Alpha Natural Resources' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 2.13 | About: Alpha Natural (ANRZQ)

Alpha Natural Resources, Inc. (ANR) Q2 2013 Earnings Conference Call August 2, 2013 10:00 AM ET

Executives

Kevin S. Crutchfield - Chairman and CEO

Frank J. Wood - EVP and CFO

Paul H. Vining - President

Brian D. Sullivan - EVP and CCO

Todd Allen - VP, Investor Relations

Analysts

Brett Levy – Jefferies & Company

Meredith Bandy - BMO Capital Markets

Brian Yu - Citigroup

Caleb Dorfman - Simmons & Company

Evan Kurtz - Morgan Stanley

Brandon Blossman - Tudor, Pickering, Holt & Co.

Timna Tanners - Bank of America Merrill Lynch

Lance Ettus - Tuohy Brothers

Curt Woodworth - Nomura Equity Research

James Rollyson - Raymond James & Associates

Jeremy Sussman - Clarkson Capital Markets

Michael Dudas - Sterne, Agee & Leach Inc.

Christopher Haberlin - Davenport & Company LLC

Lucas Pipes - Brean Capital

Operator

Greetings, and welcome to the Alpha Natural Resources Second Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Todd Allen, Vice President of Investor Relations. Thank you, sir. You may now begin.

Todd Allen

Thank you, operator. Thank you all for participating in today’s Alpha Natural Resources second quarter 2013 earnings conference call. Joining me on the call today, Kevin Crutchfield, Alpha Natural Resources’ Chairman and CEO, who will provide a brief market outlook and summarize our second quarter results; Frank Wood, our CFO, who will comment on Alpha’s financial results and updated guidance; and then following our prepared remarks, Paul Vining, Alpha’s President who will be available to address operational questions and Brian Sullivan, our Chief Commercial Officer, will also be available to address sales and marketing questions.

Before we begin, I’d like to remind everyone that Frank and I will be meeting with investors at the upcoming Tuohy Brothers Fourth Annual Energy Conference, this coming Monday August 5th, in New York.

Please let me remind you that various remarks that we make on this call concerning future expectations for the Company constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made.

Actual results may differ materially from those expressed or implied. Information concerning factors that could cause actual results to differ materially from those in forward-looking statements are contained in our filings with United States Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequently filed Form 10-Qs.

This call is being recorded and will be available for replay for a period of two weeks. The call can also be heard live on the Internet and both the replay and a downloadable podcast of the event will be archived on our website at alphanr.com for a period of three months.

And with that, I’ll turn it over to Kevin.

Kevin S. Crutchfield

Thanks, Todd. Good morning, everybody. Alpha continues to deliver solid safety performance during the second quarter and I commend our workforce for their unwavering dedication to Running Right. While I usually begin these calls with a short list of illustrative safety achievements, the second quarter of 2013 was unique. We took a moment to step forward launching our Running Right Leadership Academy, which we believe will take Alpha to a new level in safety, training and best practices.

The leadership academy is a campus built next to our Julian office and contains state-of-the-art equipment simulators for training our workforce on the operation of haul trucks, continuous miners, roof bolters and shuttle cars, simulated training environments for all mining support functions from electrical to welding and a complete simulated underground coal mine.

The Running Right Leadership Academy is the first of its kind in the United States and maybe even the world and represents the culmination of years of planning. This facility is tangible evidence of our commitment to safety, best practices and Running Right and we expect that the Leadership Academy will result in a step function improvement in safety practices, both for Alpha’s workforce and for our industry in general. And I want to say thank you to all of the Alpha folks that made the Leadership Academy a reality.

Before I get into the financial and operating results, I’d like to take just a moment to discuss our achievements on the financial front. As most of you know we move proactively and early to address our capital structure, debt maturities and our bank agreement.

Specifically we launched a $300 million convertible debt offering in early May. The issue was a success on all levels. We were able to get a 50% conversion premium to limit dilution to our equity holders, the $45 million hue was fully exercised and we received an attractive 3.75% cash interest rates for the new converts that we do in late 2017. With the proceeds from this new converts and some of our cash on hand we were able to approach holders of both our two-and-three-eights notes and our three in a quarter to 2015 converts and replace – repurchased approximately $407 million at a price slightly below par.

This reduced our 2015 maturities to a much more comfortable level with $417 million of par value remaining outstanding between the two issues. On the yields of the convert deal, we also renegotiated our secured credit agreement and amended and restated agreements successfully achieved a wide range of financial objectives.

Retiring our $525 million term loan A get matured in 2016 and which had increasing principal repayment requirements in the years leading up to its maturity. Establishing a new $625 million term loan B that matures in 2020, upsizing our revolver from $1 billion to $1.1 billion and substantially relaxing our covenant requirements through 2016, which will allow for additional flexibility as we navigate today’s challenging market environment.

I’d like to acknowledge and thank our finance and treasury team as well as our partners outside the company and the banking and capital markets communities that enabled us to see so much in just a few weeks in May.

Now turning to the second quarter operating performance, Alpha generated coal revenues of $1.1 billion and adjusted EBITDA of $76 million during the quarter compared with coal revenue of $1.6 billion and adjusted EBITDA of $186 million in the second quarter of 2012. In light of the rapidly changing market environment however, we believe the more relevant comparison is with the first quarter of 2013, when we generated a like amount of coal revenue, $1.1 billion and adjusted EBITDA of $118 million.

The sequential decrease in our adjusted EBITDA was due in large part to more than $5 per ton increase in our adjusted cost of coal sales in the East, which came in at $74.42 per ton in the second quarter. The higher cost of coal sales was due primarily to limited production from our Pennsylvania longwalls, a function of ventilation issues in the Cumberland mine and less favorable mining conditions at the Emerald mine, but the rest of our Eastern operations performed well from a cost perspective.

In fact, excluding the longwalls, we held our Eastern cost per ton essentially flat from the first quarter, despite a slightly greater proportion of met in the mix. Cost for the two longwall mines averaged approximately $52 per ton for the 2.2 million tons that were shipped during the second quarter. This compares to cost of $36 on 2.9 million tons in the prior quarter and illustrates the degree of operating leverage inherent in these highly fixed cost operations.

After the end of the quarter, on July 15th, we announced that production had been suspended at the Cumberland mine, this time due to adverse geological condition in the mine's headgate area. The Cumberland mine remains down while we work to address the roof conditions at the headgate. We currently expect that the Cumberland longwall will resume production in the back half of August and finish out the existing panel which will then position it to move to the next panel in the late September to October timeframe.

