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Oxford Resource Partners, LP (NYSE:OXF)

Q4 2012 Earnings Conference Call

April 1, 2013 10:00 a.m. ET

Executives

Karen Van Horn – Investor Relations

Charles C. Ungurean – President, Chief Executive Officer and Director

Gregory J. Honish – Senior Vice President, Operations

Bradley W. Harris – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Jim Rollyson - Raymond James

Sam Dubinsky - Wells Fargo Securities

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2012 Oxford Resource Partners, LP Earnings Conference Call. My name is Janetta and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And I would now like to turn the call over to Ms. Karen Van Horn, Investor Relations Representative. Please go ahead.

Karen Van Horn

Thanks, Janetta. Good morning, and welcome everyone to our fourth quarter and full year 2012 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I’m Karen Van Horn, Investor Relations Representative with Oxford.

Participating on the call today are Oxford’s President and CEO, Chuck Ungurean; Oxford’s Senior Vice President of Operations, Greg Honish; and Oxford’s Senior Vice President and CFO, Brad Harris.

Oxford released its 2012 fourth quarter and full year results earlier this morning. On today’s call, we will be discussing our operations and financial results for both periods. Following our prepared remarks, we will open the call up to questions.

Please be aware that some of our remarks may include statements that are not historical in nature and that may involve expectations, plans and objectives regarding future operations. These remarks are forward-looking statements and are subject to the cautionary language regarding forward-looking statements contained in our press release. Additionally, we will be discussing Adjusted EBITDA, which is a non-GAAP financial measure. The definitions of Adjusted EBITDA and a reconciliation thereof to net loss, a comparable GAAP financial measure, are included in a table presented near the end of our press release. Our press release has been posted on our website oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that, I would like to turn the call over to Chuck for some opening remarks. Chuck?

Charles Ungurean

Thanks Karen and thanks everyone for joining us today. As you saw on our earnings release this morning and as we’ve discussed on previous calls, 2012 was a challenging year for Oxford and the entire coal industry. While coal market conditions continue to be challenging, our customer relationships remain very strong. We’re 98% committed in price for 2013 and for 2014 our projected sales are 79% netted and 47% priced.

When stronger demand returns to our market, we have the ability to increase production with little incremental cost. In the meantime, we are focused on maximizing the cash margin on every ton we produce. The wind down of our Illinois Basin operations has allowed us to transfer excess equipment to our Northern App mines, which has reduced our CapEx spending. We expect to complete the wind down of our Illinois Basin operations by the end of the year. We continue focusing on selling the remaining excess Illinois Basin equipment with any sales proceeds further enhancing our liquidity.

As we stated in our press release, we are in active negotiations with our lender group on refinancing of our credit facility. Brad will address that with his remarks. We have achieved increases in our per-ton coal revenue throughout 2012 and anticipate further per-ton increases this year. I can report that 2013 is off to a solid start, with first quarter performance expected to show improvement over fourth quarter.

Now I’ll turn the call over to Greg to provide an update on our mining operations. Greg?

Gregory Honish

I’m going to report on our progress in four key areas; safety, operations, reserve acquisitions and permitting, starting with safety. Our MSHA reportable incidents rate for the fourth quarter and for all of 2012 was better than the national average for surface mines and facilities. 12 of our 18 mines and all four of our coal processing facilities completed 2012 with zero reportable accidents. Employee safety remains our highest priority and we’re proud of our record.

Moving on to operations. We strived to our high-wall miners operating as much of the time as possible because they represent our most cost effective means of producing coal. Fourth quarter production costs were thus negatively impacted by the move of one of our high-wall miners into the recently opened [Shugard] mine in October.

And regarding high-wall miner moves, in 2013 we transitioned one high-wall miner into an adjacent area mine during January and we will be moving the other minor to a new mine location late in the second or early in the third quarter. As previously communicated, we significantly scaled back production in our Illinois basin operations and are currently operating only one mine in support of one coal supply contract. We expect to produce approximately 240,000 tons from the Illinois Basin mining complex in 2013. And as Chuck mentioned, we expect to finish production and idle this complex by the end of this year.

Turning to reserve acquisitions. Consistent with our strategy to replace the tons that we mine, we acquired 7.2 million tons during 2012. This is roughly 105% of our 2012 production. Of this total, 6.9 million tons required for our Northern App operations. The remaining 0.3 million tons were required in the Illinois basin early in 2012 before the restructuring considerations arose. These acquisitions coupled with mine plant enhancements resulted in a 1.5 million ton increase year over year in our Northern App surface reserve base.

