. Last year, we saw high stockpiles into loadouts, not just our own, but because we're in the helicopter, we can fly around to a lot of different loadouts, and we did, from last year and this year. Last year, they were enormous. This year, they were down. They were down somewhat. I wouldn't say they were down the normal, but they were down from where they were. So we felt good about that.
Last year, we flew for a total of 5 or 6 days, I think. C.K., correct me if I'm wrong. We flew 5 or 6 days. We didn't see a train. We didn't see a single train that was running on the tracks with coal in it in 2012. This year, we saw a modest amount of train so we took pretty great comfort in that. The overall production based on what we were seeing from other mining companies was falling just dramatically much harder than people were realizing outside of the industry, and so we took great comfort from that.
We did, Mike and I -- Mike Webber and I and Lynn Parrish, went over to the river markets for a day, saw the Big Sandy River, saw the Kanawha River. The stockpiles on the Big Sandy were just absolutely enormous, absolutely huge. They look like parts of a mountain. But when you talk to the traders, when you talk to the people that operate on the market, a lot of that has already been sold for delivery for later this year and early next year into the seaborne market. So it's not going to put pressure on U.S. pricing so I felt a little bit better when we were done with that.
On the Southeastern utilities, really, sort of towards the beginning of February through middle of February, and then also 1 or 2 back in December. We saw most of the major southeastern utilities sat down with the buyers and sat down with management, great meetings, was very happy with the meetings. It was their feeling and it's been my feeling that the soft economy has a bigger factor than the gas burn. There's been some debate back and forth or the gas prices, they spent some debate back and forth, sort of a chicken and egg thing. I come down strongly on the economy because if the economy's stronger, natural gas prices are not $3.50, they're $4.50 and if they're $4.50, then the coal burn is higher. And absent a stronger economy, the only way you can clear the gas market at a higher price point would be lower supply, and that doesn't seem to be coming anytime soon.
So that was clear. The third and fourth bullets here I thought were really interesting. We talked with several utilities that had changed their blend over the last 2 or 3 years, and I asked them. I said, "Knowing what you know now, operationally putting pricing aside, putting the economy aside and coal burn and all, but just quality specs, knowing what you know now, would you make the change that you made?" And the answer was pretty much, "No, we wouldn't." But operationally, there've been some issues that they need to address, and so I think this blending, this changing of a blend will be an evolving process. It's not a cut and dry. They've gone through this blend today and that's the blend they're going to have. So I was interested in that. I thought those were interesting comments.
And then the last bullet, sometimes, we read that average stockpiles or this or average stockpiles or that, in the Southeast, that doesn't mean anything because we had -- this was almost what I would call a Goldilocks tour, and that we had some utilities that were too hot, some were too cold and some were just right. Some needed coal this year, some were just fine, and some may not need coal for several more years. And so I think when you look at the average stockpile numbers, I think you need to look at those with a little bit of a grain of salt.
Turning over to the next slide. India, I did spend the better part of the week in India a couple of weeks ago. I headed back there the day after tomorrow. The economy there has clearly bottomed. Without a doubt, everyone we spoke to, and we spoke to some folks that have broad insight into the market there and into the economy there. The economy there has clearly bottomed out. The growth in coking coal, they believe, will be greater than economic growth. It will exceed economic growth by some factor, and there was a little bit of debate about the various factors.U.S. coking coal plays a key part. They are very keen on U.S. coking coal. They don't like being totally dependent on any one market. This came from some of the buyers that we spoke to. It also came from the Chairman of Sales that I spent time with. They like having diversification of their supply. They like having the U.S. as part of that mix. I love how we're positioned in that market. I think we're well represented there. I think Joe has done a great job in developing the market, and I think our agents over there have done a great job of helping us. So very, very happy with India.