Obviously, this event will impact our Pitt 8 sales and our Eastern cost of coal sales per ton in the third quarter. We've issued force majeure notices to our Cumberland customers for the time being. Due to the current issue with the longwall, we believe that our full year Eastern adjusted cost to coal sales will be in the range of $72 to $76 per ton and we'll update you once the Cumberland mine resumes normal operations.

With respect to our metallurgical coal business, our shipment volumes in the second quarter were approximately 5.6 million tons but this level is not likely to be sustained going forward, because we've recently idled approximately 1 million tons of annual met production that is uneconomic at today's prices. During the second quarter, average realizations continued to decline to approximately $101 per ton due to lower market prices as well as our decision to sell approximately 180,000 tons of semi-soft, essentially a steam coal crossover at prices in the low 60s.

I'll let Frank walk you through a more detailed discussion of our financial results in just a moment, but now I'd like to share our view of the current market environment. Global crude steel production for the first six months of 2013 rose by 2% year-over-year and is on an annual pace of nearly 1.6 billion metric tons. Of course the news is mixed. Asia driven primarily by China was up 5.5% while Europe, North America and South America were all down around 5%. And looking ahead, many analysts are expecting China's rate of growth to slow in the near term.

In addition after years of development, large new sources of metallurgical coal supply have come online or are expected to come online shortly in Australia and the U.S. Together with the recovery from past weather impacts in Australia, Australian met coal exports rose 8.5% in the first four months of the year on pace for over 150 million tons of met exports this year, representing roughly a 12 million ton increase in seaborne supply.

The combination of more supply and relatively weak demand growth can be seen in today's market reflected in the weak third quarter benchmark price of $145 per ton and spot transactions that are some $10 to $15 below that. At this level some market observers have estimated that between 20% and 30% of global supply is uneconomic and we're seeing production cutbacks occurring more or less in real time with some 5 million tons coming offline in June alone, and an estimated 43 million tons coming offline since the beginning of 2012.

Of course we've taken similar actions on production. Compared to the peak run rate of 24 million tons of annualized met shipments, we've reduced our expected shipments by approximately 4 million tons at the midpoint of our current guidance. In addition, capital spending on new projects has all been ceased and production regions around the world, the Exodus for Mozambique being just one example.

While the market is currently oversupplied, the outlook is not entirely bearish. Capacity utilization in the U.S. has recently picked up to nearly 80% and we believe that European steel production may finally stabilize and begin a long, slow recovery after decreasing 5% in each of the last two years. Forecasters are calling for a roughly 4% annual growth in China's steel production over the next several years slower than its GDP growth which is forecasted around the 7% level, but strong enough to drive global steel production growth of 2% plus even if the western world remains essential flat.

When we look a few years out, continued steel production growth coupled with a dearth of new mine development project should eventually lead us back into a more balanced supply/demand situation and perhaps even back into an under supplied market. To put it simply, met coal has always been highly cyclical so we don't see any reason that patterns not going to change.

The outlook for domestic thermal coal varies by region. In the Powder River Basin, utility inventories have fallen 21% since the peak in April of 2012 and are now slightly under normal at 67 days of burn. Despite this, pricing has recently been reported at three-month flows unfortunately validating the concern we expressed on our last call that latent capacity and threat of rapid supply response to any uptick in demand may weigh on the PRB for some time.

Northern Appalachia appears to be one of the bright spots with ample demand and inventories one to two days below normal at 65 days of burn. However, our ability to take advantage of this opportunity is limited in the short run due to the absence of production at Cumberland while we address the roof conditions at the headgate. Once we resolve that issue, our longwall should provide us with attractive margins going forward. Clearly the most challenged region continues to be Central Appalachia which continues to struggle against structural impediments.

Most production is out of the money in the face of sub $4 gas. The impact of regulatory-driven plant retirements has been most profound in the Central App region. Encroachment from other low cost production regions has become a permanent part of the landscape and the opportunity for new export contract is nonexistent in the face of API2 prices at or below the $80 mark though there is some hope for improvements in light of the ongoing labor strikes in Colombia.

As you've seen over the past several quarters, we've reduced our Central App steam coal production by more than half from its peak and as we continue to optimize our mine portfolio, the risk continues to be to the downside for shipment volumes. As you can see, we tweaked our Eastern steam coal guidance range slightly lower again this morning. In light of these market conditions, I believe we've taken the appropriate actions to right-size our production footprint, to reduce our production costs, lower our overhead expense, allocate our capital prudently and address our balance sheet and debt maturities.

We'll continue to evaluate additional actions on all of these fronts and up to and including non-core asset sales, although it's still too early to discuss this option in great detail and ultimately any transaction we might undertake would have to make strategic and financial sense. While the market today is posing primarily headwinds, wins do change and there's a reason to believe that the met market will improve.

In fact the aggressive actions of a leading Australian producer to maximize shipments into an already oversupplied market might have the effect to precipitating a bottom and a recovery in the met market sooner rather than later. The actions we've taken today have positioned us for success when that cyclical recovery occurs. In the meantime we're focused on efficient operational execution, maintaining our ability to move swiftly to optimize our portfolio as needed and preserving our liquidity.

With that, I'll now turn the call over to Frank for a discussion of our financial results and 2013 guidance. Frank?

Frank J. Wood

Thank you, Kevin, and good morning, everyone. Coal revenues during the second quarter were 1.1 billion versus 1.6 billion in the second quarter of 2012. Year-over-year decrease was primarily due to the combination of lower shipment volumes of Eastern and PRB steam coal and lower realizations for both metallurgical and steam coal.

During the quarter, shipments for metallurgical coal were 5.6 million tons, flat compared with last year but up 11% from the prior quarter. Eastern steam coal shipments were 7.2 million tons, a 35% year-over-year decrease and a 9% sequential decrease. PRB shipments were 8.8 million tons, a drop of 14% from last year and 12% lower than the first quarter. The average realization per ton for metallurgical coal was $100.95 compared with $127.83 in the second quarter of 2012 and a $103.28 in the first quarter of 2013. Average realization for Eastern steam coal were $62.54 per ton in the second quarter, down from $65.05 in the year-ago period but up slightly $61.90 in the prior quarter. Per ton realizations in the Powder River Basin were $12.37 compared with $12.96 last year, $13.03 a quarter.

