James River Coal Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: JAMES RIVER (JRCCQ)

James River Coal (JRCC) Q1 2013 Earnings Call May 1, 2013 10:00 AM ET

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

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

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Justine Fisher - Goldman Sachs Group Inc., Research Division

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

David S. Martin - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Company First Quarter Earnings Conference. [Operator Instructions] I would now like to turn the conference over to your host today, Beth Cook, Director, Investor Relations. Please begin.

Elizabeth M. Cook

Thanks, John. Thank you, and good morning. Welcome to James River Coal Company's First Quarter Earnings Call. We released our earnings this morning, and our release and investor presentation are posted on our website and were furnished to the SEC on a 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; 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 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.

Now I'll turn the call over to Peter.

Peter T. Socha

Thank you, Beth. Good morning, everyone. It is a beautiful day in Richmond, and next week, it's forecast to be hot. So we're happy to see that. We'll go through. We have a short slide deck today, and then we'll jump right into Q&A.

As we talked about last quarter, we did do a very substantial restructuring in the mine operations, both in the fourth quarter and in the first quarter. Most of it was in the fourth quarter, but there was still some carryover, and C.K is still tweaking things as the market is developing.

Cash mining cost did come down. We were very happy with that. It came down partially due to a mix between met and thermal but also due to changes in the mine operations and what we've been doing.

We did have great capital control this quarter. I know that's something that we get a lot of questions about. And you could see that we had an exceptional quarter on that. The -- what a difference just a couple of months make. We were talking about this next bullet between the thermal market and the met market. It is almost exactly 180 degrees different from what we discussed back in March, back in the 1st week of March. Today, the thermal market on the domestic side looks much better than it did at that point. And the met market, not so much. The met market has clearly been impacted by the European situation, and we'll talk about that in a few minutes. And I know Joe will touch on it. We -- the last bullet, we are continuing to look at the balance sheet. We're continuing to look at liquidity. We have gotten an enormous amount of input from people, from shareholders and from debt holders. We've gotten a lot of good ideas. We've sorted through all of them, and we've had preliminary discussions with our board several weeks ago. We'll have further discussions here coming up. But I'm very, very happy. On the last call, we asked for suggestions and input. We got it in spades. And so I'm very grateful for that. And with that, I will turn it over to C.K.

Coy K. Lane

Thanks, Peter. Talk about safety first. Through the quarter, we finished up with a 1.54 NFDL rate, and you can see the trend continues down and staying below the national average. We did reduce the number of citations we had year-over-year, and we were very proud of that. And we're continuing to adjust to the changes in interpretations of a lot of new regulations that are still coming out.

But overall, very pleased with the safety performance. As Peter mentioned, the operations did perform well, both from a cost and production aspect. We've completed a pretty detailed review of our SG&A and non-production-related costs. We made a lot of those changes in Q1 and a few left in Q2.

We completed the 3 major development projects at Mine 15. We really set up the mine 3 operating sections for some long-term mining. So we felt good about that. There was a lot of cost involved in that in the fourth quarter and some in the first quarter.

We continue to develop our Mine 3B, which is a met mine in Hampden. This is a replacement mine for our Mine 3, which will mine out in the second quarter. So we hope to have a pretty seamless transition over to that. And the reason -- one of the main reasons we developed this mine, it can also be -- -- the coal belted [ph] back into the preparation plant.

We did add about 7 million tons of underground reserves at our Bledsoe operation, and we're pleased to get that done.

In the Midwest, pretty much steady as she goes. We continue to match our production to the market. We were pleased that the cost fell from the prior quarter and also from year-over-year. We did complete mining of our Freelandville underground mine, and we moved employees and equipment to the new Freelandville West mine. So same amount of production, but instead of having 2 single unit mines, we now have 1 mine with 2 sections in it. So we're hoping the cost will be a little bit better by running both sections in 1 mine. We also worked through some tough geology at our Hurricane East Surface Mine. But overall, pretty good quarter in the Midwest also. With that, I'll turn it back to you, Peter.

Peter T. Socha

Thanks, C.K. Just a summary on the market. As I've mentioned earlier, the thermal market -- the domestic thermal market is definitely looking better. It's looking better for the -- for PRB and Illinois Basin and certain Northern App. But it's also looking a little bit better for Central App than it was just a couple of months ago. And so we're happy about that. There is definitely higher coal burn by the utilities. For those of you who followed AEP the other day, they came out with a very positive announcement on the differential between coal burn and gas burn for them. It seems like every day, I read one of the periodicals in the evening and another utility is talking about their coal burn is up. So we're very happy to see that. You balance that with the production cuts, both from us and from everyone else in the domestic industry, and the market appears to be rebalancing quickly.