Turning over to the balance sheet and the liquidity, I talked about this a little bit on the last call. When we set the balance sheet up a couple of years ago, we set the balance sheet to -- a normal cycle in the coal market is 18 months. So we looked out and said we want a balance sheet that will go through 2 years of downmarket, and that's what we did. We're now into the third year of a downmarket in the thermal -- on the thermal side. The met, obviously, has shorter cycles. So we felt like it was prudent to start a process of looking at the balance sheet, looking at our liquidity and making sure that when the market turns back up that we're there and that we are strong. We can do a lot of different things. I've met with a lot of people. I've gotten a lot of ideas. I haven't gone to the board with any of the ideas yet. I haven't come up with what I think is best for us. One thing I like to do, and again, I'll say that -- people who have been with us for a while, you know this, that I do not want to surprise folks. I would rather give people the opportunity to give us input. By my folks, I mean holders, people who actually have skin in the game. The opportunity to call us and to say, "Listen, I think you need to look at this or look at that." And we'll do that, and we'll certainly do that. We may not end up following the advice, but I just think people ought to have that opportunity. We may do nothing. I don't want people to read this and say, "Oh, my gosh. They're going to do something major, anything like that." We may do nothing. If the thermal market picks up, starts to pick up, if the met market picks up a little more than we currently look at, then doing nothing is an option. Doing something like just flexing the revolver, taking assets that are currently not included in the borrowing base and flexing that up, that is an option. And then you can go down the scale to things that are broader in nature, but we've gotten a lot of good advice. We've been talking to a lot of folks who do this for a living, and we'll take it all in, and we'll certainly consider the input that we get from people who are holders of the securities.
On the guidance, you can see we cut the cutbacks by quite a bit. We did break it out between the maintenance and the safety and the ongoing project. We also gave you the DD&A. We have so many moving parts. As I put it on my quote, I think it's a quote, in the press release, we have so many moving parts on the marketing side, depending on what the thermal markets do and depending on what the met markets do, that will change our production profile, and that will change our cost profile.
Obviously, we've made a lot of changes in the operations at the operating side and the SG&A side. Those things are just now rolling through the cost structure. We'd like what we're seeing, but I didn't feel comfortable going out and saying, "Okay, this is going to be our production number for 2013, and this will be our cost number." Better to just err on the side of caution and let these things roll through.
The upcoming conferences, we've got New Orleans coming up in a couple of weeks with Holly, then at Howard Weil. We've got Lucas at Brean in May, and then we're going out to St. Louis with Mark, I think the first time we've done a BB&T Conference, the first time I've done one in a little while. So I'm looking forward to that. And with that, Mimi, we will do Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from James Rollyson of Raymond James.
James M. Rollyson - Raymond James & Associates, Inc., Research Division
On the cost side of things, obviously, you're still in a state of flux to not give guidance, but when you think about the impacts of the items you worked through in fourth quarter and in 1Q, I think we’ll see declines. We see more of that impact from the fourth quarter to the first quarter or is that going to show up more in the first quarter to second quarter since some of what you were working on didn't actually happen till the first quarter?
Peter T. Socha
I think you'll see -- C.K., kick me if I'm wrong here, I think you'll see a fair amount of impact from Q4 to Q1, and then you should see a little bit of additional impact, Q2 to Q1. C.K.?
Coy K. Lane
I would agree with that, Peter.
James M. Rollyson - Raymond James & Associates, Inc., Research Division
And from here, any other things that you target? Are we more likely to see impacts on the ops side things or on the kind of overhead side of things?
Peter T. Socha
Well, the -- it's a great question. The SG&A changes, as C.K. said, we really just started rolling those out in January and February. C.K. had a meeting the end of January, and basically, all of the operations went through their line item cost on SG&A, every single line item they had. And they came up with ideas on this is what we're doing, more than ideas. They came up with action items, where they actually were cutting their costs, and then we brought them all together and then we said, "Okay, tell us what you're doing. Tell us what you found in your cost centers and let's use sort of best practices throughout the organization." So that was the end of January and those are being implemented now kind of as we speak. That's on the SG&A line. The ops line, the only hesitancy I have on the ops is we're trying to manage inventories. We don't want the inventories to get too high. So we may have some additional idle days in Q1 or Q2 that we don't currently have planned, but again, we've got to look at the -- what the inventory numbers are going to be, heading into summer. So I'm not quite -- I'm not as certain on the ops line. I think we are clearly seeing positive results on the ongoing cost. When you're running a mine on a day-to-day basis, we're seeing positive results. But if you end up having to idle a mine for a couple of days or for a week or so, you're going to have the absorption issues that's we've seen in there.