Total cost and expenses were approximately $1.5 billion in the second quarter essentially flat compared with Q1 and down sharply compared with $4.5 billion last year. However the year ago period is not very comparable, because of the presence of $2.5 billion of impairment and restructuring charges in the second quarter of 2012. Cost of coal sales in the second quarter of 2013 were $1.1 billion compared with $1 billion in the preceding quarter and $1.4 billion in the second quarter last year. Excluding approximately $2 million of merger-related expense and a provision for regulatory cost, Alpha’s adjusted cost of coal sales in East were $74.42 per ton, compared with $74.21 per ton in the year ago period and up more than $5 per ton from $69.33 in the first quarter.

As Kevin mentioned, our second quarter adjusted cost of coal sales in the East increased from the previous quarter primarily because of reduced production that drove higher unit costs at our longwall mines as well as the impact that proportionately fewer low cost longwall tons in the mix. The adjusted cost of coal sales in the PRB during the second quarter was $10.08 per ton down from $11.01 in the year ago period. The improvement in unit cost in the PRB was primarily due to our ability to mine coal owned in at our Belle Ayr mine, thereby avoiding royalty expense on those tons. As we stated on our last call, we expect this benefit to continue through most of 2013.

Excluding a host of items detailed in our press release, Alpha’s second quarter 2013 adjusted net loss was $129 million or $0.59 per diluted share compared with an adjusted net loss of $72 million or $0.33 per diluted share in the second quarter of 2012. Adjusted EBITDA which include many of the same items was $76 million compared with $186 million in the second quarter of last year.

Cash flow from operations was approximately $2 million; capital expenditures were approximately $63 million resulting in negative free cash flow of approximately $61 million.

Turning to guidance for 2013, Alpha’s total shipments are expected to be between 83 million and 91 million tons of coal, including between 19 million and 21 million tons of metallurgical coal down from the previous range of 19 million to 22 million tons which reflects the idling of approximately one million tons of annual met coal production mentioned by Kevin earlier.

Guidance for full-year 2013 shipments of PRB coal remains unchanged. The top end of guidance for Eastern steam coal shipments has been reduced by one million tons. Eastern steam coal shipments are now expected to be in the range of 27 million to 30 million tons and PRB shipments continue to be expected between 37 million and 40 million tons.

As of the July 17, based on the midpoint as we expected shipment ranges, Alpha has 88% of its met coal committed and priced, at an average expected per ton realizations of $102.20 and another 7% is committed and un-priced. We have 98% of our Eastern steam coal committed and priced at an average expected per ton realizations of $62.66. And in the West we have 100% of our PRB coal committed and priced, at an average expected realization’s of $12.64 per ton.

For the full-year 2013, we anticipate that our Eastern and Western adjusted cost of coal sales will be in the range of $72 to $76 per ton and $10 to $10.50 per ton respectively. With regard to Alpha’s expected Eastern adjusted cost of coal sales per ton for 2013 we expect these unit costs to be similar to prior estimates for Eastern operations other than for the Pennsylvania longwall mines.

At those two high volume operations adjusted cost of coal sales per ton are now expected to be higher than previous estimates as a result of mining conditions and ventilation issues experienced in the second quarter and the adverse geologic conditions presently being experienced at the Cumberland mine. We continue to expect 2013 selling, general and administrative expense in the range of $140 million to $160 million.

DD&A expense guidance is $875 million to $950 million. Interest expenses have been adjusted to reflect the recent refinancing activities in the month of May that Kevin described earlier. We now project full-year interest expense to be between $235 million and $245 million. We have reduced our capital expenditure guidance for the year by $25 million to a range of $275 million to $325 million.

Alpha’s total liquidity at the end of the second quarter stood at approximately $1.9 billion including approximately $1 billion of cash, cash equivalents and marketable securities and approximately $0.9 billion available under the Company’s secured credit facility.

In conclusion these are challenging times in the coal business, but there is no doubt that coal is cyclical and no subset is more cyclical in the market for metallurgical coal. In light of the widespread production cutbacks and now production in capital spending for new mine developments, we believe that we're somewhere near the low end of protracted and painful cycle.

Alpha has demonstrated the willingness to make the tough but necessary decisions to navigate through these challenging times and we’ve demonstrated the ability to successfully address these market conditions adjusting our operating footprint and cost structure while maintaining our liquidity and financial flexibility and effectively managing our balance sheet capital structure and debt maturity profile. You can expect that we will continue to act in the best interest of all of our investors with the goal of positioning Alpha for a long-term success and maximizing shareholder value.

We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question is coming from the line of Brett Levy with Jefferies. Please proceed with your question.

Brett Levy – Jefferies & Company

Hey, guys. Have any of your either met coal or thermal coal customers sort of come to you and said listen, we want to try to take advantage of this sort of low point in prices and negotiate pricing fairly far out. I just figured if the customers start coming to you and providing some level of enquiry it is a sign that you’re somewhere near the bottom because they want to capture that.

Kevin S. Crutchfield

That’s a good question Brett. I am sitting here looking to Paul and Brian to respond.

Brian D. Sullivan

Yeah, we’ve certainly seen some of the met customer’s start their 2014 enquires a little earlier than perhaps they would have traditionally. So we have seen a bit of that behavior of testing how far forward they think this condition will persist, so I would say yes that we have seen a few of those enquiries earlier than we otherwise might.

Brett Levy – Jefferies & Company

And then can you talk about sort of where you see the sort of green initiatives in China sort of going and how much that in your eyes is real and how much of that is actually going to affect you?

Brian D. Sullivan

Clarify what you mean by green initiatives Brett, I am not sure.

Brett Levy – Jefferies & Company

I mean there’s been a lot of rhetoric’s not so much actual action, but in China to sort of reduced emissions and sort of, the air quality issues and that sort of thing. I don’t know if you sort of feel any affect of that or you’ve been asked to sort of weigh in with the government on any of that or anything like that?

Frank J. Wood

We saw certainly the floated initiative about the ban on imports of high sulphur and lower CV coal that was banned about in the second quarter. That would have affected some Eastern U.S. met and thermal exports to China. We have also seen that the Government of China seems to have backed off that trial balloon.

Kevin S. Crutchfield

Yes, I think the other thing they’re committed to publicly too is the expenditure over the next several years on the order of $250 billion to $300 billion to add equipment to plants and whatnot in an effort to impact air quality. So I think I would just characterize it, Brett, as more of an evolving situation. There's been a lot of talk but not a lot of action at this point. It's something we're mindful of and pay attention to, but no impact thus far.

Brett Levy - Jefferies & Company

Thanks very much, guys.

Paul H. Vining

Thank you.