Europe, the only thing I can think of on Europe that caused such a change is Cyprus. When they closed the banks over there for several days and just were deciding how much money they wanted to take from depositors to balance their fiscal situation, their government fiscal situation, I think that just sent a chill not only in Cyprus and not only in Europe but around the world, that a central government would do that. And certainly, we've seen a slowing in the European economy since then. The March auto sales came out, and they were just horrible. It's absolutely horrible. So we're hoping that, that will slow down and that will correct itself over a period of time, hopefully, a short period of time. But clearly, Cyprus had an impact on the European economy. The natural gas market is clearly better. I think anyone who follows it would agree with that. I've got a couple of slides in here, that I'm going to talk about it. Two items to watch, I've got at the bottom here. One is the national elections in Indonesia. As I think I talked about on the last call, I was in India in February. I was back in India in March, and I was surprised by how often the national elections in Indonesia came up in conversation. And I was meeting with senior people in business and senior people in government. And I was just very, very surprised by that. And so I started doing -- one night, I was up till 3 in the morning looking online about what's going on there. And it's clear that the national elections next year will be a populist -- will have a populist theme through them. For those of you not familiar, Indonesia is one of the largest suppliers of coal to the world market. And I think the concept of resource nationalism is very much on the minds of people who follow that part of the world, the Pacific Rim coal markets. And so that's something that you may want to talk in the back of your mind. Sort of as you see articles in the Wall Street Journal or in the Financial Times or whatever, you may want to follow that sort of from afar.

Then secondly is the GDP growth in Japan. The Bank of Japan has -- starting in, really, December embarked on a massive stimulus plan, quantitative easing, monetary expansion, a reflation of the economy. And I was at lunch a couple of weeks ago and a note came through from ISI, which for those of you familiar with it, is Ed Hyman's economic forecasting group, and they were looking for 4% growth in Japanese GDP this year. And the number just startled me. It just absolutely startled me. I knew that they were reflating the economy, but I didn't realize that it was already coming through in an economic forecast at that level. And so I started thinking about an economy that large that would inflate -- that would have GDP growth this year of 4%. What would that mean for steel production? What would that mean for coal -- thermal coal consumption? What would that mean for natural gas consumption? And it really is quite startling.

Now the caveat there is the Japanese economy is very dependent on export, and they are very dependent on growing economies elsewhere in the world. So their primary markets are still struggling. But that is something to watch and to follow. There was a great story in the Wall Street Journal last week, and they had some interviews with various manufacturers in Japan, and what struck me was there was one in particular, it was either a machine tool or robotics company, their orders this year, they are projecting their orders that they are purchasing are projecting to be up 52%. And the president of the company that they were interviewing discussed it with upside potential from there. He described the 52% as conservative. And so that jumped out at me because if they change the, psychology of what's going on in that market, there is a lot of liquidity. And if they're able to change the psychology successfully, that will have an impact on coal markets around the world.

And with that, I'll turn it to Joe.

Joseph Czul

Thank you, Peter. We continue to keep a close eye on the worldwide supply-demand balance for met coal. On the supply side, after a period of some rationalization, volume is holding up. There's still a fair amount of production with cost over market. We thought some of this supply would continue to come off, but that has not happened.

Low cost suppliers seemed keen to capture rather modest incremental margins and are thus willing to increase supply rather quickly. Even higher-cost mines continue to be brought online and several new projects from multiple sources are still projected to begin production in the relative near future.

So on the supply side, discipline does appear to be weening. Worldwide steel prices and demand are not overly encouraging and are keeping demand for coal in check. While demand is relatively stable in Europe and Brazil, aggregate demand is a little less than we had hoped earlier in the year. Here in North America, most coal plants are running as expected and our business is more or less on plan. In the rest of the world, U.S. met coal is mostly holding market share, although pricing is challenging and American coal is still sold at a discount to other premium coals. With that, I turn it back to Peter.

Peter T. Socha

Thanks, Joe. As I mentioned, the thermal market is definitely looking better. Just in talking to utilities, their coal burn is picking up. We had a -- one of our guys had a conversation with a large utility last week and they said for the first time in a long time, they are burning more coal today than is coming in by train. And so that was very good news, that kind of made our week. So the inventories are still all over the map, but they're all over the map at a lower level than they had been. The highs are lower and the lows are lower, and so that's a good thing.

The -- I've got this last bullet here, that the railroads are being creative and flexible. And this really started last fall. Last November, December, Mark and I were with a couple of utility guys, and we're spending the afternoon together, and one of the senior guys looked at me and said, "Peter, you know what? If the railroads would change the structure of their contracts to look more like pipeline contracts, my dispatch would flip immediately from natural gas to coal." And so I thought about that for a while, and we talked about it some more. And the railroads are very -- if you're going to have a conversation like that with the railroads, or if I'm going to have that conversation, I really need to know much more about it. So I sort of thought, well I'll go down and I'll see this utility person again, and we'll talk about it, I'll understand it more before I ever bring it up with the railroads, and they just chew me up like the Tazmanian devil. And, well, I didn't get that opportunity, but I was with one of the senior people from the railroad a few weeks ago, and he's a good friend of mine, and we were just having a casual conversation. And I told him, "Look, don't chew my head off. But this is what I was told." And he said, "Well, Peter, it's funny you should mention that because we are already working on that actively." We know what the issues are, and it's not a question of discount. It's not a -- don't misunderstand. It's not a question of the railroad just cuts their rates and they make coal economic. It's in the actual structure of the contract between fixed costs and variable costs. And there's a differential. They are viewed differently in the dispatch stack by the utility. So the railroads are working on that. The utilities are aware that. And that may have a role to play and maybe having a role to play right now in why coal is being burned a little bit more than it had been. But I think it's something to keep an eye on.