James M. Rollyson - Raymond James & Associates, Inc., Research Division
Right, makes sense. And just one follow-up on volumes, obviously, you're not there yet to give good guidance. But when you think about what's contracted for this year, and I don't know if you want to do this in Central App or just overall, but ballpark mix of what's left to sell just between kind of met...
Peter T. Socha
Yes, well, we're trying to get to the point where we have very little thermal to sell this year. That's the goal, and met will be market dependent. Met will depend on where the settlement comes out over the next couple of weeks for this quarter, the international settlements. And then depending on what happens in the June quarter, we can dial the production back up, but that is market dependent. The thermal market, I don't -- I'm not sitting here expecting a huge improvement in the thermal market until later this year, maybe early next year. Again, as C.K. said, we've idled these mines. We can dial it back up, but I'm not expecting that we will do it. Met, I think we will dial back up sooner, but on the thermal, we are trying to just sell what we have under contract right now.
Operator
Next question will come from Michael Dudas with Sterne Agee.
Michael S. Dudas - Sterne Agee & Leach Inc., Research Division
Peter, a follow-up too on Jim's comments. Can you characterize what your met business, the utilization and what kind of -- how quickly, how much flexibility, quality to meet, any improvement in the market that you seem to be thinking it's going to happen in the next 6 months?
Peter T. Socha
C.K. and Joe?
Coy K. Lane
From the operation side, we have one metallurgical mine that's idle right now, underground mine, that we could start back up. We have a surface mine that produces 60% met, 40% stain that we could start back up on that, and also just the amount of hours that we're working. So we can dial our production up fairly quickly on the met side with those mines that we have currently idle.
Peter T. Socha
Joe, you have any comment on that?
Joseph Czul
I don't have anything to add. I think the upside, really, on the met side is on price curve.
Michael S. Dudas - Sterne Agee & Leach Inc., Research Division
I thought it was an interesting comment about the discipline in the U.S. market. You are seeing narrowing spreads going into the benchmark, especially in the pull that you are seeing, Joe?
Joseph Czul
Not really narrowing, not yet. But we see that, that's coming. I guess, I'd say you sort of are getting a handle that -- it's really more, let's call it the last 6 to 9 months, there's been very little price discipline on the U.S. side. It's been a scramble for market, and we see that basically coming to an end, I guess, will be the way to say it. And it's not over yet, but the -- everybody's sick of selling their coal at prices at a discount to benchmark, will be a way to say it. And the future looks like we're going to be able to get that, some of that gap back, I guess.
Michael S. Dudas - Sterne Agee & Leach Inc., Research Division
And Peter, how -- from your travels in Central Appalachians and stuff, I mean, you guys have taken your operations on pretty hard to the bone. Any sense of how much, percentage-wise or how awful things will continue to be in future testing and some of the underground and even surface [indiscernible]
Peter T. Socha
You mean industry-wide?
Michael S. Dudas - Sterne Agee & Leach Inc., Research Division
Yes, yes, industry-wide, given what you're seeing, given how hard it is for you guys, what you're seeing...
Peter T. Socha
I'll be honest with you, Michael, I mean, my head has been down, I've got blinders on, and I'm just trying to help C.K. out anyway I can on his operations, and at the same time, feed in to what his doing sort of information that I'm getting in the market. So I haven't paid a lot of attention to what's happening with mines around us.
Michael S. Dudas - Sterne Agee & Leach Inc., Research Division
Got it. And on the capital budget this year, certainly, that's your best guess, the safety and maintenance levels, is there any variability there that you can see maybe in the second half of the year?
Peter T. Socha
Not a whole lot. I mean, we've cut it right down to the bone.
Operator
Our next question comes from Lucas Pipes of Brean Capital.
Lucas Pipes - Brean Capital LLC, Research Division
My first question is kind of on -- it's also on the met side. I wondered if you could comment on where you see your total production capacity right now for met coal, and how much you think you're going to add through kind of third-party sales and such things?