Operator

Thank you. Our next question is coming from the line of Meredith Bandy with BMO Capital Markets. Please proceed with your questions.

Meredith Bandy - BMO Capital Markets

Thanks for taking my questions. I was just wondering if you could give us a little bit more color about what you think are the sustainable long-term Appalachian costs when you get Cumberland back up and running?

Kevin S. Crutchfield

You want to take that one, Paul.

Paul H. Vining

Sure. I guess I'd go back to the first half of the year and look at those as what our view is certainly sustainable, the impact of Cumberland is obviously huge. What's occurred up there is superb for Cumberland in its almost 40-year life and we'll get back on track here in the next two, three, four weeks. But we've actually seen costs at a lot of our Central App mines certainly get [reigned] here in the last six to nine months as we've rolled out some sourcing, maintenance and operational initiatives and we have some cost to squeeze out in the Central App area. Rather than give you a number I'll point to the first half and say that the goal is to improve actually on our first half performance and I'd also note that in that cost reported for the East includes idle mine costs and there is a tail to that. So call it $3 to $4 a ton of idle mine costs that get rolled into all those tons and over time those costs will get cut back, so there's two or three areas where we've got opportunity for cost improvement.

Meredith Bandy - BMO Capital Markets

Okay, thank you. And then when you guys talked a little bit about potentially more idling, does your coal guidance assume additional cuts this year already?

Paul H. Vining

No. I think that's sort of a go-forward footprint, Meredith. I mean the plan here obviously we're in very much a real-time situation and we'll address the back half issues as we see how the market unfolds. But I guess the thought I'd leave you with is number one, we've been proactive thus far and you can expect that kind of behavior going forward. And to the extent that we think further adjustments need to made, we will demonstrate that ability and make those adjustments with passage of time and I think it's just a little too early to say definitively right now, but we are willing.

Meredith Bandy - BMO Capital Markets

Okay, thank you very much.

Operator

Thank you. Our next question is coming from the line of Brian Yu with Citigroup. Please proceed with your questions.

Brian Yu - Citigroup

Hi. Thanks. Good morning. Kevin, you've mentioned earlier that you shed about million tons of net capacity and I was wondering is there a way to think about your current operating plan today, grade adjusted, and so how that relates to the global price, i.e. if prices remain static and hopefully not the case but if it does, should we expect the same volume output on a go-forward basis?

Kevin S. Crutchfield

If global prices stay static, is that your question?

Brian Yu - Citigroup

Yes and talking more about, let's say contract as opposed to spot just 145 benchmark?

Kevin S. Crutchfield

I think it's a dynamic place up there right now in terms of kind of what's out of the money globally and the big geographic jurisdictions that produce coal. I mean we've seen weekly reference in our script of somewhere between 20% and 30% but we also think probably another quarter is kind of hovering somewhere in the danger zone as well. So a price move downward means that you're going to be looking at half the global dispatch kind of under the water to kind of the big variable and equation too is the rapid movement here over the last several months in the Australian dollar giving them a fair amount of power, but then again you look at BHP's strategy which is clearly to [callback] market share. But at the end of the day when you look at our financials, they're not generating any EBIT either. So I'd characterize it as a purely volatile and very much dynamic marketplace but clearly some more tons need to come out of the market to establish this as a bottom before we're going to see any recovery. And I think with the passage of the next couple of quarters, of course depending on what the fourth quarter benchmark does, we'll continue to see bites around the edges in terms of additional production trimming.

Brian Yu - Citigroup

Yeah, I wasn't clear. I was speaking more about the operating plans, what the production cuts you made that's efficient at 145 benchmark and what are you prepared for with the ones that are currently operating?

Kevin S. Crutchfield

We don't really want to speculate out loud on the call. Again, I'd point you back to our willingness to take necessarily steps to match our production with anticipated demand and with the tons that we've cutout thus far, it would not be surprising that those are on the lower quality end, so the back half of the year is more comprised of the higher quality material. So we think we've done an appropriate amount that look it's subject to change. Like I said, it's a dynamic marketplace and if we need to make further adjustments we're absolutely willing to do so.

Brian Yu - Citigroup

Okay, thank you.

Operator

Thank you. Our next question is coming from the line of Caleb Dorfman with Simmons & Company. Please proceed with your questions.

Caleb Dorfman - Simmons & Company

Good morning. Thanks for taking the question. I just [indiscernible] we could possibly see them [bottoming] in the market. I guess when you're looking ahead I know that last quarter Brian sort of gave us a range to think about for the uncommitted and the unpriced tonnage and you've sort of indicated that some of the lower quality coals haven't been in the same extent of the price decline. When you're thinking about what you have uncommitted right now, Brian, do you have a range which would be helpful for us to think about?

Brian D. Sullivan

I think what we said last quarter held up. The spreads, if you look at May, we saw a significant compression of spreads from the low vol and higher vols – the high vol B curve kind of stayed in the same range from last call to this call with very little decline. So the lower quality coal has kind of stayed in the price range that it was midpoint or about the last time we talked. And so you've seen the spread come down now about half between the higher quality coal and the lower quality coal.

Caleb Dorfman - Simmons & Company

Great, that's helpful. And then I guess we sort of talked about in the past how there's a lot larger emphasis on the lower quality coal. When you think about that, are you sure that entails some adjustments in the cost in the actual production footprint. How big of a cost do you think that's actually helping in B when you actually start having increased steel production and faster cooking time, how fast could you ramp up that higher quality coal production in your footprint?

Kevin S. Crutchfield

Well, we really haven't trimmed that much of that now to be honest with you. One of the key strategies Alpha has always employed is blending to meet what the market wants. And while I believe it is undeniably a short-term trend, I think we referred to it on the last call was the race to the bottom in terms of quality. I don't believe it's a trend that will hold up long term. Yeah, there may be some structural change with that bias over the long term but I do think once we see economies start to heal and the production footprint begin to adjust, you will see ultimately a price response and also a [flight] back towards the higher quality coals. You can't rely on anywhere between 24 and 72 hour resonance times in the coke ovens over the long term if you've got any kind of underlying demand at that, it just won't work.

Caleb Dorfman - Simmons & Company

Thank you.

Kevin S. Crutchfield

Thank you.

Operator

Thank you. Our next question is coming from the line of Evan Kurtz with Morgan Stanley. Please proceed with your questions.

Evan Kurtz - Morgan Stanley

Hi. Good morning, guys.

Kevin S. Crutchfield

Good morning.

