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Massey Energy Company (NYSE:MEE)

Q2 2009 Earnings Call

July 29, 2009 11:00 AM ET

Executives

Roger S. Hendrickson - Director of Investor Relations

Baxter F. Phillips Jr. - President

Eric B. Tolbert - Vice President and Chief Financial Officer

Don L. Blankenship - Chairman and Chief Executive Officer

Meredith Bandy - BMO Capital Markets

Analysts

Kuni Chen - Banc of America Securities

Pearce Hammond - Simmons & Company International

Michael Dudas - Jefferies & Co.

Justine Fisher - Goldman Sachs

Jeff Cramer - UBS

John Bridges - JP Morgan Chase and Company

Jim Rollyson - Raymond James and Associates

Brett Levy - Jeffries & Co.

Luther Lu - Friedman Billings Ramsey

Paul Forward - Stifel Nicolaus

Brian Singer - Goldman Sachs

Garrett Nelson - Davenport and Company

Fritz von Carp - Sage Asset Management

Curtis Woodworth - Macquarie Research

Brian Yu - Citigroup

Marco Russo - Millennium Partners

Operator

Good morning and welcome to the Massey Energy Company Second Quarter 2009 Earnings Conference Call. Today's call contains copy writer material that may not be recorded or rebroadcast without Massey Energy Company's express permission. Your participation in our call implies consent. Please disconnect if you do not agree with these terms. Roger Hendrickson, Massey Energy's Director of Investor Relations will now provide opening remarks. Please go ahead Mr. Hendrickson.

Roger S. Hendrickson

Thanks Jackie. Good morning everybody thanks again for joining us on our second quarter conference call. We appreciate your continuing interest in Massey Energy.

As you know we distributed our second quarter press release after the market closed last night and it has been posted on our website and it has been furnished to the SEC on our Form 8-K. The members of our management team will be who'll be speaking with you today are Chairman and Chief Executive Officer, Don Blankenship; our President, Mr. Baxter Phillips and Eric Tolbert who is Vice President and Chief Financial Officer.

Also in the room with us today we have Chris Adkins, who is our Chief Operating Officer and Mark Clemens, who is Senior Vice President of Operations and from a remote location dialing in Shane Harvey, our Vice President and General Counsel.

Before we begin, I need to remind you that the statements made in this presentation which are not historical in nature, are forward-looking statements made pursuant to the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995 and are based on current factual information and certain assumptions which management currently believes to be reasonable.

Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control. Information concerned of those factors is available on the company's 2008 Annual Report on Form 10-K and other periodic filings with the SEC. In providing projections and other forward-looking statements, the company does not make and specifically disclaims any undertaking or obligation to update them. With the legal formalities out of the way I'll turn the call now overt to Mr. Baxter Phillips. Baxter?

Baxter F. Phillips Jr.

Good morning and thanks for joining us. We are pleased to be able to report on another successful quarter from Massey Energy Company. Facing difficult market conditions we have made tough decisions to ensure that we continue to operate profitably.

During the quarter we were able to selectively model higher cost operations to improve overall cost in productivity. We have reduced overtime and weekend shifts and reduced total headcount. We concluded the second quarter with a net reduction of 639 members, the number had been higher but we have begun to rehire some of those who had been laid off as we make further operational adjustments and as our market outlook begins to improve.

We currently have about 20% of underground operations on 40 hour work schedules down from the normal 50 hour roughly. Early in the second quarter this was as high as 44%. As we've stopped or reduced production at some of our less efficient operations, we have seen overall productivity improve. Our underground state of advance per share increased by 6% compared to the first quarter of the year and our surface mining ratios improved by about 3%.

These improvements helped to partially offset the impact of higher fixed costs per ton on the lower production volume. In addition to the cost cutting measures, we were also able to reduce capital expenditures in the quarter as previously we said we would. The result was a solidly profitable quarter and a significantly higher cash balance.

Given the tough conditions and more shipment volumes, we believe these were acceptable results for a challenging quarter.

Now let me turn the call over to Eric for discussion on the financial details of the second quarter.

Eric B. Tolbert

Thank you Baxter. For the second quarter of 2009, we reported net income of $20.2 million for $0.24 per diluted share compared to a net loss of $93.3 million or a loss of $1.16 per diluted share in the second quarter of 2008.

Produced tons sold, totaled 9.4 million ton in the second quarter, a decrease of 13% when compared to the second quarter 2008. Our average produced coal sales realization are $64.14 per ton in the second quarter with a $1.64 per ton lower than in the second quarter 2008. This average price decline was mostly the result of weaker product mix. Net and industrial coal shipments declined year-over-year while thermal coal shipments increased.

In the individual product categories, average prices were significantly higher for thermal coal and industrial coal shipments in the quarter as compared to a year ago. The average price for metallurgical coal declined approximately 3%. Average cash cost per ton for the second quarter 2009 was $53.68 per ton compared to $49.84 per ton reported in the second quarter of 2008. Higher fixed cost absorption on lower total volume was the major driver of the increase. This is partially offset by improvements in mining productivity.

Cash capital spending declined to $75.4 million in the second quarter compared to a $178.2 million in the same period a year ago. Depreciation, depletion and amortization were $67.6 million for the second quarter 2009, compared to $62.8 million in the second quarter 2008. This increase was attributable to the large amounts of capital assets acquired in 2008. DD&A is expected to be approximately 280 to $290 million for the full year 2009.

Cash provided by operating activities in the quarter was a $114 million. We ended the second quarter with $624.7 million in unrestricted cash, cash equivalent and short term investments. This compared to $591.6 million at the end of the first quarter and $646.4 million at December 31, 2008.

Of the June 30, 2009 total cash and cash equivalent short term investments; 609.6 million is in cash or cash equivalents, 15.1 million is invested in the reserve primary money market fund which is classified as a short term investment. We also had $99.5 million available under our asset based revolving credit facility.