The -- flipping over, I've got 2 slides for you on natural gas. One is the storage. Clearly, storage has come down. It's now below the 5-year average. Last week's number was 5% below. We talked about this last, I think, it was last August, and we were already on the down slope. And I got a lot of calls over the last few weeks asking me if I would update this slide just so people could see where it is. So I did that. But then on the next slide, I was in a conversation with a friend of mine, and we were talking about natural gas production. And he was saying, "Well, yes, Peter, but production is still growing by quite a bit. There's huge growth in production." And I looked at him and said, "No, it's not. No, it's not." And he said, "Yes, it is. It's growing quite a bit." So at the end of the day, we made a bet for a beer and I won the beer. But sometimes you hear about freeze offs in January and February. You hear about production being off because of that or other various reasons. This is a trend line. I mean, this is a clear trend line that production growth has come down.

Now the number came out. Rolly and I were exchanging e-mails this morning, the 914 data came out yesterday from EIA that it was plus, I think, 2% or 1.7%. So it ticked back up, but you have a couple of factors -- you do have a couple of factors in there. One is freeze offs, which would be a negative to supply growth. And then you have ethane rejection, which would be a positive, because the ethane is not being fractionated. So it's being kept in the pipeline as natural gas.

But anyways, I thought this was interesting. We're not seeing the huge growth numbers in natural gas production the way we were. And so that's part of the reason. We were having a conversation right before we joined the call today, and the fact it's May 1 and natural gas just has $4.30 in front of it, I think Mr. Market is telling us something there. A year ago, at this time, it was $1.90, $2. And so right now, we're in the heart of the shoulder season and we've got a $4.30 natural gas. I think that, that's a good thing.

The last slide is on the balance sheet. We have gone through -- we've talked about this before. We've gone through what I consider to be a very, very deliberative process. We've met with a large number of people. We've met with advisers. We've met with shareholders. We've met with bondholders. We've gotten a lot of input. And I said to the board, and I'm very happy about this, the process has worked. What we started out on to now, we still have to conclude it, we still have to finish up everything and execute on it. But the process for gathering information and coming up with ideas and options has worked thus far. And so I'm very happy about that. We do want to reduce the balance sheet leverage, and we do want to improve the liquidity. The market is improving, the coal markets are improving. And we need to make sure that when they get back up to acceptable levels, that we are there and we are ready to take advantage of that for everybody involved.

We do had a proposal in the proxy. It became pretty clear early on that if we wanted to do anything substantive, that we would probably have to get shareholder approval. There's a NASDAQ rule that limits us to 20% of the shares outstanding that we can do anything with, which for us would be about 7 million shares. So you can imagine 7 million shares, from a dollar standpoint, it doesn't get us what we need to do on any of the options, on any of the potential options, whether it's debt for equity, debt for debt or new equity or whatever. It's just too small of a number. So we put a proposal in the proxy. It is absolutely in the best interest of the shareholders that that proposal gets approved.

Now when I say that, I've got 100 bondholders on this call saying, "Wait a minute. What about us? Why don't you do something that's in the best interest of the shareholders?" It is also absolutely in the best interest of the bondholders that that proposal gets approved. So if you're a shareholder, I would please ask you to review that proposal very closely, consider it. And we did put something in here. ISS came out with a recommendation yesterday. We had a call with them, I guess, 2 weeks ago, and they thought that this proposal was going to be used as some sort of a takeover defense. And that came at me from left field. I said, "What in the world are you talking about?" And they said -- well, I guess it had to do with Walter. I guess, the Audley situation. They were looking at that and -- I don't know. I'm not sure where it came from. And I told them, I said, "If we made a public disclosure, a public statement, that this is not being designed around a takeover defense, will that satisfy you?" And they said, "Well, yes, we think it will." So that's why we have this last bullet in here. But we strongly encourage the shareholders, if you voted no on it, please reconsider, go back, revote. And if you have any questions about it, please give me a call directly, I'll be happy to walk you through it. And with that, John, I think we're going to do Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jim Rollyson with Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

So Central App costs were dramatically better sequentially and just versus the last few quarters. How much of that was this mine reorganization kind of program you've been working on versus production mix versus the fact that you had a bit more purchased coal, which I presume was at some attractive pricing? Just how do we think about that going forward?

Peter T. Socha

More -- it's more b and c. I actually had a great chart on this yesterday, and Sam shot it down like a dove with a 12 gauge. I mean, it was dove McNugget [ph]. Because I had, first, I had Central App and I had Midwest, I had first quarter cost, I had fourth quarter cost, and then I had first quarter '13 cost. And it's more on product mix in Central App, okay? Let me differentiate between the two. In Central App, it's more product mix related in Q1. Having said that, we're seeing great -- C.K sent me an e-mail last night or this morning, I can't remember which, about the cost numbers that we're seeing right now. So we're seeing more of the cost benefits right now than we did in Q1 in Central App. In the Midwest, clearly, that's not a product mix issue. That's apples-to-apples, and that's just great performance. They just did a great job.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

So do you think on Central App, as the mix bounces around from quarter-to-quarter, that your cost will have some variability?