Peter T. Socha
C.K., you want to take the production capacity?
Coy K. Lane
Okay. So we have historically ran about 1.2 million to 1.3 million tons out of the Hampden operations. It's been kind of their level. I think we could get back to that when we need to, when the market improves. We also have some of the met capacity there at McCoy that we had idled so we have a little bit of capacity there. So I think we can get back to our historic levels without too much trouble.
Peter T. Socha
And then on the sales, I'll let Joe answer this, but my guess is that, I mean, historically, we've kind of matched what we produce, but that will be market dependent. I think that will be entirely market dependent. So Joe, if you want to give a number.
Joseph Czul
Yes, I'd say probably sales in the 3.5 million-ton range.
Peter T. Socha
Total sales?
Joseph Czul
Yes, total sales.
Peter T. Socha
Total sales, company production, okay.
Joseph Czul
Yes, but it's typically what we would do. I'm not giving guidance, don't get me wrong, but that's particularly what we do.
Lucas Pipes - Brean Capital LLC, Research Division
And I should think of that like 50% produced in-house and then the other...
Peter T. Socha
Yes, I think that's a good number.
Lucas Pipes - Brean Capital LLC, Research Division
Okay. And in terms of just rough ballpark, in terms of what you have contracted so far, can you give us a rough idea of what is met, what is thermal?
Peter T. Socha
I don't have the breakdown right here in front of me. Joe, why don't you give the met, if you want?
Joseph Czul
I mean, I don't have the breakdown in front of me either, and I think...
Peter T. Socha
We'll come back here with that...
Joseph Czul
I think you said the...
Peter T. Socha
We'll either come back to it or we'll somehow be able to disseminate it in a broader perspective, and maybe by the end of the call today.
Lucas Pipes - Brean Capital LLC, Research Division
Okay, great. And then just in terms of you mentioned taking a look at the balance sheet, I wondered if you could discuss some of the options that you've thought about so far, kind of what flexibility you see for moving things around.
Peter T. Socha
Well, when we built the balance sheet, we built, as I said, I think I said on the last call, we're building the dry powder at the top. We build it with runway so we don't have any near-term maturity issues, and we build it with liquidity on the balance sheet to go through to your cycle. I think, I'd rather not go through sort of all the options we're looking at because I haven't sat down with the board. I'll be honest with you, I mean, I don't know that it would be appropriate for me to go through everything today when I haven't done it with the board yet. I mean, I'm still getting in. I'm still asking a lot of questions. I had several calls on Tuesday of this week, where I was asking a lot of questions on things so I'm still gathering information on things.
Operator
Our next question comes from Shneur Gershuni of UBS.
Shneur Z. Gershuni - UBS Investment Bank, Research Division
Just wanted to start off with the thermal coal markets for a second, if you don't mind. You'd made some interesting comments in your prepared remarks about inventory. I was wondering if you can comment if in your discussions with the utilities, if given the fact that the plants are not necessarily base-loaded anymore, some are load-following and so forth, does that sort of change their perception of how much inventory they actually need to keep on hand? Do they need to keep more, relatively speaking, to where it has been in the past? And I was also wondering if you can comment about the export market a little bit. We've been hearing that rail rates are a lot lower, is there a lower rate? The API #2 number that we should be thinking about as an opportunity to export steam coal?
Peter T. Socha
Well, I think in general, the railroads, I'll start with the second and then go to the first. I think, in general, the railroads -- and Joe chime in, please, have been more flexible over the last 6 months, 6 to 9 months. And so yes, that does change sort of when you're looking at netback calculations, okay, API #2 netback calculations on thermal. That definitely changes it. I think we're still out of the money. I think, right now, it's still out of the money, pricing, current API #2 levels into the European market or the European theater. But I will say the railroads have stepped up, I mean, now. I'm with -- I get back from India next Thursday night, and I'm with one of the railroads on Friday morning. I've got a 7:00 flight Friday morning to go see one of the railroads. So I'll know more after that. Joe?