Our total book debt at June 30 2009 was $1.320 billion as compared to $1.312 billion at December 31, 2008. Our total debt to book capitalization ratio declined to 52.5% at June 30, 2009 compared to 53.8% at December 31, 2008. Total net debt to book capitalization was 35.2% at June 30 compared to 35.5 at December 31, 2008.

Including an interest expense in the second quarter was a non cash interest charge of 4.6 million as a result of the accounting change except for an APB 14-1 effecting the treatment of convertible debt. Total interest related to this accounting change is estimated at $18.7 million for the full year of 2009; and it's important to note that this increase in interest charges is a non-cash expense.

Going forward we will continue to preserve liquidity control capital spending and cut operating cost as much as we can while continuing to adjust production to meet customer demand. For the full year 2009 we are tightening our guidance slightly. We now expect 2009 average price realization per ton in the range of $61.50 -- $63.50 and shipment volume of 38.5 to 40.5 million tons. We expect our cash cost to be in the range of $51.50 to $53 per ton for the full year. Other income is expected to be in the range of 75 to $100 million.

Capital spending which was down significantly in the first half of the year will be reduced even further in the next several quarters. For the full year 2009, we are maintaining our CapEx estimates at $300 million or less.

Finally, you should expect our book income tax rate for the year to about 22 to 23% which is what it was in the first half. With the results within these guidance ranges, we expect to position ourselves with an enviable liquidity position, lower cost and an improved competitive position in 2010.

Based on our current market view, we now expect produced coal shipments for 2010 to be in the range of 37 to 42 million tons. This is an increase of 2 million tons at both low-end and high-end of the range we provide at the end of first quarter. Other elements of our guidance for 2010 has not changed. We still expect average sales prices in the range of 60 to $65 per ton, cash cost per ton is anticipated to be in the range of 48 to $52 per ton and capital expenditures are still expected to be in the range of 100 to $200 million for the full year of 2010 which would be significant as well in our normal maintenance CapEx levels.

Now at this time let me turn the call over to Don.

Don L. Blankenship

Thank you Eric. Before we take your questions, let me take a few minutes to share my thoughts on our outlook for the rest of 2009 and 2010. We are obviously encouraged by the positive news we are hearing at the Asian markets. China report economic growth of 7.9% in the second quarter. We have seen some estimates recently that China maybe a net importer of as much 50 million tons of met coal for the year. This news has helped solidify and improve met coal prices.

India's steel production was up over 9% in May compared to May of 2008 and total production for the first five months of the year exceeded levels for the same period last year. As a result we are seeing increased demand for our met coal products in this important market.

Also in India we have seen reports suggesting that utility stock piles of thermal coal are as low as two days of burn in some areas, their increasing electrification and overall economic growth will inevitably lead to increase in thermal coal imports. As China and India consume more coal we believe our opportunity may be greater to sell our coal directly into thee markets or to displace Australian and South African coal in the Atlantic Basin market as that production remains in Asia.

We are well positioned in terms of product quality proximity to the ports and the ability to ramp up production quickly if necessary to take full advantage of this type of opportunity. Conditions however different in the US markets. Utility stock piles remain high, demand for electric power remains low, due to the soft economy in cooler summer weather. Furthermore, coal burn is down as result of some switching to natural gas.

Unfortunately, current US policies which have increased focus on so called green energy subsidies and which are environmental standards continue to make US products less competitive than the world marketplace. Therefore the US economy slow growth is no surprise as developing countries around the world fuel their economies by utilizing low cost coal.

The coal industry reaction to the weak domestic market and the demand has been significant as producers have scaled back production. Central Appalachian production was down by nearly 14% in the second quarter, trailing 5% in the first quarter. So, the rate of cut backs seems to be accelerating.

It is important to note that Massey gained significant market share in the domestic staying co-market in the first half of the year. Our shipments increased by 8% while total coal shipments were now by 7%. While the production cutbacks in cap have been meaningful to date we believe far more lot ahead for domestic steam coal some cutbacks will be implemented voluntarily, but more production will be forced to close due to increasing cost, falling prices, and lack of capital.

We were extremely pleased to finally receive permission to begin work on the valley of those sites who's permits have been delayed through litigation, in the West Virginian Federal Courts, the so-called Chambers litigation. These four permit cover approximately 100 million tons of reserves that can now be mined by extending existing operations over next several years and using mostly existing infrastructure.

These permits will also help to lower COGS. Our visibility into 2010 is improving as sales activity and total sales commitments have increased. We presently have commitments for approximately 37,210,000 tons, 31 million tons of which have been agreed as to priced. The committed unpriced terms are more than 50% metallurgical coal; approximately four million of the tons are at various stages of contract finalization. Some contracts do have limitations that are dependent upon the customer's total volume requirement.

Eric, went over our guidance with you with results anticipated in the ranges he provided. We remain our we maintain our expectations in generating positive free cash flow for the full year 2009 and again in 2010. This concludes our prepared comments, we'll be happy now to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Thank you our first question is coming from Kuni Chen of Banc of America Securities.

Kuni Chen - Banc of America Securities

Hi god morning everybody.

Eric Tolbert

Good morning.

Kuni Chen - Banc of America Securities

I guess just first off on met coal I noticed that one of your peers had a sequential decline in met coal realizations while your pricing was up a bit. Seems a little kind of intuitive as some of the '08 pricing probably rolls off. So can you help us reconcile that difference in the trends, is that due to some shift in the mix or export sales just hoping for some more color? Thanks.

Don Blankenship

Yeah, it's hard spot of things so it's difficult to but essentially we had a lot of tons that had not been taken in the original time frame of April 1. So we had some carry over the half past tons in the second quarter. We also had some value out of an agreement or settlement with one of the customers.

And we had some offsetting revenue resulting from some customers that were renegotiating some contracts if you will, that we have to take some or give them some breaks. So it's hotchpotch of things but we feel like its representative of the second quarter. And I think if you look at our projections in the second half it will be down some sort of consistent with the other companies you are referring to.