Peter T. Socha

Yes, I do think they will. I think that's a fair question. When I walked in this morning, I asked Sam, I said, "Okay, what are you hearing? What do I need to talk about? What are people asking about?" He said, "Guidance. Why didn't you give guidance numbers?" And I said, "Well, obviously, I didn't give guidance numbers because 6 weeks ago or 7 weeks ago the met market was different than it is today and the thermal market was different than it is today." And I asked C.K., we had breakfast on Monday morning, and he was walking me through his production numbers for the next 6 months, and I said, "If prices do this," then I gave him some numbers on thermal and met, "does that change your production mix?" And he looked at me and said, "Absolutely. Absolutely change it." So that's why we didn't go out with guidance because this market is moving, both the met and thermal are moving so quickly that I just can't see having to go out with guidance numbers to you all when it has such an impact on us. So the answer is yes, if the met market comes back strongly, then our costs would probably be going up because we'll be buying some more met coal for blending purposes, but we'll also be producing more met coal which has a higher cost comp. So yes, it will bounce.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

I guess without giving any volume numbers, since that's a very questionable, a number that changes with pricing, open tons that you kind of think about right now, how -- what's the mix of what's left that's open that could be sold or what have you?

Peter T. Socha

Very little on the thermal side. Based on current production and current market, we have very little on the thermal side to sell. Joe, what we sell on the met side, again, it's all market-dependent. But clearly, we didn't sell a whole lot this quarter and that's because of the market. We don't need to practice mining coal at a loss. Joe, do you have a comment there?

Joseph Czul

No. I think that that's well said.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. Last one for me, Peter, is just going back to the liquidity situation and evaluating options and what have you, is the vote coming up on the proxy, is that kind of the last hurdle you need to clear to maybe start to act? I mean, when you think about this strategically, it seems like you've got one thing working for you to do it sooner, which should be your liquidity today is of decent shape and your options are a little bit probably more? And the flip side maybe is as the market recovers, appetites for ability to do things start to improve. Just kind of how do you weigh the timing of all that?

Peter T. Socha

Yes, I mean, those are the 2 edges of the knife, aren't they, Jim? Do you wait for the market to recover -- the thermal market, let's just say, the thermal -- domestic thermal market improves by $5 or $7 a ton, what impact would that have on our ability to do something on the capital side? It probably would be a huge positive, I would think. But do you want to continue to run down the liquidity while you wait that out? How responsible is that? I would argue, probably not very. So I would like to get the shareholder approval through, and we have more of a bias towards action than inaction. And then trying to time the market to maximize -- we've lived with low liquidity in the past. Let me tell you something, Jim, it ain't fun. It's not fun. And I think we have a window here to fix the balance sheet and to make sure that when the market has truly recovered to a much higher level, that we're there and we're strong and we can turn things up.

Operator

Our next question comes from Michael Dudas with Sterne Agee.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

I'm just wondering what that takeover price was?

Peter T. Socha

I got to tell you when they said it, it just blew me away. I was in a hotel at Florida on this call and I'm just sitting and thinking, what are they talking about? Where is that? And they were asking about the pills, and they were asking about things like that. I was like, "Guys, I was just trying to fix the balance sheet, that's all I'm trying to do." I'm trying to fix the balance sheet and I'm trying to make sure I have a little bit more liquidity cushion than I have right now so that we can go through this third year bear market when we were set up for a 2-year bear market. So I was confused. I'll be honest with you, I was confused.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

I'm glad you clarified that with your comments in -- at least this morning.

Peter T. Socha

But didn't help because they published yesterday afternoon.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Understood. So to kind of follow-up on your last comment to Jim. Without getting the crystal ball out, but do you see the inflection points on these markets given what you would've thought 6 or 9 months ago accelerated a little bit? What do you think is really required from maybe a global and a U.S. standpoint to really kind of jar this market better looking into maybe later this year when you start to contract coal for 2014?

Peter T. Socha

Good question. Let me separate global from domestic. Global, clearly, China, has -- they came out of the gate strong, and I think they've had a pause. They've had a little bit of a pause. Europe -- and I talked about the Cyprus situation. How long does that take to move away from it? And I'll say something near and dear to your heart, and that's Lehman Brothers. It had that same shock feel to it as Lehman Brothers, and sort of how long did we take to overcome that situation. But -- so that will affect Europe. On the other hand, coal is well in the money in Europe. So coal is being burned very nicely over in Europe compared, say, to LNG or natural gas. In the U.S., I come back to my comment about it's May 1 and gas is $4.30. Mr. Market sends messages sometimes, and I'm just looking at that. And 6 months ago, there were a lot of people saying gas right now would have 2 end, and it turns out they were wrong. Now was that short covering or is that fundamentals in the market? If I look at the supply growth curve, I say, "Well, it's fundamentals. It's probably more fundamentals." It was a crowded trade. The short was a crowded trade. But when we hear from a utility like we heard last week, saying, "We're burning more than we're getting." I mean, it's a fairly simple statement, really. We're burning more than we are getting. That tells me that we may be at an inflection point.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

And that's a Central App user utility?