Joseph Czul
I really don't have a whole lot to add. I think that railroads have been fairly aggressive in participating. And so exactly what your price point you have in mind, I don't -- I'm not really -- of course, I have no idea there. My guess would be that it's -- that the price point is lower than maybe your earlier thought to where U.S. coke and still work the market.
Shneur Z. Gershuni - UBS Investment Bank, Research Division
Okay, great. And then a follow-up question, with some of the activity that you've done in the capital markets recently, where you've purchased back some bonds and so forth, just trying to sort of think about this, I guess, from a technical perspective, in some instances, you've bought them lower than the average and so forth and where they're trading at right now. Are they retired? Or can you, in theory, actually resell them back into the marketplace the same way you were able to repurchase them in...
Peter T. Socha
I think they get retired. I mean, that's a Sam question. I'll have Sam call you on that. I don't believe they're retired right now, but they get retired, and I'm not sure what the trigger is. We have no intention. There is absolute no intention of selling them back into the market, okay, let me say that definitively. But how we handle that on the balance sheet and all that, that's a Sam question. I'll be happy to have him call you.
Justine Fisher - Goldman Sachs Group Inc., Research Division
Okay. And one, just final, on that some line of questioning, there is a large purchase made in the third quarter, but kind of when you reported last time, it sort of you're actually reporting technically in the terms of the fourth quarter. So the purchases we see today, that's just completing what you had focused on.
Peter T. Socha
Yes. When we disclosed, I believe, at least, this was my intent, when we disclosed back in November what we had purchased, we included the total. And then I think we may have broken out sort of third quarter, fourth quarter, but it was absolutely including the total. And as I said at that time, we're done. We're not doing it anymore.
Operator
Our next question comes from Chris Haberlin of Davenport & Company.
Peter T. Socha
Chris, before you get to your question, let me give the breakout for Lucas and his question, and that is of the ton sold this year, 3.5 million are thermal and 1.5 million are met. Okay?
J. Christopher Haberlin - Davenport & Company, LLC, Research Division
Okay. Going back to met and I recognize you all have idled some of that capacity. But if you look at Q4 and Q3, your run rate was about a 4-million-ton per year run rate. Is that something sustainable in a stronger market? And then kind of what drove that upside versus your prior production guidance? Was it more purchase coal or were you able to get more out of the mines?
Peter T. Socha
C.K.?
Samuel M. Hopkins
Well, the run rate that we've had on the underground and surface for the met mining has always been in that 1.1 to 1.3 range so that's been pretty steady. So I think it's probably the purchase coal.
J. Christopher Haberlin - Davenport & Company, LLC, Research Division
And then thinking about returning some of those met mines back to production, kind of do you have a price in mind where if we kind of get above a certain price level that you all would start to think about bringing that production back online?
Peter T. Socha
Honestly, no. I haven't, again, because we've been doing so much all at the same time. I know we're not there now. I mean, I do know that, but I think I would need to get more input from Joe on where he sees the market, say, in the back half of 2013. But I'm not sitting here saying, "Okay, this is my threshold number." I know C.K. has numbers that he works with, where he would sequence the production -- return to production of every mine in the company. Every mine that is producing at less than capacity today, he's got a number that he works with and said, "Okay, if this is what we're getting average sales price, then I would bring this section on or I would bring this mine on." But I haven't sat down with him and I haven't sat down with Joe just because both of them are so far underwater right now. Not so far, not on the met side. On the met side, I wouldn't say so far, but they are below -- they are underwater.
Operator
Our next question comes from Justine Fisher of Goldman Sachs.
Justine Fisher - Goldman Sachs Group Inc., Research Division
The first question I have is just a follow-up on the met coal environment that Joe was talking about earlier, and that U.S. producers are getting sick of selling below benchmark. I was just wondering, because I understand why producers would say, "Never mind, we're just going to tow the line." And so and trying to higher pricing, but is the market still fragmented? And if some producers need to sell their met for whatever they can because they're not making money on the thermal, how do you -- how does that mindset change permanently enough to actually get U.S. pricing up to where the international benchmark is?