Evan Kurtz - Morgan Stanley

Just a question on Asian met prices over the last couple of weeks here, we've seen a little bit of bounce in the spot market price, a few bumps or so, and even more recently hearing some reports that most of the Australian producers are booked down at this point through the end of August. Are you seeing any sort of signs that maybe we might be add some sort of a bottom here on the – in the met market?

Frank J. Wood

We’ve seen the same reports and have the same market until it’s been reported about Australia’s availability for August and we’ve seen an uptick in customer enquiries that would support that market intelligence. So, I think that’s probably – its probably accurate. So, in terms of what’s sustainable, we will have to do with the factors Kevin has already identified. BHP and the other major Australian producers ability to continue to increase volume as they have in the first half of the year and the effects of the Australian dollar having gone from a AUD$1.5 to AUD$0.90 over the period of time since we last talked.

Evan Kurtz - Morgan Stanley

Understood. Thanks. And then maybe one other, just on 2014, can you give us any sort of guidance on what’s been booked so far for next year on the thermal side?

Kevin S. Crutchfield

Yeah, we are in the throws or we will be in the next 60 days of beginning to take very detailed look at 2014. And what I will tell you right now is Powder River Basin is actually in good shape and (indiscernible) in reasonably good shape, given where we’re in the year, obviously we’ve got some exposure in Central Appalachia just in terms of volumes and where this market going to go and as we indicated earlier, the structural impediments are being borne largely by Central Appalachia and having the API2 where it stands currently is obviously problematic and we’ve been out of that market now for some months and don’t plan to reenter. But I’d say after it provides at least somehow because that’s the API2 is roughly a 230 million ton marketplace that moving across and best we can tell about three quarters of that is open for 2014. So it will get active at some point, but we’re holding back right now and so as we formulate our plans for 2014, we will be talking about that. I suspect on the next call at least in more definitive terms and we’re prepared till today, because again it’s a dynamic environment and it still remains work in process, but we will keep you posted with the passage of time.

Evan Kurtz - Morgan Stanley

Okay, great. Thanks guys.

Kevin S. Crutchfield

Thank you.

Operator

Thank you. Next question is coming from the line of Brandon Blossman with Tudor, Pickering, Holt. Please proceed with your question.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Good morning, guys.

Frank J. Wood

Good morning.

Kevin S. Crutchfield

Hi, Brandon.

Brandon Blossman - Tudor, Pickering, Holt & Co.

On the Northern Appalachian Cumberland it looks like (indiscernible) data that the mines were down about 800,000 tons quarter-over-quarter, Q2 over Q1. Can you give me any guidance there to what Q3 may look like, given what you known now?

Frank J. Wood

No, I don’t think we can. And the primary reason is, in Q2 it was delays due to gas and post that some difficult mining conditions for a period of days, if not several weeks. When you go into an outage as we have and performing the work that we’re performing, we have a plan that says it can take three or four weeks, it could take five or six because the primary focus is not just getting back into production, but taking care of safety of all the people who are working. And the first week or two after we start-up will be pretty important in terms of the advancing the longwall towards the pull out for the long haul move, we only got about 800 or 900 feet to go. So I’m not going to sit here and speculate it to a tonnage level that we’re going to hit for the quarter.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Okay. Fair enough. How about switching topics just a little bit, it was a pretty good quarter for met sales, Q2, was there a mix shifted all Q2 versus Q1 for those incremental 300,000 tons or so?

Frank J. Wood

Yeah, I think we returned a bit more to the traditional trend of higher rank coals out waiting lower rank coals in Q2. So, I think it was a bit of a mix shift, because some of the below rank coal buyers who were very present in the market in Q1 were less present in Q2. So, we saw a shift back towards the traditional trend of higher rank coals versus lower rank coals in terms of percentage shipment.

Kevin S. Crutchfield

We expect to be there throughout the – we expect throughout the year as well.

Frank J. Wood

We expect to see that as Kevin said before.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Okay. So that’s a positive. Thanks guys.

Frank J. Wood

Yep.

Operator

Thank you. Our next question is coming from the line of Timna Tanners with Bank of America Merrill Lynch. Please proceed with your question.

Timna Tanners - Bank of America Merrill Lynch

Yeah. Hi, good morning.

Frank J. Wood

Hi, Timna.

Timna Tanners - Bank of America Merrill Lynch

I want to follow-up on the cost side, just you talked about some further measures and taking up cost operationally. I was just wondering overhead what else – what are the measures you might be able to do and I know you’ve already done a lot.

Frank J. Wood

Yeah, we talked previously about the one we announced our restructuring plan back in September last year, we talked Circa $150 million of structural – permanent structural cost reductions, I’m happy to report that we’re solidly on track to achieve that and I think it exceeded. Additional actions will be a function of what we see unfolding here over the next two to four quarters I think. As Paul mentioned, there are several very major initiatives we have underway internally, what we formed a group called the operations performance group whose focus is very clearly and very squarely on standards how an Alpha mine runs and what efficiencies ought to be and we think there is a lot of opportunities there for both increased efficiency and can ultimately cost reduction along with a very large maintenance initiative that’s ongoing across the Company and last, but certainly not least is one thing that scale brings you is, you’ve got a wide footprint and there is a lot of spend that occurs here, so we created more of a central purchasing and sourcing function that we think they’re going to be continued savings there as well. We are not quite prepared to start quantifying what those are because we’re still kind of in the early stages of that. But I will tell you they’re substantial and what Paul said earlier looking at the first half of the year is kind of a guide for the go forward plan. We believe that’s quite reasonable and believe there is some opportunity to the upside there as well from a positive perspective. So again coal miners are pretty resilient and pretty creative when their backs get pushed against the wall and we – so we think we still have additional opportunities to take cost out of the system as we move forward.

Timna Tanners - Bank of America Merrill Lynch

Okay. That’s helpful. And I don’t mean to take advantage of your candor, but we get this simplistic question and I was hoping if you could help me understand how to answer it when investors ask us why the coal miners continue to mine below their cost of production for any – more than a quarter or two. And I know there is a lot more involved there, but can you help walk us through some of those to stay answer that question, what goes into shutting down a mine and what kind of steps you take to make that decision?

Kevin S. Crutchfield

Yeah. It’s a fairly – I mean it could be very straightforward, very, very simple. But those are the decisions that tend to be – get made pretty quickly. I think longer term what you got to get a sense of is what the mines potential is in terms of its volume and its cost structure relative to its quality in the market demand for the product and kind of where you see that market evolving over time. And look, I will be the first to admit there are instances where you will take a hit a quarter or two, because you think the long-term prospects are good, because you want to see a move in the market or cost that can be taken out of the system, but – and we have internally what we kind of its actually referred to is an optimization process because each one of these mines has different characteristics and qualities and what we try to do is think about creating plans that optimize margin, thereby reducing costs and improving profit over the long-term. Sometimes these things are – unfortunately just takes some time, but it’s a fairly complex process and some – but something we’re and continue to be very, very focused on.