And last, regarding permitting, we were issued four permits with 2.2 million tons of recoverable coal during the fourth quarter. This brought our 2012 total to 14 permits and almost 11 million tons of recoverable coal, despite continued challenges in the permitting environment.

And with that, I’ll turn the call over to Brad. Brad?

Bradley Harris

Thanks Greg. Good morning everyone. Fourth quarter adjusted EBITDA was $8 million, a decrease from $12.5 million in the prior year period. While cash coal sales revenue per ton increased 8% to $50.05 for the fourth quarter of 2012 compared to the same period of last year. this was offset by lower sales volume from our Illinois Basin operations.

Lower production from our Illinois Basin operations and increased purchase coal volume price drove a 10% increase in cash cost of coal sales per ton over the prior year period. As a result, cash margin decreased to $6.14 per ton in the fourth quarter of 2012, from $6.60 per ton in the same period last year. Lower sales volume, coupled with a reduced margin contributed to the quarter over quarter decline in Adjusted EBITDA.

For the fourth quarter of 2012, we reported total revenues of $86.5 million, including $85.1 million from our 1.7 million tons in coal sales. Comparatively, for the fourth quarter of 2011, revenue totaled $96.3 million, including 494 million from our 2 million tons in coal sales. The decrease in coal sales revenue was primarily due to the Illinois Basin coal supply contract termination that we have discussed in prior quarters.

Depreciation, depletion and amortization expense declined to $12.2 million in the fourth quarter from $13.2 million in the prior year period.

Corporate SG&A for the fourth quarter was $4.2 million compared to $3.3 million for the same period in 2011. The increase primarily resulted from higher professional fees and insurance expenses. We incurred $1.8 million of impairment and restricting expenses in the fourth quarter, primarily related to further impairment of the excess Illinois Basin equipment we have held for sale and severance costs associated with workforce reductions at the Illinois Basin operations.

For the full year of 2012, adjusted EBITDA was $47.9 million, compared to $58.8 million in 2011. While cash coal sales revenue per ton increased 7% to $49.57 in 2012 compared to 2011, this was offset by lower sales volume from our Illinois Basin operations. Lower production from our Illinois Basin operations and increased purchase coal volume price, together with higher equipment lease expense, drove a 9% increase in cash cost of sales per ton over the prior year. As a result, cash margin decreased slightly to $7.06 per ton in 2012 and $7.10 per ton in 2011. The lower sales volume coupled with reduced margin contributed to the year over year decline in adjusted EBITDA.

CapEx totaled $24.5 million in 2012, down from $32 in 2011. The excess Illinois Basin equipment transfers to our Northern App operations enabled us to reduce capital expenditures.

As of December 31, 2012, our liquidity was $18.1 million, including $4 million in cash and $14.1 million in borrowing capacity on our revolving credit facility.

During the fourth quarter, we sold certain assets, including mined out land and excess equipment for $4.3 million. Due to the favorable consideration we received for these non-core assets, we recorded a $3.9 million gain associated with these transactions. Subsequent to yearend, in February of 2013 we received a settlement payment of $2.1 million from a purchase coal supplier to settle a contract dispute.

As announced on January 29, due to continued weakness in the coal markets, our board elected to suspend cash distributions on both the common and subordinating units for the fourth quarter and going forward in order to further preserve liquidity. While this suspension is in effect, we will not be reporting distributable cash flow.

Our current revolving credit facility matures in July of this year. Accordingly, we are actively engaged in negotiations with our lender group to amend and extend our current facility, including both our revolver and term loan. Because the negotiations are not yet concluded, we reclassified the outstanding borrowings our revolving credit facility as a current liability in our December 31, 2012 consolidated financial statements. The audit opinion related to these financial statements being filed with the SEC in our annual report on Form 10-K either later today or tomorrow, will include a going concern emphasis paragraph related to this matter.

We remain optimistic that we will complete the refinancing this month, with the structure that supports our near term operating plan as well as our longer term strategy to recapture growth when the coal markets rebound. We will share more with you when we have completed our refinancing efforts.

And now for our 2013 outlook. We expect to produce between 5.8 and 6.3 million tons and sell between 6.4 and 6.9 million tons. Based on this projected sales volume, we are 98% committed and priced. The average selling price is projected to be $50.50 to $52.50 per ton with an anticipated average cost of $42.85 to $44.85 per ton. Adjusted EBITDA for the year is expected to be in the range of $45 to $50 million. We anticipate that 2013 CapEx will be between $22 and $25 million.

As Chuck indicated, 2012 was a challenging year for Oxford and the entire coal industry. We are making progress on enhancing our liquidity with the non-core asset sales and are diligently working on the refinancing of our credit facility. Our operating outlook for 2013 is stable in spite of continued challenging market conditions. We remain focused on maximizing operating efficiencies in Northern App while best positioning ourselves to participate in the coal market rebound.