Kuni Chen - Banc of America Securities

Right, okay and then just as a follow-up on your -- can you give us an update on expected met coal volumes for the year. Are you still in that 7 to 7.5 million range? Obviously steel utilization rates are now starting to recover, so just hoping for an update there?

Don Blankenship

Yes, constantly move being just even sense, no regret to lot of the stuffs that we put out, we've had some further request for tonnage that we didn't expect, so, I think there will be to the higher side of that range if not slightly higher than the range about in the year, so we're encourage by some of the shipment schedules that we're now being provided.

Kuni Chen - Banc of America Securities

Thanks I'll turn it over.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Pearce Hammond of Simmons and Company.

Pearce Hammond - Simmons & Company International

Yeah. Great quarter Don.

Don Blankenship

Thank you.

Pearce Hammond - Simmons & Company International

Don, on utility double contracting right now, how much activity are you seeing specifically for 2010 and then if you can provide some rough indication where you see pricing for thermal contracts?

Don Blankenship

I think that it's a slow at this time of the year for succeeding years that I've seen, and my two decades have been familiar with it so it's slow. Inventories are high domestically. Prices will still be in the $60 range for 12 to 12.3 central coal because people can't get it out of the ground on average for less than that.

So the COGS (ph) have fundamentally changed over what they were four or five years ago and that will keep the price high than it was three or four, five years ago down market. But the market is very soft because everything, its imperfect storm, on the other hand, you know the news we are seeing out of India and China and optionally around the world or if you have the demand for export central at steam coal that can change the picture very quickly if we could get some of the volume off through non-traditional markets, the inventories aren't so large that it couldn't jerk them back in place pretty quick.

Pearce Hammond - Simmons & Company International

Thank you and then on the permits, you've taken up your shipment guidance for 2010. Is that -- should I read into that, that that's some confidence on securing permits or is it just a case that the permitting issue doesn't effect Massey until beyond 2010 and because, one your competitors public companies mentioned yesterday that they could have some impact if they were unable to secure some permits for the back half of 2010 production?

Don Blankenship

We are fortunate with the permits that led the charge always gives us the negative publicity, the big Massey permits that are up front and of course getting through the chambers thing they're now not in the same box, that the famous 108 permits or whatever. So we feel like we have pretty good situation relative to the average. But we probably have enough idle capacity that even without that we would not have had a volume problem at 40 million ton level in 2010. We would had a volume problem at the 48 million ton level but we've where we've kept back in response to the market we had some dry powder so to speak.

Pearce Hammond - Simmons & Company International

And what steps does the industry try to take to break the law jam on the permits?

Don Blankenship

Well there'll be a lot of PR work then, and but there'll be a lot of lobbying. I find it hard to believe that today that utilities will be without coal. So whatever they burn they're going to get it one way or the other. We look at the user side as being more important if you will, because the coal that has to be delivered and will get the electricity in I think that are so eventually I think that will trump some of this other stuff.

Pearce Hammond - Simmons & Company International

Thank you.

Don Blankenship

Thank you.

Operator

Thank you and our next question is coming from Michael Dudas of Jefferies & Co.

Michael Dudas - Jefferies & Co.

Good morning gentlemen.

Don Blankenship

Hey Mike.

Eric Tolbert

Hey Mike.

Michael Dudas - Jefferies & Co.

Don your essay on the American thinkers a must read I think for investors and energy observers. That was published the other day. Could you maybe share a little bit of your thoughts about what your -- why the essay, and are some of the messages that you maybe putting forth, you think there is any traction relative to Washington or industry users, producers of energy in general to kind of push towards a different thought on these legislative opportunities?

Don Blankenship

Yeah, for others on the phone, that might not know what Mike's referring to I think is the article I wrote that referred to global warming as a superstition. So I want to see that it is still advocates that position but I do it on my review of the math and the facts of the temperatures and so forth. So I don't do it lightly, I'll not say that -- I know that it's not a politically correct position in many places, but now on evaluation and analysis, I'm confident that global warming is not the issue of today.

I think that it's important, I think speaking out for the next six months will be very important because basically a 100 people are going to decide whether the other 300 million Americans are going to have a cost for electricity to compete on a very competitive world market and we owe it to our coal miners and our stockholders and everyone else to speak out what we believe is accurate and I do believe its accurate that global warming is highly in doubt and even if it were true, there's nothing United States can do about.

Michael Dudas - Jefferies & Co.

Don, as you look forward now given what's happening in the Asian markets and the world global coal flows, do you anticipate Massey's mix of shipments to the international market improving dramatically through the thermal and the cooking coal side and is that a thread that's probably your other coal given some of the issues we are seeing the US?

Don Blankenship

I think if you are focused beyond quarter-to-quarter and you're thinking about making an investment and thinking about a coal company for five or 10 years that I think the dynamics could change tremendously. By way of simple explanation, the world may move six to nine million tons of coal use in the next 10-15 years and 3 billion ton increase, its going to be hard to achieve for the world without full utilization of every coal basin.

So, we think that could well mean that Massey's mix of export domestic could change with what we view the world situation being, we get rather long with it and therefore we're looking at that and we're trying to make sure that we are prepared for that possibility and we thank at all for this tremendous opportunity.

Michael Dudas - Jefferies & Co.

One final follow up Don, over the next six to nine months, do you anticipate we're going to see more deals like what you structured in the foundation asset swap or will it be lot more distress assets that Massey will be looking to pick up as you move forward.

Don Blankenship

I think that the trade you have to have the synergy that makes it make a lot of sense with foundation and Massey had in this particular situation. There is tremendous synergy for them to have our property and have us to have ours where you simply, though the property we had was next to them and their property was next to us, so you'll have that occasionally but its obvious there is going to be change in the valuation of a lot of the assets once their high price business expires -- they meaning the industry. When the coal companies or the industry run out of the process that have been supported by prior years markets there will be devalued assets available. Absent the exports team market picking up and throwing that accrued.

Michael Dudas - Jefferies & Co.

Thank you Don.

Don Blankenship

Thank you.