Timna Tanners - Bank of America Merrill Lynch

Okay. Thanks, again.

Frank J. Wood

Thank you.

Operator

Thank you. Next question is coming from the line of Lance Ettus with Tuohy Brothers. Please proceed with your question.

Lance Ettus - Tuohy Brothers

Can you talk about potential for the production cut backs? And I know that you’ve some mines that produce both thermal and mat. I think that you produce around 4 million tons of thermal from those mines. I guess my question is how many tons of met you produce from those mines and am I right in thinking that these would be probably more likely to be idle than other mines, given the thermal output?

Kevin S. Crutchfield

Yeah. Again, that's very, very mine specific questions. I mean some mines appear thermal, some appear met, some are mixed and what we try to weigh actually is from the standpoint of met if we go ahead and get it price produce, what sort of margin generating potential do we have on the met side and can we make any money on the thermal side or does that become a loss leader type of situation. And again, we're trying to think of it in a broader context whether it makes sense from a business perspective. I'm not sure I can give you numbers off the top of my head to sort of affirm or deny the 4 million ton assertion there, but I'll just characterize it as an optimization process that we try to go through. And unfortunately right now, we're in a situation where it's a very iterative process we're doing and over and over and over again on a very regular basis. Paul or Brian, you guys have anything to add to that.

Paul H. Vining

Yeah. I'd say that – I mean if it's a surface mine as an example, it seems intuitively that you could more easily idle something like that. The fact is you just can't flip the switch and put it out of business, sign on it and walk away for six months. There's a lot of cost associated with either closing the surface mine of idling it. So it's not really straightforward comparing surface mines which is where we have the mix of thermal and met to appear deep metallurgical mines.

Lance Ettus - Tuohy Brothers

Okay.

Operator

Thank you. Our next question is coming from the line of Curt Woodworth with Nomura Securities. Please proceed with your questions.

Curt Woodworth - Nomura Equity Research

Thanks. Good morning.

Kevin S. Crutchfield

Hi, Curt.

Curt Woodworth - Nomura Equity Research

Maybe a question for Paul just in terms of discussions you're having with your customer base primarily in Europe and in the fact that these spreads have compressed pretty significantly, I mean do you get the sense that your European customers are trying to work with you in terms of the pricing right now or do you feel like there's a lot of pressure right now to have you come down more to meet the fall on the benchmark prices that we've seen in the Pacific Basin?

Paul H. Vining

I'm going to kick it to Brian and let him handle it. Brian?

Brian D. Sullivan

Yeah, obviously everybody is aware of the benchmark differential from quarter-to-quarter and where the spot market is and we have to contend with that and have discussions with our customers. But they also recognize the disconnect between the Asian benchmark price and the availability of high quality U.S. metallurgical coal and the fact that those two things are not as linked as they would appear in the worldwide trade press. So certainly it's something we have to contend with but the customer recognition has always been that they have to have a base load of high quality U.S. material and that hasn't changed but we try to react and recognize that a certain percentage of oversupplies coming out of Asia could intrude into our home markets and we deal with that accordingly.

Curt Woodworth - Nomura Equity Research

And are you guys evaluating any potential asset sales or further cuts to CapEx in an effort to make a bigger impact on the balance sheet?

Kevin S. Crutchfield

Yeah, with respect to CapEx we saw today we took that down a little bit and feel pretty good about that. 2014 still is a little bit of question mark. Some of that depends on the production footprint and Frank would readily admit we continue to operate out of a very, still pretty substantial surplus of idle equipment which has allowed us to forego some level of capital expenditure. And to your other question around asset sales, we do have an internal process up and running as we work through these various levels of durations of optimizations creating a collection of assets that we characterize, decent assets that we would characterize as non-core to us over the long term and just sorting out and how to proceed with those, what that looks like and I'm not in a position as I think this morning to discuss specifics around exactly what those assets are, what we think we can raise. But what I would say the benefit in there is a couple fold. A, we stand the potential we've been able to generate some cash and b, you take liabilities off your balance sheet in terms of some of these tails too whether it's reclamation expense or bonding or whatever. So the benefits' twofold but we do have an internal process up and running and look forward to keeping everybody updated on that as we move ahead.

Curt Woodworth - Nomura Equity Research

Okay, thanks a lot.

Kevin S. Crutchfield

Your welcome, Curt.

Operator

Thank you. Our next question is coming from the line of Jim Rollyson with Raymond James. Please proceed with your questions.

James Rollyson - Raymond James & Associates

Good morning, guys.

Kevin S. Crutchfield

Hi, Jim.

James Rollyson - Raymond James & Associates

Kevin just maybe circling back to CapEx, I noticed with your new range and your first half just totaling about 107 implies a bigger pickup in second half. Just curious what might be driving that or kind of where that's targeted?

Kevin S. Crutchfield

Yeah, go ahead, Brian.

Brian D. Sullivan

Jim, it's Brian. One very notable item and it will occur in the fourth quarter is the annual bonus bid LVA payment in the Powder River Basin which is $42 million, so you have to factor that in. If you look at that, then I think what we're projecting for the third and fourth quarter on average is slightly more than what we've projected or what we actually did in the second quarter but not significantly more and we continue to look at that and evaluate that, but we've always said that we thought the year would be somewhat backend loaded, particularly because of the LVA and we continue to have some of the regulatory capital that we're committed to under our non-prosecution agreement continuing to – it's progressed pretty steadily but as we get closer to the latter part of the year, I think it will accelerate at least some of those projects and that's another factor.

James Rollyson - Raymond James & Associates

Yeah, LVA explains that some people break that out separately and some people don't, I couldn't remember so but that helps. And then Kevin if you look at your guidance for costs and PRB, you actually brought the top of the range down 10 to 10.50. You've averaged just over 10 so far this year and if I'm doing my math right, the midpoint of the range your volumes ought to be higher second half versus first. Just wondering if there is still some possibly room to go just on a unit basis with volumes picking up in second half or cost to be a little bit better than maybe $10?