Peter T. Socha

That's a domestic utility.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Okay. How is India in your trips over there?

Peter T. Socha

Loved it, loved it. They have issues. So they're working through the issues. But I was on a panel on Monday night with Ben Hatfield and a couple of other folks, and it's just amazing to walk around the country and to say to people, you're in the coal business, and to have them smile and have them welcome you because they are using coal to develop their economy and to develop the quality of life for their population. So I think it's a tremendous opportunity. As I said on the last call, I think Joe has done a great job on the metallurgical side, in developing that market over a long period of time. And I think we have a good reputation and we have a good opportunity to participate in the growth of the Indian market. So I loved it. I was very happy with the trips and I'm looking forward to going back.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Which I assume, because they get -- probably got 2/3, if not more, from Indonesia in their imported?

Peter T. Socha

They get a lot from Indonesia, yes. I mean, there were a couple of senior, senior, senior people who brought up the elections and asked me about it. And I just kind of nodded like I didn't understand what they were saying because, quite frankly, I haven't looked at it a whole lot. But these were senior people. And I was at a luncheon discussion a couple of weeks ago and I asked somebody about it, and they were like, no big deal. And then somebody over in India, I mentioned it to them. I said, "Are you concerned about" -- or, they asked me, "Are you concerned about it?" I said, well -- my answer was, it would not be in their economic interest to restrict exports of coal at all or any natural resources. And the guy looked at me and said, "I got 2 words for you. Hugo Chavez." Hugo Chavez. They restricted exports coming out of their country. And the populism is going to be a big deal in that election. Whether that has any impact on the coal markets or not, I don't know. But it's got the attention of people who take Indonesian coal, I will tell you that. It's definitely got their attention. And what it does, and I heard this several times, is it creates a situation that they want to diversify their sourcing. Without a doubt. Without a doubt, that came up.

Operator

Our next question comes from Lucas Pipes with Brean Capital.

Lucas Pipes - Brean Capital LLC, Research Division

Just piggyback stuff of some of the earlier questions, but I want to kind of focus specifically on the met coal market. The outlook, you said, changed a little bit since the last time you reported. And now going forward, what do you think would turn that market specifically around? What do you think is kind of required? Where do you see the potential for upside?

Peter T. Socha

Joe?

Joseph Czul

Yes, I think what -- there's a rethinking going on now among, I guess, some producers, it would be my expectation. But the thought process for, let's just say, the past 6 to 12 months has been that the met market was in a slump and it was really quite temporary and that it was going to rebound pretty quickly. It looked like that maybe that was happening in early March. And then it did sort of have taken a bit of a turn. Now with where it is and it looks like perhaps it might stay that way for some period of time, not a protracted period, that there is going to be a reevaluation that the producers take that are currently selling below cost in order to sort of maintain market share, I mean, we sort of think that there's going to be a reevaluation there and that some high-cost coal is finally going to be taken off of the market. And so the balance will return in the relative near future, I guess, would be our expectation.

Lucas Pipes - Brean Capital LLC, Research Division

That's helpful. And in terms of your thermal coal volumes for 2014, do you have -- when would you expect to get into the market for those?

Peter T. Socha

For 2014?

Lucas Pipes - Brean Capital LLC, Research Division

For '14, yes.

Peter T. Socha

That would be the fall. That would be -- the typical buying season for us for '14 would be October, sort of early October through mid-November.

Operator

Our next question comes from Shneur Gershuni with UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

A couple of quick questions. Jim had actually asked some of them, but with respect to the cost improvements that we've seen and you'd suggested that some of it is efforts that have been taking place as well as some mix purchase coal and so forth, are there more opportunities to be able to drive costs further from where you sit today? And I understand that mix is going to change and what you sell is going to change things. But as you sort of think apple-to-apples, just produced thermal versus produced met versus produced Midwest, are there opportunities to take that down a little further as well?

Peter T. Socha

No, I mean, the guys are, as I said on the March call, having recently been out in all the mines, everybody is just incredibly focused on every dollar that they are spending, from the hot cocoa packages in the office to the steel that they use or the belting that they use. They're focused on every single item that they purchased and every hour of labor that they use. I've never seen them. As a matter fact, I put this in the slide deck on the last call, the operations today are in better shape than they've ever been. In my opinion, they're in better shape than they've ever been in the history of the company. But of course, I've only been here 10 years. But -- so they're always looking for that. So that's all I can say, is that, yes, I understand you want cost to be lower, but so do we. And it's their livelihood. I mean, these are the guys who are -- they see what the market is everyday, and they see where the stockpiles are everyday. And they're very, very focused on our costs in a good way, in a good and positive way.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I recognize everybody comes in to try and drive it as low as they can and so forth. I was just wondering if, given that we are in year 3, as you said, of this bear market, have there been some third rails that nobody would touch before? Let's say, health care or something like that, that's now up for discussion and so forth? Somewhere along those lines.