Operator

Thank you our next question is coming from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs

Good morning.

Don Blankenship

Hi.

Eric Tolbert

Good morning.

Justine Fisher - Goldman Sachs

One follow up on the foundation assets I see the point that your assets was contiguous to their and theirs were contiguous to yours, but weren't they shutting down the lower three complex because it was too high cost? And so from the sort of cost to production and what was the incentive from them to acquire those ?

Don Blankenship

Everybody that runs a coal mine has a higher cost than we have. So we won't we were trading for lower cost too often, but the thing basically is that we were reserve and one thing that we picked up was particularly attracted to was a permitted extension of our surface lines and low accounting.

So they were running basically too deep mines to head some age on them and were being victimized by the new ventilation and shelter and seal rules. So those operations are a significant or are meaningful parts of our plans were intending to operate the surface mine that was permitted and then have the other reserves and inventory for our properties later on.

Justine Fisher - Goldman Sachs

Okay, so the fact that you guys can access those reserves via different type of mining method means lower cost for you?

Don Blankenship

Yes we can haul some of the coal off road for example to our existing load off foundations and they in reverse can do similar things with their reserves. So the deep mines that were hacked off and were being shut down were again pretty much victim of age and the new laws and we don't intend to run them.

Justine Fisher - Goldman Sachs

Okay, that's makes sense. And then the next question is just on the production outlets for 2010, its interesting but not too surprising that you guys have gained steam coal market share and I guess quite of the steam production increase for 2010 has probably continued share gains from smaller mines that continue to shut down. But what kind of market indicators, the utility inventories are pricing. Can we look for further production increases from you guys maybe kind of restart some of the higher CapEx levels that we saw over the last year, I mean is that a 2011 event?

Don Blankenship

I think at the earliest it would be a 2011 event again, absent the exports team market changing. I hate to keep coming back to that, but when you're using 5 billion tons around the world, you usually get reasonable freight rates and a weak dollar, the math can change very quickly. And I don't know which way the dollar's going to go, there's a lot of people on the phone who know better than I do but the weak dollar can make a big difference in that marketplace and the absence of that happening, I doubt you'll see us able to ramp up our utility business and before '011 if not longer.

Justine Fisher - Goldman Sachs

Okay and then the last question I have is on the cash balance of...we agree that the company should probably pretty cash flow generative over the next couple of years and a high cash balance always is a good thing for current investors, but there is always a sense of nervousness about what that cash could be use for of specially when there's just asset for they come under to the market, I mean we're seeing M&A alter in the industry, is it the company's desire to use that cash for share repurchases or for acquisitions or should credit investors be comfortable that much of it looks down the balance sheet for a rainy day?

Don Blankenship

Well I think that much of it will stay on the net balance sheet for a rainy day but we've never had this much liquidity. So we're constantly looking at -- we know that everybody has a different opinion as what a balance sheet should look like and obviously we like a conservative balance sheet given the capital markets that we've been in for a nice while. So in your answer I think we're comfortable with a couple of 100 million less liquidity, less cash, if the right opportunity was out there to invest it. But not knowing where the stock price is going to be and not knowing what assets are going to be available we really can't prejudge

Justine Fisher - Goldman Sachs

Great thanks so much I appreciate it

Don Blankenship

Thank you

Operator

Thank you our next question is coming from Jeff Cramer of UBS

Jeff Cramer - UBS

Hi good morning

Don Blankenship

Good morning Jeff.

Jeff Cramer - UBS

Just following up on the volumes for 2010, was there, as far as the increase, the two million ton increase. Do you think that most of that going to the sea (ph) market or the met market what's the mix shift there?

Don Blankenship

The net volume didn't change much in those numbers, I think its probably fairly well split, the only reason we increased it was that we sold some coal since the last quarter and firmed some shipment schedules and got a couple of deals that we didn't expect to get quite frankly. So, it's solid as far as the increase over the last quarter projection.

Jeff Cramer - UBS

Okay. And just in terms of the revenue that was obviously uplifted as well, are there certain items in that you consider one time or is that I guess how sustainable is that run rate?

Don Blankenship

You are talking about the run rate as '010 versus '09 or...?

Jeff Cramer - UBS

Sure.

Don Blankenship

Yeah. What's really happening in the big picture '010 over '09 is, in '09 we have quite a, I guess inventory or portfolio of high priced met contracts and lower steam coals. But when you start shipping 25 or 30 million tons of steam coal with a few dollars more in '10 because we had so much below market coal this year. If you're referring to the other income, the other income is something that we can't predict at all.

Jeff Cramer - UBS

Okay so that's second half of '09 it's...

Don Blankenship

As far as the other income in the second half of '09 I think we have enough visibility to know that will be very comfortable to the first half of '09.

Jeff Cramer - UBS

There aren't certain one time items in there or..?

Don Blankenship

Well there will be one time items, but internally we pretty well know what those one time items will be. So we will -- the other income line in the first type of '09 and the other income line in the second half of '09 should be reasonably close to one another. But we only know that because we know what deals are in the works. On the 2010 we have less visibility.

Jeff Cramer - UBS

Okay. Thank you.

Don Blankenship

Thank you.

Operator

Thank you and next question is coming from John Bridges of JP Morgan Chase and Company.

John Bridges - JP Morgan Chase and Company

Hi Don, John Bridges. Just wondering if you could talk a little bit about the potential attrition of the smaller miners. We know a lot more now about what the new safety rigs are going to be and for some of the smaller guys, those cost look pretty heavy, what do you see happening in the second half into next year?

Don Blankenship

I think there will be a lot of people trying to slide through '09. The implementation dates and exactly what the shelter has to be and which shelters are approved and some disparity between the states as to what the law is there's some confusion there, and a lot of the small guys will try to at least get through '09, without having to spend all the capital. Its -- so it will cause, the new laws will cause some mines that finish up in '09 not to continue in '10 I suspect.