Paul H. Vining

This is Paul. The guys out West have done a heck of a job on execution. We've taken the range down as acknowledgment of that and some of it again is due to the feed coal, partial feed coal down there. But we're introducing a different approach to a little bit of mining out there that we've not used, other producers have. It's helped their cost and we're going to continue to do so in the future. So there's a little bit of upside but we put in what we believe to be a conservative but realistic view of what the end result might be.

James Rollyson - Raymond James & Associates

Okay, that's helpful. Thanks.

Kevin S. Crutchfield

Thanks, James, take care.

Operator

Thank you. Our next question is coming from the line of Jeremy Sussman with Clarkson Capital Markets. Please proceed with your questions.

Jeremy Sussman - Clarkson Capital Markets

Hi. Good morning, everyone.

Kevin S. Crutchfield

Hi, Jeremy.

Jeremy Sussman - Clarkson Capital Markets

It sounds like the Eastern cost guidance increase this year is almost entirely due to the longwall issues. So as a result when this is kind of worked through, should we expect costs to kind of normalize to what you were previously thinking in the fourth quarter and then from next year? Obviously if that's the case, I would assume full year cost below where they end up this year. Am I thinking about that the right way?

Kevin S. Crutchfield

Yeah. I guess I'd go back to my comment before and that is take a look at the first half for the year, the only qualifier would be as if literally if we hit a brick wall and had to drop out a lot of lower cost thermal coal. Averages can be really deceiving. And obviously our met costs are higher than the thermal side of the business and there still is an unknown around cap thermal for 2014 for everybody. So that's the only [clause]. I guess I'd like to give you a little more color and I've given examples of the revolution mine. The revolution mine we idled in June or were in the process of closing. This mine will incur cost for the second half for the year on the order of let's say 5 million to 10 million. We're recovering from that mine equipment and supplies with the value somewhere between $30 million to $50 million, so we're actually incurring costs that are flowing through in our cost statements this year that in the back half of the year [indiscernible] that is not producing coal but is adding cost to the overall cost in the East and that equipment is going to offset 30 million plus of capital and supplies next year and we'll get no credit for it either on our balance sheet or on our costs. And that's just one example of one mine where that's happening. So this idling of facilities, the impact on the average cost in the East and leveraging around the capital and supplies that are being taken out of the these facilities is pretty big. So, it gives me a lot of confidence in terms of a go forward basis not withstanding pickups at longwalls that we should easily be able to meet or beat what our costs were certainly in the first half of the year.

Kevin S. Crutchfield

And I think you hit on an important point there too Jeremy and that we are thinking of the Cumberland situation as an exogenous event as Paul mentioned it never happened there. And once we get that behind this and we will and changes have been made in the subsequent panels to reduce the chances of something like this happening again. We will reach a more normalized, and that frankly that’s a great word normalized and we can all probably stand a little if it doest normalize at the moment, but I think it will kind of restore back to sort of the trend you saw that we had late last year and early this year, and think of that more as the go forward as opposed to this spike that we’re experiencing at the moment.

Jeremy Sussman - Clarkson Capital Markets

Super helpful and just a quick follow-up by my math you signed a few million tons of met at about $93 a ton this quarter, is that kind of how for short-term that the mine is that kind of how we should think about a good price for you all in a 145 benchmark area?

Kevin S. Crutchfield

Keep going forward that’s probably the reasonable assumption for the un-priced tons that we have, and that was essentially what we saw through the beginning or the middle of last quarter all the way through.

Jeremy Sussman - Clarkson Capital Markets

Great. Thank you very much.

Kevin S. Crutchfield

Thank you.

Operator

Thank you. Our next question is coming from the line of Michael Dudas with Sterne, Agee. Please proceed with you question.

Michael Dudas - Sterne, Agee & Leach Inc.

Kevin, everybody good morning. How -- I mean obviously the regulators have been very helpful to Alpha in the industry in general, but how helpful have been some of the vendors role from transportation, suppliers, even from labor getting better productivity in these very difficult times?

Kevin S. Crutchfield

Like the railroads have been responsive, they have continued to make adjustments to their rates in light of what's happening in the world. I mean we’ll always argue that it's not enough. They’ll argue that it is too much, but you got to give them fairness for being responsive and as we talked about earlier the sourcing initiatives to try to concentrate purchasing power and sourcing power and those kind of things, we have seen pretty substantial savings there to say that the regulatory environment has been challenging with a pretty fair statement especially in light of the President’s recent change. The speech around climate change and I will get into that today, but yes (indiscernible).

Michael Dudas - Sterne, Agee & Leach Inc.

Oh, come on.

Kevin S. Crutchfield

Keep probing me, probably that will (indiscernible). Now look, it is a challenging environment and I think everybody gets the fact that it's the easiest fairly transformation of what's happening not only here in the U.S. but around the globe and there is no such thing as a normalized rate of anything at the moment. We’re in a very volatile market place and everything is happening in real time and you’re pricing -- we’re heading towards, basically running a business on the spot basis is what it feels like at the moment, which I think will land itself long-term to the creation of synthetic instruments I think we’ll all be able to use to lay off some risks, but by in large I think everybody gets it and we’re seeing them be responsive.

Michael Dudas - Sterne, Agee & Leach Inc.

Kevin, as a large controller of export capacity for coal in the United States, do you believe that the industry is going to continue to invest and expand port capacity and is the opportunity for the U.S. to be a meaningful player in the market, of course you can cyclically challenge the pricing but is that still something that the coal industry in general and you guys particular are still believing as we emerge from where we get some more normalized demand? Thank you.

Kevin S. Crutchfield

Yeah, look absolutely. I think there are places on the planet where we will fight to be a core suppler. I don’t think there is a reason or possibility that we can be core in Asia by probably not huge volumes but off the east coast in a way off the west coast I mean I think there is a very strong chance that we could become core to the Asian region just given the productivity of the western basins and so I think yeah long-term you’ll continue to see efforts especially on the west coast to create those outlets, probably a little less so at least in the near term off the east coast because we had excess capacity anyway. And it is based on what we see happening that’s probably going to follow on a year-over-year basis. So, but over the long-term yeah, I continue to believe that the world is a big place anytime you use 8 billion tons of something that’s kind of hard to wave off, and we’ve got a good industry here, a great workforce, good infrastructure is already in place, we’ve just got to create those end markets and we’ll do just that in time I believe.

Michael Dudas - Sterne, Agee & Leach Inc.

Excellent, Kevin. Thank you.

Kevin S. Crutchfield

Thank you.

Operator

Thank you. Our next question is coming from the line of Michael Goldenberg with Luminus. Please proceed with your question.

Michael Goldenberg - Luminus Management

Yes, thank you. My questions have been asked and answered.