Peter T. Socha

No, we've touched health care. I mean, we've touched everything except safety. Obviously, safety and regulatory, those are third rails and you just don't touch them. But everything else has been touched. When you're locking up -- I'll give you an example. When you're locking up the hot cocoa packages in a mine office and you're putting them under lock and key, you're looking at everything.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. Fair enough. And then my follow-up question, I am not sure if it's for you or for Sam, I was just wondering if you can walk us through how you expect working capital to sort of move throughout the year? Is it draw this quarter? Is there some seasonal factors that we should be thinking about? Are you discussing with some of your suppliers as well as who you're selling to in terms of extending terms and so forth to help on the working capital side?

Peter T. Socha

No, the biggest variable will be inventory and that's a production decision. The mines, quite frankly, the mines are doing so well right now that we need to look at that everyday. But the receivables and the payables and other things like that, that's pretty much steady-state. I mean, there is changes within Q1 as you come out of the holiday period. But we're already beyond that. C.K., do you have anything to add to that?

Coy K. Lane

I think it's a good summary, Peter. I mean, we will continue to look at cost as we go forward. But I think you've -- we've looked at an awful lot of stuff already.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

So I mean -- so the draw that we saw in Q1, we should sort of think that happens throughout the balance of the year? Or do you think that just gets closer to 0 or could be a little positive.

Peter T. Socha

The draw of what?

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Your change rather in working capital.

Peter T. Socha

No, I think you should look at it as being steady -- it should be steady-state to Q1 for the balance of the year. There might be some blips, up or down, but as I said, the biggest driver will be production and inventory -- production and shipments and inventory. And that's something that we're looking at every day, and we are working with the utilities on every day on when shipments -- when do they want to schedule shipments.

Operator

Our next question comes from Chris Haberlin with Davenport & Company.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

I think earlier in your comments you mentioned that C.K had said that you're seeing additional benefits here in Q2 versus Q1. Did I hear that correctly?

Peter T. Socha

Well, you did and you didn't. In that, of the drop in costs, say, from Q4, I'll just use sequential, from Q4 to Q1, the majority of that was product mix-related. There was some -- there were some benefits there from the restructuring process. We're not seeing as much on the product mix. The product mix is not changing as much right now. We're seeing a little bit more on the result of the restructuring of the operations. So you wouldn't necessarily look at it and say costs are going to be lower in Q2 than they were in Q1 because, obviously, there's a large mix component to that. But on our internal costs that we're looking at, we're seeing a little more benefit, say, in April than we saw in February.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

So when you say the product mix isn't changing much, is that relative to Q1 or relative to Q4 where your shifting that to more...

Peter T. Socha

Q1. That would be Q1.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay, so that's a good kind of product mix?

Peter T. Socha

Yes, I mean, clearly they're going to balance, as I said, to Mike, they're going to balance based on what the product mix is. But we're seeing, obviously, when you have layoffs the way we had and you have both in the administrative area, the support function area and all, some of that involves severance pay and things like that. Well, those tend to drag out. That drags out for a period of time. We're now seeing the end of that. But the changes that C.K and the guys made, we're clearly seeing a benefit from that would be my point. But I think it would be wrong to look at the Q1 numbers and say, "Wow, Peter is saying they're doing better in Q2 than they were in Q1. So the cost will be lower in Q2." That's not what I'm saying.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay. And then, Joe, you had some commentary about, I guess, discipline from coal producers in the met market. I mean, if we continue to see prices in this $1.50 to $1.70 range through the end of the year, how much incremental production do you think we could see come off-line worldwide?

Joseph Czul

I guess, rather than sort of throw a percentage or a tons figure, I guess, I think I could just simply say that I think there's a fair amount of Australian coal that is underwater at 160 plus or minus $10. And there's certainly a fair amount of American coal that's underwater, maybe even well underwater after you include the discount that Americans generally give compared to -- not generally give, but in many cases, give against benchmark. And so rather than sort of put a figure on that, I think I would say that if even a fair amount of the volume that's underwater were to be rationalized, that the market would come back in balance.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

And I guess there's been a lot of chatter in the trade rags about seeing increased demand for some of the B coals relative to low-vols or A coals, are you all seeing that? And is that driving any change in your met mix relative to what it has been in the past?

Joseph Czul

I guess I would not really endorse what the rags are saying, simply say that there's a fair amount of experimentation being undertaken, in particular in Europe and Brazil with measures to try and lower the overall blend costs. And so we're in business to sell our customers the coal that they want to buy. And so that's what we're trying to do. So rather than force them to take something that they've taken in the past, we're trying to sell them what they want to buy. So we're trying to participate in that.

Operator

Our next question comes from Justine Fisher with Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

The question I have is on the exact kind of liquidity raising that you guys would be able to do under the -- in case this proxy vote is approved and specifically, whether you'd be able to raise liquidity just for general corporate purposes or is the issue more than...

Peter T. Socha

Justine, didn't you ask this question on the last call?

Justine Fisher - Goldman Sachs Group Inc., Research Division

No, no. In the last call, there wasn't a proxy issue. So I'm asking specifically about what you can use this for? Can you issue more shares only to -- can you issue more shares for general corporate purposes and liquidity? Or can you only do it in order to refinance near-term maturities like...