And it's very hard to predict it by saying its big companies and small companies. It's probably more relative to the size of the -- and age of the coal mine than it is the size of the company. If you've got a mine that's three or four miles deep and you've got to make it complaint with new laws a whole of whole different and more than (ph) if it's half a mile deep. But you will see if, I hope I am being responsive, you'll see more and more mines drop off as you go through the second half of the year.

John Bridges - JP Morgan Chase and Company

Now look Don, if are you having difficulty with it, then you can just imagine how difficult this is from our side. And then..

Don Blankenship

Great.

John Bridges - JP Morgan Chase and Company

And then just house keeping, is it possible for you too breakdown the percentage of continuous mine along was at this quarter and then maybe for the second half?

Don Blankenship

We have had over long walls would be running out of from most of the second quarter and but for the two half's the volumes won't be much different probably will run 1.4 million in the second half off the walls. So out of the 20 -- using 20 million to make it easy will probably about 1.4 million off the walls and maybe a million off a high wall mine that's 2.4, I don't know maybe nine off the surface mines and rest were offered in little deep mines.

John Bridges - JP Morgan Chase and Company

That's great, thanks a lot. And congratulations on your results.

Don Blankenship

Thank you.

Operator

Thank you your next question is coming from Jim Rollyson of Raymond James and Associates.

Jim Rollyson - Raymond James and Associates

Hey good morning Don everyone. Don going back to the exports stuff since you brought it up a lot you are you actually seeing kind of opportunities for that's today or is it just more of a anticipatory statement of what might happen as you get into 2010, '11, '12, and kind of beyond.

Don Blankenship

As to the utility export side, it's just a heads up that what just considered as soft Central Appalachian steam market which is only a 160 million ton market that begins at 0.5 million ton world market can change over night, if the dollar changes the freight rates the oil prices.

So, if we're ahead of that solely forecasted to 2010, '11 utility market will be really bad for Central App, what you think it is. They have absent something like that happening but that's happened before, so we're trying to make sure that it's not ignored by those that are trying to forecast, but not lot of head.

We have seen not any spot pricing on the export market or any specific orders but we have seen signs that the utilities around the world are looking to diversify strategically, their co-supply and looking at how they will supply new power plants that are in motion. So you see more conversation about we're going to build a plant, let us go out and kick some tiers and see where the coal might come from and also some concern about diversity.

Jim Rollyson - Raymond James and Associates

That's very helpful and on the net side obviously there's been a lot of positive data points in the last few weeks, couple of months. Can you maybe talk about what you're seeing and hearing? Kind of how pricing is faring there and do you think there's maybe any upside to your pricing outlook at second half and next year based on what you're seeing?

Don Blankenship

Just a week ago, I told you that on the domestic met side, we thought we were pretty well, we were going to be, but we have seen two significant accounts change their shipments schedule positively at and even at some fairly healthy prices. So I don't think we are going to sell anymore coal at high prices but I think people that have commitments to us appear to be more able to fulfill those commitments and so therefore you could see a better volume and second half met situation than we forecasted. On utility side the -- again absent something export I expected to very ugly for the next 18 months as far as new sales but that's one reason we like our situation.

Jim Rollyson - Raymond James and Associates

Perfect thank you and a great quarter.

Don Blankenship

Thank you.

Operator

Thank you. Our next questions is coming from Brett Levy of Jeffries & Company.

Brett Levy - Jeffries & Co.

Hey guys just a final a little bit on the met coal side can you guys talk a little bit about what portion of the 4 million tons that you hoped to get committed before the start of 2010? And then you know hearing spot prices well above the current -- but as well was this year's contract price. No where near last year's, can you talk a little bit about the type of levels you're seeing for potential contract prices for met coal in 2010?

Don Blankenship

Well we always talk about met coal finances because we're obviously placed on the gains, we're in the middle of a lot of negotiations. So, prefer not to say too much except that I agree that the prices have recovered and that we believe that we are particularly strong in Asia and we're seeing signs that Chinese and Indian situation is beginning to pull on the Central Apps supplies. Other than the fact the we agree with you to this moving and that the fact that we've got a lot of negotiations to do, I'd rather not through our numbers right now because it's a very sensitive time for us.

Brett Levy - Jeffries & Co.

How about the percentage of the four million, you think you have locked up by the end of 2009?

Don Blankenship

Nearly all of it, a lot of those terms are at times we're worth the income and still companies don't like to switch goals unless there is a compelling reason to do so because it changes their whole plan, if you've got five different coals, and you blindly take one of them out, then you got to lift the whole blime so then you got to redo everything, so we feel pretty good there's no tons on that essentially in corporate sense.

Brett Levy - Jeffries & Co.

And the last one is again on the net say, given the high cash balances effected, one of your competitors just upsized the deal and price it at the low end of price starts for the GAAP markets might be open a little bit more, you talked in the past about wanting to significantly increase your met flow reserves. Will you say met coal is an area of particular interest in terms of some tuck-in acquisitions?

Don Blankenship

Because it is in loan, I'll give you little history back in the 80s, late 80s when I became President of Massey, we were the only company at Saint that believed in met coal, because the theories then was that never be another in was never been another coal build in the United States and met coal would suddenly shift dollar extinct coal but we went on a controlling strategy then and today we have more than a billion tons of metallurgical coal which is the largest metallurgical coal reserve over in the Western hemisphere I suspect.

So we believe in it. My ideas weren't very scientific, it was that you couldn't use scrap to make steel forever because eventually you had to have more steel in use than you could recycle. So we think that what we are seeing in the India and China and the rest of Asia or so forth means that that's a great position to be in because met coal is far more scarce than utility coal and the flexibility is not nearly as great and so we believe that met coal has a tremendous value and the answer then would be yes, that we would continue to seek out and buy the valid met coal reserves in the market levels.

Brett Levy - Jeffries & Co.

Thanks, keep up the good work.

Don Blankenship

Thank you.

Operator

Thank you, our next question is coming from Luther Lu of FBR Capital Markets.

Luther Lu - Friedman Billings Ramsey

Good morning Don.