Joseph Czul
Well, sure, I guess, the -- I mean, sort of the thesis is that the market's tightening a little bit. And so as the market tightens, there's going to be -- we think there's going to be opportunity, a, for benchmark improvement; and b, for the gap to be narrowed a little bit, and so it's not so much that -- I guess, I use the word sick of, but sick of selling, call it, below benchmark and really not having the opportunity to reduce that gap because as you said, there's the next U.S. guy who's really needs to sell his coal. And, I guess, what we're seeing is U.S. has held market share and has been good. There's not a whole lot of room for a whole lot more U.S. met coal into the market. There's just not that much coal. And so we think that what the next step will be, that gap between what U.S. coal is being sold out in the benchmark that there's some -- there's going to be some opportunity for that to be narrowed.
Justine Fisher - Goldman Sachs Group Inc., Research Division
Okay. And then, Peter, just a follow-up question on the potential balance sheet opportunities, I know you said there's one avenue might be to do nothing, and I was wondering, what needs to happen either on the met price side or the thermal price side further, for the company to decide to do nothing.
Peter T. Socha
Yes, it would price -- yes, it would be price dependent. We would need to see an increase in met prices from where they are right now. I don't want to put number on it, but it has to be an increase, a meaningful increase. And on the thermal side, we'd have to see some real positive change in the thermal market that I don't currently see right now. But I don't want people walking right and saying, "Gosh, they're forced." They have to do something or anything like that because that's not the case. That is simply not the case. But it would be market dependent. As I said, we set the balance sheet up for a 2-year bare market. We're into the third year. We recognize that. And I mean, you followed us long enough. We've been in markets and in liquidity situations and balance sheet situations that were a whole lot, a whole lot different than what's going on right now. I mean, big time different. And so we're not forced into doing anything. We have the patience of time. We did set the balance sheet up to give us that flexibility. We did allow ourselves dry powder at the senior secured level that we can add debt -- we can add a liquidity piece of paper at the senior secured level if we choose to do so, and so we've got options. One of them is to do nothing. But that's probably less likely just because I would have to see a really, really positive change in the market that I don't see where I sit today.
Justine Fisher - Goldman Sachs Group Inc., Research Division
Okay. And then just one final question, can you remind us how much secured capacity the company has to issue? Now I know it's based on a trailing EBITDA number. Can you just remind us what the ability is to issue additional secured debt?
Peter T. Socha
Yes, that's like -- I don't know if you asked the question on the last call or not. I'd just simply not say, because as soon as I say it, I'm going to get 5 calls in here as soon as I hang up today, and saying, "I calculated, it's this. I calculated, it's that." And so I'm going to save myself the pain of spending an hour on the phone right after this phone call, and one call maybe from you.
Operator
Our next question comes from Caleb Dorfman of Simmons & Co.
Caleb M.J. Dorfman - Simmons & Company International, Research Division
I guess, first off, you sort of talked a little bit about what your met production capacity is. With this total of 3 million tons capacity close, what should we think about as the thermal capacity and what type of utilization rate is it running right now if the changes have been implemented?
Peter T. Socha
C.K.?
Coy K. Lane
Well, we have always ran at a higher level that are running now, and we said we've got 3 million tons of idled capacity. I think most of that would be on the thermal side. So that would be a good number to look at that we could increase right now if we needed to. We could also increase some production out in the Midwest because we've reduced that -- the tons down from what they were running, at the high 3. On the met side, like we said, the Hampden operations are in that 1.3, 1.4 range. And then with the other operations we have with some met coal out of potentially Bell and McCoy, we could get another potentially up to the 2 million ton in-house level on the met side if all 3 of those were successful in producing the net met. So I think on the thermal side, the 3-million-ton number is a pretty good number to look at right now.
Caleb M.J. Dorfman - Simmons & Company International, Research Division
Okay, that's helpful. And I guess, real quick on the Midwest, are you seeing any demand improvement? And what happened on the cost side this quarter? It was a pretty significant jump up, and I guess production was down a little bit, but does that explain all the increase in cost?
Peter T. Socha
C.K.?