Peter T. Socha

For general corporate purposes, liquidity or to reduce debt, just the way that it's written.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And is it a onetime issuance or does it give the company the ability to just continue to issue equity as needed, let's say, for the next year or 2?

Peter T. Socha

No, I think we have it worded in there that it's very specific to a transaction or a series of transactions that we are looking at and will be completed within a fairly short period of time.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then, well, I guess, that sort of answers my last question, whether the company has been having discussions with the near-term convert holders as well in addition to just shareholders as far as raising additional liquidity.

Peter T. Socha

We talked to everyone. Yes, Justine, we talked to everyone up and down the capital structure, and we've talked to every different type of it. I got an e-mail yesterday afternoon from somebody who said, "We understand you talk to XYZ firm, which is an advisory firm." I'm like, "Yes. I talked to everybody and I publicly said that." So it's not exactly a newsflash. But one of the wire services was out there with this newsflash that we had talked to an advisory firm. I've talked to probably, I don't know, 12 or 14 different advisory firms. And quite frankly, I mean one of them, when we had the last call and when I asked for input from shareholders and bondholders, one of them told me later he was aghast that I would do that. And I sat there thinking, aghast. The only time I get a gas is when I eat a burrito. What are you talking about aghast? It turned out to be good. It turned out to be great, because I have talked to a lot of convert holders. I've talked to high-yield holders and I've talked to shareholders. And as I said on the last call, you don't necessarily -- you're not going to be just necessarily use every idea or consider every idea, but each one adds to the mosaic. Each one adds to the deliberative process where we have this option. I didn't think we had another option, but we have this option and we have that option. I think I told the story when Sam and I went to New York in January, we spent a day meeting with different people all in one conference room one after the another. And we got in the cab, and I was just absolutely exhausted after the day, but I looked at Sam, and I said, "Sam, I cannot believe how many different options we have available to us, that people are thinking about." And I still think that today, having talked to the bondholders and having talked to shareholders. People understand what the situation is in the industry. They understand what our position is and they understand what we're trying to do. And by and large, and when I say by and large, I mean like 99%, want to be helpful. They're having constructive conversations. And you always get the 1% that are just kind of moaning and groaning. But 99%, which are the ones I'm focused on, are trying to be very helpful and trying to be very constructive, and I cannot tell you how much I appreciate that.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And I just have one question on broader industry issues. I know that when people have asked utilities what they are planning on as far as long-term coal versus natural gas, some of them, I think it was Exelon who said they're planning on $4 to $6 natural gas long-term. So some of the utilities are planning for that kind of a long-term natural gas price. How does that affect how you guys view the economics of that business? I mean, costs are down, but it seems as though there is more -- there's limited room for you guys to bring costs down more. And if $4 to $6 is what the utilities are planning for, how does that change how you view the business and how you view contracting with the utilities?

Peter T. Socha

It factors into it. But honestly, I mean, I've met a lot -- how many people in August or September were calling for $2.60 natural gas or $2.25 natural gas right now. And so I just -- every time I hear a long-term planning or a steady-state pricing on things like that, I'm just -- I'm a little skeptical. I mean, we tend to keep shorter-term contracts. We're sort of in the 1 to 3-year length. We don't do things like CONSOL [ph] does or Peabody does with their huge fixed asset investments. We are more nimble than that. It's just a different business model. And so we don't tend to factor in what a long-term natural gas forecast might be. It's a good question though.

Operator

Our next question comes from Caleb Dorfman with Simmons & Company.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

So I guess first off, CapEx this quarter was pretty low. Were there -- and I know that in the past you've talked about how it had sort of been at bare bones levels. Was there any like a onetime issue that we should be thinking about, or why was it so low particularly this quarter?

Peter T. Socha

C.K.?

Coy K. Lane

Our capital is low because we managed it very closely and did some rebuilds in-house and worked on equipment in-house a little bit. We did have some development of our Mine 3B capital. So that's a onetime issue. That should finish up in Q1, in Q2. So you'll see some of that capital on getting that mine up and running. But for the most part, the folks at the mines just, really, watch what they spend.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Obviously, nice to see. I'm sure that with, I guess, transferring some equipment from other mines, you've had some savings. Do you have any excess equipment that you could possibly sell or would even be attractive to sell in this type of market?

Coy K. Lane

Well, we've got -- we have idled mines, we have transferred mine equipment around and that's been one of big cost-saving issues. We've been able to do that. And operating, of course, your best equipment. We do have some equipment that's idle right now. Not a lot, not enough to make a difference. So we haven't thought about selling it or anything.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Okay. That's helpful. And I guess, Peter, if you could touch on what you're seeing in the stoker and industrial PCI markets, are you seeing any continuing strength or increasing strength from when we last talked?

Peter T. Socha

Joe, you want to take that one?

Joseph Czul

I can't speak really much on the PCI market. It seems to have bottomed out, I guess, would be the way to say it as opposed to maybe on the coking coal side, which is certainly more volatile. And there's some signs of encouragement there that there might be a little bit of upside.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Have you seen more upside on the pricing side or actually on the volume side?