Kevin S. Crutchfield

Hi, Michael.

Operator

Moving on to our next will be coming from the line of Chris Haberlin with Davenport. Please proceed with your question.

Christopher Haberlin - Davenport & Company LLC

Hi, good morning.

Kevin S. Crutchfield

Hi, Chris.

Christopher Haberlin - Davenport & Company LLC

Kevin, you talked about in the release and then also in your prepared remarks about Northern App being a bright spot and obviously there’s been several major supply disruptions between you all in consul, can you just talk about what you’re seeing in terms of demand in price trajectory there, and then maybe as we get into Q4 assuming that these supply disruptions are taken care of, is there a chance that the market might start to weaken there or demand strength strong enough to support what you’re seeing today?

Kevin S. Crutchfield

I think, Paul and Brian to comment on it too, but these events I think run the potential of throwing that market a little bit out of balance in terms of being undersupplied with the event that we’re having as well as consuls event was pretty nicely balanced before. Inventories have been following now 65 days of burn or something like that very competitive with gas at its current rates. So yeah, I continue to believe that it's a bright spot and also I mean we continue to find that these coals are desirable not only here in the U.S. but they also make a nice export product and we expect to see that continue for the foreseeable future. So, yeah I fully believe it's a pretty bright spot and will continue to be so.

Christopher Haberlin - Davenport & Company LLC

Okay, thanks. That’s real helpful, and then just the second question here, a number of the trade rags have talked about recent utility RFPs that are out there and the utilities are requesting some flexibility in the contracts in terms of future volumes. Can you just talk about maybe some of the risk and some of the benefits that might have for Alpha or just coal suppliers in general?

Kevin S. Crutchfield

Yeah, it's frankly a characteristic we don’t really care for. I think the way to think about it is, we are happy to provide the optionality. It's just not something that we can do for free. This is always a function of who’s got leverage at the table and who doesn’t. But our proclivity would be to avoid it where we can or price it. This is very much in it's infancy it’s just kind of come up in the last couple of months. So we’ll just have to see where that shapes out. Any further color probably from you or Brian.

Christopher Haberlin - Davenport & Company LLC

Okay. Thanks very much.

Operator

Thank you. Our final question of the day is coming from the line of (indiscernible) with Brean Capital. Please proceed with your question.

Lucas Pipes - Brean Capital

Good morning, this is actually Lucas Pipes, I’m abroad and [Trent] dialed in for me, so (indiscernible) inconvenience. Thank you [Trent]. My first question is, in regards to your description of widespread cutbacks on, or in terms of met coal market, when I look at Q1 exports from you and also other producers that have reported previously, they look very healthy. So, could you reconcile the shipment numbers upper steam with the perception of widespread cutbacks and then secondly, if there are cutbacks when do you think -- if there are net cutbacks when do you think that will impact shipments?

Kevin S. Crutchfield

I think you’ll start -- Lucas, I think you’ll start to see it in the back half. I mean, I think as you look forward based on the adjustments that have been made, you’ll start to see that trending down over the next couple of quarters pretty clearly I think and I wouldn't be surprised to see even more announcements in the back half of the year with the [cash] position.

Lucas Pipes - Brean Capital

Thank you. That's helpful. And then I appreciate your description of the Cumberland issues as an exogenous event. Could you maybe give us a bit more understanding of what exactly happened at that mine? It sounds like it had to do something with the roof, but then it's hard for me to visualize what was really the most recent case there, so if you could maybe describe them in a bit more detail the exact nature of the geologic issue and how you are addressing that issue currently?

Paul H. Vining

Lucas, this is Paul. That's like forget the cliff notes and give me the full nickel version. I'll try to condense it here in a minute or two but basically – we started having problems in April or in May and June with gas and the wall was stopped for a period of time while we worked through that [indiscernible]. You stopped the longwall, you tend to put pressure on the headgate and the tailgate, two entries on either side of the longwall block that you're mining and we continued to see that during the period of time. It slowed our mining down more and eventually in the first part of July, we reached the point where the [stage loader], which is a piece of equipment on the headgate, it's about 100 feet long had a roof sitting on it under about over 1,000 feet of cover. I've had this happen before in other mines and had it happen normal. You get out some fairly large hydraulic jacks and you sort of push your way through it. If that doesn't work, you actually take out an air drill and you drill and you manually shoot dynamite above the stage loader to remove the rubble and the rock and then apply the jacks and push it. So unfortunate is to be in a position where there's a lot of rock and a lot of ruble and a lot of pressure around the stage loader. If that doesn't work, you have to go to the last option which we moved to in terms of shutting the wall down and taking the stage loader apart, taking a continuous minor above the stage loader and mining above the stage loader and bolting the top about 30 feet up into a competent roof, in this case it's a limestone roof. I was up here two days ago and the guys have done a fantastic job. The worst thing you can do is try to do it too quickly, put it a bandage on it, get somebody hurt or get into the same situation two or three weeks later. And you take the headgate [indiscernible], you're just assembling a lot of equipment, doing a lot of things that people normally don't do and this is something that probably occurs once or twice in a 10-year period in all the longwalls in the country. It's not very often. As we go to the next longwall, we got about 800 to 900 feet to mine on this one. The key is to keep the longwall and we cannot let the pressure get ahead of you on the headgate and the tailgate. The key to that is ventilation and on this next longwall, we got an intake shaft that will be in use that wasn't on the current longwall panel. We've got an additional bleeder shaft. We've got a de-gas operation going on above the Pittsburgh seam and another seam. This is a source of some of the gas. We have de-gas holes that we normally drill on the [indiscernible] area and turn on after we mine past them, we're actually doubling the number of de-gas holes and the next panel and we're significantly increasing some of the roof control measures on the headgate to avoid the problem as we go forward. So the guys have done a heck of a job but it's an unfortunate occurrence.

Lucas Pipes - Brean Capital

I wish you all the best. Good luck in getting that all sorted out.

Paul H. Vining

Thanks.

Kevin S. Crutchfield

Thank you, Lucas.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Crutchfield for any concluding remarks.

Kevin S. Crutchfield

Okay. Thanks, operator. Thanks everybody to attending today. I'd like to just remind everyone that we're going to continue to optimize our business to manage it through today's choppy markets and so doing we aim to emerge from the current cycle to better position for long-term success. In the meantime we're going to maintain our focus on execution, operational excellence and maximizing our liquidity as well as our financial flexibility and we look forward to updating you on our next call. Thanks everybody. Have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation

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