Don Blankenship

Hey, how are you doing?

Luther Lu - Friedman Billings Ramsey

Good. You gave the contract positions for 2010. Could you indulge us and give us the average realization in price for the thermal and met coal?

Don Blankenship

Looking over here, my guys and to ask them, but you're talking about the 2010 average process for utility and for met coals is that what you're?

Luther Lu - Friedman Billings Ramsey

Yes.

Don Blankenship

You want to do it, or not?

Eric Tolbert

It is given in the press release.

Don Blankenship

Yeah, it's in the press release. Is that what you want me to say?

Luther Lu - Friedman Billings Ramsey

No, I mean, that's the range, right? Just wondering if you can...

Don Blankenship

Oh, you're talking about the sold middle tons versus the unsold tons?

Luther Lu - Friedman Billings Ramsey

Yes.

Don Blankenship

I don't know it, the met coal where we are talking about four million ton and four million to this and if we give the sold average and the total average then we are given the unsold average. So its such a small market, I am a little bit -- I don't want to damage our possibilities for the shareholders by being in that specific if its all right.

Luther Lu - Friedman Billings Ramsey

Okay well could you then provide a little bit color on thermal coal?

Don Blankenship

Yeah I think we could probably do that more safely because it's such a large market. But I don't have the numbers, Eric do you have some numbers that you can help with that?

Eric Tolbert

Yes Sir, we've got the -- just giving you a kind of a range, its in the mid to high 50's. I am talking about the 57 to $59 range. I think that's probably close enough.

Luther Lu - Friedman Billings Ramsey

Okay well that's sound good, thank you for that and my next question is, Don when you look at the utility, do you have a rough idea of just how contracts are there for 2010 and 2011?

Don Blankenship

I think that probably very latently contracted for 2011. I would say they need to buy a lot of 2011 goal, 2010 I would suspect given the inventory levels and burn rates that and what they have differed or carried over from '09 to '010 that they don't need to buy a lot of coal, I'd be surprised if they need to buy more than 10% as an industry so if you call that market 160 million, if there was 10 to 20 million tons on volatile, I'd be surprised or probably less than that.

Luther Lu - Friedman Billings Ramsey

Okay and so given that are they giving you guys well given the coal units rate in general a good price so that they will keep their supply in place or that they're looking out at the natural gas price and say this is 50 is as much as they can pay?

Don Blankenship

I think they're doing everything from looking at gas, to looking at how much working capital they want to have and inventory ask themselves whether maybe they ought buy now and maintain a large inventory. So that when the market does turn they've got a large inventory to burn off that they didn't pay much for. But each of them has a different circumstances as far as availability to use gas or borrow electricity for that matter. So its hard to describe it generically.

Luther Lu - Friedman Billings Ramsey

Okay. Got you, thank you very much.

Don Blankenship

Thank you.

Operator

Thank you, our next question is coming from Paul Forward of Stifel Nicolaus.

Paul Forward - Stifel Nicolaus

Good morning.

Don Blankenship

Hi, Paul.

Eric Tolbert

Good morning Paul.

Paul Forward - Stifel Nicolaus

On the capital spending range in 2010, I think in the past you expressed an interest in keeping that spending towards the bottom of that 100 to $200 million range or toward the low end. Just wondering if you could still do that considering the additional two million tons in your production guidance for next year?

Don Blankenship

I think its an excellent question and thought you know we -- it could be an impact although we have that much in our capacity. Totally adjusting on capital because the operators always want more capital and I think your question and the simple answer would be, it would be far more difficult. But we didn't raise it because we're not certain, where the market will be at the half side but the volume range we got it to at the low side a 100 might be possible if the half you're correct is probing on?

Paul Forward - Stifel Nicolaus

Okay, and then on the eight million tons of met coal for next year, where would your ability there to increase that number above the eight. Can you quantify how much you might be able to do if in fact you get a significantly stronger net market than you've got right now?

Don Blankenship

You know if you're here in the lead time, if the market we are strong say within three months you can probably get 10 million ton but whether the market, you know the market didn't strengthen until April 1is new export season of course that would hit that number almost again. So it depends on when it strengthens but there's probably a couple of million tons in there if we knew it in the next ninety days or so.

Paul Forward - Stifel Nicolaus

Okay well thanks very much.

Don Blankenship

Thank you.

Operator

Our next question is coming from Meredith Bandy of BMO Capital Markets.

Meredith Bandy

Hi good afternoon everybody, can I just ask you, no, I'm not commenting on where you thought that market would go but just what do you think your maximum capacity could be without a; additional CapEx and also without running into the some of the permanent issues you were talking about earlier.

Don Blankenship

Well the CapEx, I mean if you're talking $200 million, we could probably get a 44, 45 range if not higher. The only thing you get into that you that's directly related to more volume on capital is mine development and the obstruction drives; we've got quite a bit of addled underground equipment and surface line equipment that we would -- if we were advancing the mines incur a capital of infrastructure that's necessary to do that.

So I think that would probably be the only thing that would move the capital if you set your up spend above 200 million, 250-300 million you're going to get property of somewhere like a million tons for every $100 million. So it gets to be pretty big of about 45 million tons.

Meredith Bandy - BMO Capital Markets

Okay. And the permitting issues?

Don Blankenship

Permitting issues, probably wouldn't bother us till 45 or 46 million tons. Again as I think Baxter alluded to we're running some mines, four days a week. We've got some mines out of both surface and deep and we're not running on weekends; hardly at all. So, we would be able to use existing active mines and not need additional permits.

Meredith Bandy - BMO Capital Markets

Okay. And if I could you mentioned, Don, possibly being able to sell more into directly into Asia, and I was wondering how much is any of your products now is going into Asia? And then more generally what are your met exports versus domestic these days and where are the export tons going these days because obviously the met marketed has been changing a lot?

Don Blankenship

No I would say that they're looking to see if they can find in some top my head I would say we're going to get close to 50% moving to Asia as opposed to used to be sometimes letting anything going to Asia.