Joseph Czul

I guess I'd probably say both. But PCI is a completely different process, of course, than coking coal, other fuels can be used. And currently, with the price of other fuels, coal is oftentimes the winner, I think would be the way to say it. Whereas maybe that hasn't been the case for all of the past 12 months. So there's a little bit of upside on volume and that drags with it the price also. The improvement of the price of thermal coal also helps the price of PCI.

Operator

Our next question comes from Brandon Blossman with Tudor, Pickering, Holt.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

A couple of, hopefully, fairly easy follow-ups on Caleb's CapEx question. Just on a go-forward basis, how do we think about being able to maintain something similar to Q1 quarter-over-quarter throughout this year?

Peter T. Socha

Yes, I mean, we purposely didn't go out with guidance on those numbers. But C.K., do you want to say anything on going-forward CapEx?

Coy K. Lane

Q1 was awful low. So I think it will be hard to maintain that at that low a level going forward, but it will definitely be reduced on -- from the previous years that we have on our capital numbers.

Peter T. Socha

If you were somewhere in between Q1 and Q4, you might be -- C.K., are you okay with that?

Coy K. Lane

Yes.

Peter T. Socha

Yes, then you'd be okay.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

It obviously can't go to 0 or negative, so we have a bound there, at least.

Peter T. Socha

I think we put the bound that affected the Q1, the bottom number.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Yes, fair enough. Fair enough.

Peter T. Socha

You're like Shneur. You're just like Shneur.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Well, no, it's amazing number. So the question is how fast and much does it rebound?

Peter T. Socha

I understand.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then second follow-up, Joe, obviously, lots of interesting comments on the global met market. Specifically, it seems like supply discipline has been less than certainly anybody hoped for. What surprised you the most? Was it incremental tons coming into the market from low-cost mines or was it just folks pushing out costs or pushing out coal that obviously was more expensive to produce than it was to sell or than they could get a price for. But it seems they continue to come out into the market.

Joseph Czul

I guess I would say the willingness to sell incremental coal at really relatively low margins basically to bring on new production. Even guys that are on the lower cost side to bring on production for relatively not-so-big margins, rather than be a little more disciplined and let the market return to some reasonable level. I guess adding to that would be, I guess, we'll see what happens, but we sort of think there will be reevaluation of some production that's people have grinned and beared the pain, that we sort of think there will be a reevaluation of that now. In particular in the U.S., some higher cost production will probably come off now.

Peter T. Socha

Well, just connect between what should happen fundamentally and what has, so let's hope that does change.

Operator

Our next question comes from Brett Levy with Jefferies.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

You had said previously that -- this is just a follow-up to the previous question. You'd said previously that $70 million was maintenance CapEx. Can you like actually give specific guidance on that?

Peter T. Socha

Did we give specific guidance on that? Or -- I'm sorry, say it one more time, Brett.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

You'd said on the previous conference call that with Obama and everything else, that the maintenance level of CapEx was $70 million. And I just -- I think it should be lower than that but some...

Peter T. Socha

Yes, I think I would reiterate what we've said, I think, on Caleb's question, and that is somewhere between the Q4 number and the Q1. Q1 -- using Q1, assuming that we reused equipment and we brought things from mines to mines, one mine to another mine, that there was some of that going on. If you take a number somewhere between the Q1 and the Q4, you're okay.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

All right. And then also in terms of the utilization of your downstream operations and everything else like that, is there an implication to the downsizing in terms of the utilization there?

Peter T. Socha

On the downstream operations? Such as what? You mean on the wash plants and all?

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

Yes, exactly.

Peter T. Socha

Yes. I mean, that definitely factors in into what C.K and the guys are doing on their operations on the mines, which prep plants perform best, quite honestly, and which can be adjusted a little bit easier. But yes, it's a factor.

Operator

Our next question comes from Dave Martin of Deutsche Bank.

David S. Martin - Deutsche Bank AG, Research Division

I think I only had one remaining question and that's tied to your contract position in Central App for the year. Of the 5.9 million tons sold, could you give us a breakdown of those tons between coal types?

Peter T. Socha

It's -- I don't have it -- I don't have the specific numbers in front of me, but it's somewhere between 800,000 and 1 million of stoker, and the balance would be thermal. C.K., does that sound about right?

Joseph Czul

I think in the Central App number, that includes the met, too, Peter.

Peter T. Socha

Oh, yes, yes, yes. Joe, what number?

Joseph Czul

I don't have the sort of figures in front of me.

Peter T. Socha

David, we'll come back to you on that. Really, we'll come back to it. We'll find a way to get it out there in the public domain.

Operator

Unfortunately, that's all the time we have for questions. I'd like to turn it back over to Peter Socha for closing comments.

Peter T. Socha

Great. John, thank you for your help today. We appreciate it. And we are happy to -- again, if anyone has any questions, we really encourage shareholders, if you have questions on proposal 2, call us. I am headed out of town, but I will -- I'm going to be doing phone calls on Tuesday morning. So if anyone wants to talk, I'd be happy to talk then. So thank you, everyone. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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