With that, I’ll open the call up for questions. Janetta?

Question-and-Answer Session

Operator

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

Jim Rollyson - Raymond James

Chuck, on the cost side of things, obviously 2012 was negatively impacted just by the fact that volumes came down in such a -- what's been a pretty tough market. Your guidance for 2013 has costs relatively stable if you take the midpoint of the range from where you were in the fourth quarter, and obviously you've got volumes coming down a bit again. I'm trying to get to maybe what moving parts are helping costs proceed more stable with a bit of a step down in volumes. Is it the ultimate idling and restructuring at Illinois Basin that makes the difference? Or just moves that you made throughout the course of last year that brings that down or less high-wall moves? Or just what do you think gets you there?

Charles Ungurean

Well, it’s a number of those things, Jim. One, the getting the Illinois Basin right sized is a big help. Another thing for 2013 in Northern App is the high-wall miners. We’re in much better shape this year than last year with fewer moves and actually one of the miners when he gets moved will be set for at least two years. So those are the big drivers. Given the market conditions and we’re like everyone. We’re squeezing our suppliers all week to get costs down also, but probably the single biggest item is the high-wall miners.

Jim Rollyson - Raymond James

That makes sense. And when you look at kind of working your way down on Illinois Basin as the year goes on, maybe just give us a little update on what equipment is left there that you might be able to sell. And more importantly I guess, what kind of value do you think is left on the table to possibly raise for equipment sales?

Charles Ungurean

Basically what we have there is a 2800 P&H electric shovel and four 830 Komatsu 240 ton haul trucks. As far as valuation, it’s hard to put a number on that right now given the market conditions. So I just really couldn’t give out -- I wouldn’t want to put out a number right now especially when we’re trying to sell.

Jim Rollyson - Raymond James

All right and maybe last one for me, you talked about the ability if the market comes back and certainly gas pushing $4 maybe ultimately helps get you there, but you can bring volumes back up with very little incremental cost. Where do you think your volume capacity is today and, maybe more importantly, where is it going forward once ILB is done at the end of the year?

Charles Ungurean

Well, I think as we stated, we could probably turn up another 5%, 300,000 to 400,000 tons with little if any cutbacks and just some incremental labor.

Operator

(Operator Instructions). Your next question comes from the line of Sam Dubinsky with Wells Fargo. Please proceed.

Sam Dubinsky - Wells Fargo Securities

Just a few quick ones. You reduced your maintenance CapEx for 2013. Do you believe this is a sustainable rate going forward for the next several years?

Bradley Harris

For the most part, yes. There clearly are years when we’re going to have peaks and valleys based on timing of equipment purchases and the like. But I think the rate that we put forth here is largely sustainable, yes.

Sam Dubinsky - Wells Fargo Securities

Okay. And then in terms of your net margin on purchased coal, could you disclose what that is?

Bradley Harris

The margin of the purchase coal, the thing we just need to be careful of is that the purchase coal is primarily used to blend as opposed to sold, just purchased and resold separately. So it’s really if you will a commodity where a component of the cost of our existing sales. So we are selling that at a margin, but it’s more important or I think more appropriate to look at the total margin on the coal sales that we have which is why we have disclosed it accordingly.

Sam Dubinsky - Wells Fargo Securities

And then with natural gas pricing having rebounded recently, are you seeing any changes in buying patterns from your customers at all?

Charles Ungurean

We haven’t seen that yet, but I think the coal industry expects that. I know recently EIA came out with their projection about additional 50 million tons in the domestic coal burn for this year. so that’s clearly going to help the entire domestic steam market.

Sam Dubinsky - Wells Fargo Securities

Okay and then my last question, could you just give us a little more color on your financing? I know you said it would be done this month. Number one, do have high conviction on that? And number two, what type of terms are you looking for in terms of is it the length of the credit facility that’s the hold up? Is it the interest rate? Is it the debt size? What are the sticking points in your conversations?

Bradley Harris

Sam, certainly we would like to be in a position to give you more color at that time, but I don’t think that’s appropriate as we talk with the lenders. We are making good progress. All the parties are actively working together on this. Again we remain very optimistic that close to month end we will be in a better position. But we’re going to refrain from making any comments specifically on the term until we get that resolved.

Operator

This concludes the Q&A portion for today’s call. I would now like to turn the call back over to Mr. Chuck Ungurean for any closing remarks.

Charles Ungurean

Thanks again everyone for your ongoing support of Oxford. We look forward to sharing our progress with you on our next earnings call.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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