Meredith Bandy - BMO Capital Markets

50% going to Asia, by what -- kind of like you say eventually or would this be...?

Don Blankenship

On a forward run rate.

Meredith Bandy - BMO Capital Markets

Okay. And is that where you are now or not really?

Don Blankenship

Well, that's where we will be in the second half I think but ...

Meredith Bandy - BMO Capital Markets

Okay. Okay. That's great. Thank you.

Don Blankenship

Thank you.

Operator

Thank you and next question is coming from Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs

Thank you. Good morning.

Don Blankenship

Hi Brian.

Brian Singer - Goldman Sachs

When you highlight the increase you've received from European customers from met coal, are they preparing for what they might do with Australian cargos, say remain in Asia or are they seeing as cargos not show up now are making them more willing to look for alternative supply in the near term?

Don Blankenship

We've not had anyone such as to turn out yet adequate coal from their existing suppliers Australia or wherever. But as the Chinese import more coal and the commitments from Australia and elsewhere are fulfilled, I think that that is more likely to be an April 1 -- new year issue which of course that's now only about five months away from negotiation. So, I think its more forward-looking than it is any problem at current time.

Brian Singer - Goldman Sachs

Got it, thanks, and I guess if I could maybe just ask a very broad pricing related question. Can you give us a sense on the benchmarks in Asia, the rumored stock prices in Asia and whether that is relevant in the negotiations that you're having?

Don Blankenship

Well, they're relevant although the volatility of the is a huge factor, as far as what you price is over there. But I again prefer not to throw up any specific numbers. But the market went down from whatever it was the 127, 129 markets per ton now it's going in the other direction so we're hoping before we commit in tons that we will see, numbers north of 129 though.

Brian Singer - Goldman Sachs

Great, thanks. And then lastly really following up one of the earlier question on potential acquisitions, I think you mentioned a couple of 100 million in cash is what you'll be willing to use correctness. There was a misinterpretation of that you still focused to mainly on coal assets or you looking at natural gas or other opportunity?

Don Blankenship

No, we're looking at natural gas and coal in terms of strategically. We don't have specific things in mind yet, but we're trying to look at diversifying a little bit in terms of those two fuels. And then we're are also of course still heavily involved in trying to figure out International production whether it be through the SRJV or whether it be in some other form.

Brian Singer - Goldman Sachs

Great thank you.

Don Blankenship

Thank you.

Operator

Thank you your next questions coming from Garrett Nelson of Davenport and Company.

Garrett Nelson - Davenport and Company

Good morning everyone.

Don Blankenship

Good morning.

Garrett Nelson - Davenport and Company

I know were asked about the sequential increase in met realizations but your industrial realizations jumped about 8% from the first quarter actually a record realization for any quarter. Could you provide any detail on that or what we should be expecting in the back half?

Don Blankenship

Mark or Eric may have some numbers about the back half but I will tell you, one of the advantages to having sold our coal too cheap in '09 '08 as it looks like the price went up in '09 a lot of that -- we had -- we were way below the market on some of the industrial business in '08 and some of it's just -- even though the spot market's down our price is up so to speak. Eric do you have anything particular on the question?

Eric Tolbert

Not specifically Don. I would say that of course our industrial volumes are less than thermal and met a littler more volatility in that pricing and just looking at the overall year aspect that the second quarter is probably a couple of dollars higher than what you'll see for the full year in the industrial.

Garrett Nelson - Davenport and Company

Okay and should we expect any increase in volumes over the second quarter rate?

Don Blankenship

I don't think the volumes would change and I think the second half pricing and volumes will be pretty similar to one another and not meaningful, particularly to the whole thing but the -- of course the industrial segment of the American business is struggling quite a bit. So it's hard really to make a judgment on it. So we don't think it will be much different in the second half and the first half either in terms of volume or price?

Garrett Nelson - Davenport and Company

Okay. I know it's ways off but could you also give us an idea of what your commitments currently look like for 2011?

Don Blankenship

We're wondering where and how specific we should because we have not given a lot of guidance but I think that I could just state that we have a lot of unsold tons and let me see what the percentage just a SEC. Yeah, we're probably more than 50% and so probably if you said we were 50-50 on a 40 million ton base that's about or we would be as...

Garrett Nelson - Davenport and Company

Okay. And I assume, the vast majority of the commitments are on the utility side?

Don Blankenship

That's correct every little metallurgical commitments in terms of contract and price. We have some commitments, but we don't know what the price is going to be.

Garrett Nelson - Davenport and Company

Okay. Great, thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Fritz von Carp of Sage Asset Management

Fritz Carp - Sage Asset Management

Yeah hi good morning guys I was wondering on this conversation about the pull on the steam side the pull of the Appalachian thermal to Europe, China, South African coal out of Europe and so forth. Usually I watch the AP2 benchmark for European -- West European coal prices given where your -- given where shipping is and the exchange rates and everything else.

What would be the breakeven -- what price would we need to see and given where U.S. coke prices are or where you think it would be attractive for you to enter into a new contract with a new buyer what AP2 price how high does that have to be in order to make it worthwhile to bring the coal out of the United States and into Europe? Given the transport and to get the paper to U.S. coal everything else?

Don Blankenship

I don't know if I have all that in front of me but I'd say that we need to be in the $85 FOBT metric ton price when you look at -- its on the 1105 -- so its sort of partially a bad product to offer. So for surface make a lot different and some of the other, but I don't know what that translates to because I don't allow them to talk to me in terms of those AP numbers I have to eventually get it back to the mines and make that judgment and probably has to be close to 55-$60 of demand, 85-$90 FOBT metric ton.

Fritz Carp - Sage Asset Management

If you spend $100 FOBT -- the terminal and on, where is it today, how does that compare and what are the -- I mean its is it fair to say that Europe won't have any affect on our pricing until the AP2 gets high enough to a awful level?