Coy K. Lane
We're not seeing a lot of demand in increase right now. Utilities are pretty cut back in the Midwest, and a lot of it was just we had 1 mine that had some geologic issues that was down in the fourth quarter and into the first quarter. Those have been corrected now. We were finishing up the one underground mine and getting set up to add that section over and move it over to the new underground mine. And then we had some shipments that were deferred. We cut back production on that. So just a litany of things right now. I think, going forward, most of those have been worked through and costs are more backed to what we've used to see.
Caleb M.J. Dorfman - Simmons & Company International, Research Division
Is there any difference in cost structure between the Freelandville East and West ones that we should think about?
Coy K. Lane
No.
Operator
Our next question comes from Brett Levy of Jefferies.
Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research
Okay. In any case, as you guys sort of kind of almost like shrink your way to profitability, I worry that if you've got 2 mines, feeding one wash plant that there's inefficiencies there, and then I would have thought that maintenance CapEx would have come down more as you kind of take more operations down, and then I have one follow-up question.
Peter T. Socha
Well, on the -- I think C.K. can address those, but I'll tell you, the regulatory environment is different than maybe you would have thought. I mean, everyday, that regulatory CapEx requirement is just a little bit higher. C.K.?
Coy K. Lane
I think, if you go back and looked at the 2012 original budget on capital, it was in the 123 million-ton range -- $123 million range and we're looking at a $70 million range in 2013. So that's a pretty significant cut on capital. And I would think if you ask our mine presidents, they would have grown to that level there because we have cut it, as Peter said, to the bare bones. As far as the efficiencies, I'll defer back to Peter's comment. I think the mines are in excellent shape. We were very systematic in what mines we reduced and why. And of course, operating efficiencies, right now, I think we're in much better shape than we were before we did this, and I know the phone calls and e-mails I get on issues and problems are dramatically reduced. So I would think our operating efficiency right now is better than it has been, as Peter said, in a long time.
Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research
All right. And then I know this is a longer-term issue, but I mean, it seems like some of these markets may not turn for quite some time. As these mines lay idle, is there sort of a time clip that you guys worry about, where some of the reclamation liabilities start to kick-in, and you actually have to spend a bit more money because they're sort of recognized as being more permanently closed down?
Coy K. Lane
Not really. I think on the underground mines, we have no issue on that. We're maintaining those. They are in pretty good shape to maintain those. Preparation plants, there's really not an issue there, and our surface mine folks have had a massive effort over the last 18 months, catching up all the reclamation that was out there and outstanding, and we're looking at probably north of $5 million in bond releases from those efforts. So from a reclamation standpoint, we're probably in the best shape we've been in a long time.
Operator
Our next question comes from Brandon Blossman of Tudor Pickering.
Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
For Joe, just one more follow-up on the met pricing discipline. As you look over the landscape, how do you see prices where folks are willing to sell at versus cost of production? Are we still seeing kind of inventory being put out in the market at the low cost of production, and is that slowing down or stopping today?
Joseph Czul
Okay. Most of the inventories, I think, have been cleared out. You probably have some production being sold above marginal cost or below total cost.
Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
Fair enough. So we've hit the bottom there and are looking better on a go-forward basis...
Joseph Czul
I think so.
Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
Okay. And then Peter and C.K., just on a year-over-year basis, it looks like '13 will be more heavily biased towards net production, net sales, just -- and this is probably more optimistic than anything else, but we will see that, I assume, reflected in the Central Appalachian total cost dollar per ton structure?
Peter T. Socha
That's a fair comment, yes. That's a good point. That's actually a very good point.
Operator
Our next question comes from Lance Ettus of Tuohy Brothers.
Lance Ettus
Just had a question, you have about $100 million of legacy liabilities, and it looks like your interest expense is running around $50 million a year. Is there any -- do those pension holder [ph] may have any recourse that they might use to kind of almost potentially stop you guys or almost force into bankruptcy that's kind of...
Peter T. Socha
I'm not even going there, Lance. I'm not even going there. Ask me about the weather. Ask me about a lot of things, but I'm not going there.
Operator
I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.
Peter T. Socha
All right. Thank you, Mimi. I appreciate your help. I appreciate everyone joining us this morning, and if you have any questions, comments, concerns, please feel free to give us a call.
Operator
Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!