Don Blankenship

It's been probably $15 below where it would need to be to be attractive but its also been very erratic; so it only takes be in one ton short for it to change over that of course 10% change in the currency say to $9. So that's just a lot of moving parts and a lot of volatility and when you look at how weak the broad economy has been and then it stayed more I guess more near and acceptable level than I thought it would.

Fritz Carp - Sage Asset Management

Okay, thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Curt Woodworth, of Macquarie.

Curtis Woodworth - Macquarie Research

Yeah, hi good afternoon.

Don Blankenship

Hi Curt.

Curtis Woodworth - Macquarie Research

Don if you look at your thermal performance in the first half of the year up 8% volume the markets down seven, you know to me it would seem like your market share opportunity is only getting greater as we get into the back half of this year and certainly next year, specially considering you have now that is the permit issue somewhat behind you and a lot of the distracting accelerating from the guys in Central Apps.

So number one do you agree with that? And if you look at Central App and you say 30% of production there is from these real small producers they're one million or below in production. How much of that do you think would be up for grabs on a market share basis for you and some of the other public players next year?

Don Blankenship

I think next year less than the following year. I think what will happen I don't know if I can characterize this very easily but in 2010 the utilities will get their coal out the inventory and coal steep will go down. And then in 2011 people they take coal to down by burning off their inventory won't be there to feel the true match between the burn and the shipments. And that's when our percent of the market should increase.

So if you said our example that we had 30 million out of 160 million steam tons in 2010 and say they have to go back to run rate of 170, 180 or whatever then we should get a really huge percent of that increase, because we'll both be in motion and have the cash and have the assets and so forth to do that.

So I look for a bigger opportunity to pick up percent of the market in '11 than I do in '10. And having said that percent may be pretty decent in '10 but not of the burn perhaps of the shipments, but of the burn.

Curtis Woodworth - Macquarie Research

Okay. And then in terms of the permits that you ordered for the 100 million tons, I believe that there is configures to your current mining operations and if you're running roughly I think 20 million tons surface today. Does that basically gives you almost a five year window visibility before the permit issue would really become more of the hindrance to expanding production or what's the best way to think about that?

Don Blankenship

These things are always more complicated than we wish they were. The answer at this level would be yes but let me save the hand that the EPA is now looking at what they call MPDS permits and annual renewals from all kind of say we just don't know quite frankly how far they are willing to go. I mean if we're able to operate even half way normal in the permit arena and with the permits we have, we would have the bond for five years but we don't know what card go for in it.

Curtis Woodworth - Macquarie Research

Okay. And just one quick question, on the 50% of your met that's going to Asia and that's 50% is your export business?

Don Blankenship

Yes.

Curtis Woodworth - Macquarie Research

And within Asia how much of that was going direct to China?

Don Blankenship

None of it goes direct to China.

Curtis Woodworth - Macquarie Research

Okay. What are the main destinations?

Don Blankenship

Main destinations -- that would be projected going forward would range from Korea to India to anywhere in the rim, but we don't want to say too much about exactly where, but in India obviously would be the bigger one.

Curtis Woodworth - Macquarie Research

And are you guys are getting the benchmark for those tones?

Don Blankenship

No I don't --

Curtis Woodworth - Macquarie Research

Some of the business has being conducted above the benchmark right now on the spot market in Asia.

Don Blankenship

We've had some both above and some below the benchmark its always a one-off negotiation of those benchmarks are something to have on the table but they're not in themselves for forward negotiations.

Curtis Woodworth - Macquarie Research

Fair enough. Great thanks very much.

Don Blankenship

Thank you.

Operator

Thank you. Our question is coming from Brian Yu of Citigroup.

Brian Yu - Citigroup

Thanks Don. Just want to follow up on Paul's question earlier about CapEx spend and I think you had mentioned that your are now investing below maintenance. So if we work out and we'll look out to 2011, what type of capital expenditures do you need to maintain this 40 million ton per year profile?

Don Blankenship

Again it always depends on the market in the sense that price of equipment can be hugely different, but we've been shown off the number 3.50 to $4 a ton so if you use $4, 160 million the reason that number are both side expressed and they retain because we have other equipment that we don't have to buy, but I know we would use up that other equipment in routine and be on a very normal ongoing rate of 350 to $4 per tons or call it a 160 million.

Brian Yu - Citigroup

Okay, thanks.

Don Blankenship

Thank you.

Operator

Thank you. Our last question is coming from Marco Russo of Millennium Partners.

Marco Russo - Millennium Partners

Hi good afternoon now. Just Don I guess that Brian sort of asked my question, but looking at the guidance you gave for 2010 and the CapEx level and the fact that you do have extra equipment carried over. Is it fair to assume that you can keep CapEx at a similar rate in '11? And then also along those lines, we want to see if that is case, it seems like you're poised to generate a fair amount of free cash flow in those years, but I just want to make sure that I am thinking about it the right way?

Don Blankenship

I don't think that answering the question with the same numbers but from a different angle of it was actually to put forward. We have spend 60 million more capital in '11 on ongoing and we would in '10 which means that we think in '10, we're going to do about 60 million of capital out of equipment is now idle, so we don't have to buy it again.

Marco Russo - Millennium Partners

And then as far as that goes, it seems like you'll be generating some amount of free cash flow but it doesn't look like SMP give you any credit for the cash and the balance sheet or the potential free cash that you're going to generate in the other years. So I was just wondering if there is some sort of disconnect there or how should we thinking about that?

Don Blankenship

Yeah. We've been figure out how far we can go, we've been very frustrated by the rating agencies they don't consider cash, we think cash is important to have a metric where they divide gross debt by EBITDA and they get a number and then they use it and they will really tell you that if you had debt would be and cash would be, you get sign rating, but if you got better than a billion and no cash we had trouble with that logic but we don't understand it.

Marco Russo - Millennium Partners

Got you. Thanks.

Don Blankenship

Thank you.

Roger Hendrickson

Alright everybody thanks very much for joining our call today. This will conclude our conference call for the second quarter and we will look forward to speaking with you again in the weeks and months to come. Thanks a lot.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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