Cloud Peak Energy, Inc. (NYSE:CLD)
Barclays Capital CEO Energy-Power Conference
September 12, 2013 12:25 PM ET
Colin Marshall - President and CEO
Dave Gagliano - Barclays Capital
Dave Gagliano - Barclays Capital
Okay. Oh, good, it’s on and the strobe lights stopped, two for two, all right. So my name is Dave Gagliano and I cover the metals and mining space for Barclays and I have the privilege of kicking off the next three presentations which are all from coal producers. The first one is Cloud Peak which happens to be the only “pure play” in thermal coal among the US, publically traded US coal companies. And obviously that with – and with us today is Colin Marshall, the president and CEO, and Colin, why don’t I just turn it over to you, I am not going to get in any more detail.
Thank you, David and thank you for coming along. It’s always touching when the room actually fills up more than MCs from the previous presentations. I do appreciate it. Thanks for that. Obviously we got our forward-looking statement, you will have to make up what I say as best as you can, it’s really small type.
In terms of the business, I will just run through a few overview slides of Cloud Peak Energy before I get on to our strategy and what we are doing at the moment. And obviously I will touch upon the current market environment and the things that I think are impacting us more immediately.
Cloud Peak, we are one of the largest US coal producers, I think we are about fourth largest on tonnage, about 90 million tons; it’s all thermal coal in the Powder River basin. We have approximately 1700 employees. We were spun out of Rio Tinto in 2009 when they were divesting their thermal coal assets in the US. Our market cap is about $1 billion and we have – I will come on to the liquidity I guess a bit later but so a reasonable sized business, all in the Powder River basin, I’ve got to explain.
Being in the Powder River basin, all surface mines, all thermal coal, we do actually – because we can do reclamation as we go along, we have compared to other businesses relatively low reclamation and long-term liability, that’s just the nature of the business and the fact that we started in 2009 with no pensions.
We’re very proud of the environmental performance we have in terms of reclaiming as we go. So you can see that picture at the bottom right hand picture is actually an area we mined through and put the stream back where it was. So we actually do leave the environment as pretty well as we started off with, potentially a little bit better certainly as far as ranching and farming goes. So we consider the mining a temporary use of the land and we are very proud of the way the operations are run in Wyoming and Montana.
One of the things that we always focus on as a sign – first of all, something we really believe is very important is that there is no reason why anybody should be hurt mining coal. So we spend an awful lot of time on safety and I think most people who have been involved in mining would understand that a good safety is also a sign that operations might be well run. The graph you’re looking at there is actually MSHA data from 2012 which is the all injury frequency rate for employees across a whole range of different mines and you can see where Cloud Peak Energy is, with a level of 0.82. So that’s 0.82 injuries per 200,000 man-hours worked and that might be a stitch in a finger or something worse. So that’s where we are. We are currently running at 0.66, we just spend a lot of time on making sure people are kept safe and we look after the environment, I think it’s very important to us and maintaining a sort of license to operate and mining in the Powder River basin.
In terms of where the Powder River basin is laid out, they are in northeast Wyoming and into Montana. Most of the mining is done from the area just north of Gillette down south to around the Antelope mine. We own the Cordero Rojo Mine just south of Gillette, 8400 coal. The Antelope mine is the most southernly mine in the basin, 8800 coal and then we have the Spring Creek mine which is in the northern Powder River basin, just north of Sheridan in Montana, and I will come on to the export position we’ve put together later but around the Spring Creek mine we also have Youngs Creek Project and it’s adjacent to the Crow Indian Reservation where we have an option agreement with a lot of coal assets, there’s an awful lot of coal set up for exports in that area, just into Montana.
Current reserves, it stood for the year about 1.3 billion tons, 300 at Spring Creek, about 300 at Cordero Rojo and 650 at Antelope as well as additional non-reserve coal, including 300 at Youngs Creek. So we’ve got plenty of coal. I will come onto the Cordero Rojo that we didn’t bid on the LBA there at the moment and explain our thinking behind that.
In terms of our liquidity, which is obviously very important issue given the current depressed market outlook and prices. We are thankfully in a pretty good position. We have $280 million of cash and marketable securities. Total available liquidity of $767 million. We have $600 million of debt with us that comes due within 2017. So we’re obviously very focused on our liquidity position at the moment, thankfully we’re in decent shape and working to make sure that we stay away from getting in any financial distress, certainly if we could avoid it. So that’s where we are, we are well set up, we’ve got the maturities in ‘17 and ‘19 which thankfully at the moment are reasonable way off.
Now the story for – to give you an overview of the business in terms of story for where the production has gone and our earnings or EBITDA. The little graph on the left shows you the – in the last few years we produced over 90 million tons, around about 90 million tons. Domestic has decreased to about 86 million last year and the growth has come from exports. Now our exports are predominantly being through the Westshore terminal in British Columbia and the reality is that’s the growth opportunity for us.
Domestic I see, if we look at the environment now with obviously gases come on in the last few years, it was particularly dominant last year when gas was selling for very low prices and displaced a lot of coal, including PRB burn I think that’s obviously now recovered and coal’s replaced – has come back to about 40% of the American electricity production. My feeling is that the burn rate that we are at now and maybe the average of now, next year would sort of be a levelling point where PRB will be for foreseeable future.
Given regulation stuff I am sure some power plants will close but others would run harder to meet MATS rules or whatever. So overall my projection is that the overall US production will – the coal burn and production will come down but within that the PRB will stay relatively flat from around about the level it recovers to this year and next year.
The growth will come from exports, you’ve seen there and I will come on to explain what we are doing to try and position ourselves for that.
So for Cloud Peak Energy, our strategy, just to lay it out in simple ways, we’ve obviously got our existing domestic business and we want to run that as efficiently as we can to generate cash flow. We want to invest in that as appropriate, whether it’s an equipment or reserves where it makes sense. So we’re doing that to try and generate the liquidity in the base – stable base so that we can look at growth opportunities. Initially there are some around the northern PRB and Spring Creek that we can do based upon some smaller domestic opportunities and we are looking at those. We’re obviously looking at other LBAs as well.
The big opportunity for us though, as I’ve said already a couple of times is maximizing exports. We are working very hard on that. We put our positions together around Spring Creek to make sure we’ve got the reserves and the opportunity to do that and now what we are looking at doing is making sure that we – that as we do that we now can put work on making sure that the ports are there to deliver that coal as time goes on. So we are busy with the port works that will come along but we’ve positioned ourselves in terms of reserves to be sure that we've got the coal to move when the opportunity arises.
Then the last point is that we are prepared to look at other opportunities for M&A. But we’re also very cautious and it’s pretty clear that it's very easy to get that wrong particularly at the top of market but equally at the bottom of market we’ve got to make sure that anything we look at isn’t likely to put us into a bind. Clearly our thoughts are that anything that’s got export potential surface mining Northwest US into Canada is more likely to be the sort of areas that we think we could operate well in and have some value. So whilst we look at lot of things, I think those are the obvious things we’re drawn towards but we are also very cautious and don’t feel compelled to do anything at the moment unless we can come up with a case that we find compelling.
So in terms of our – I will just quickly run through the domestic strategy then is obviously to operate what we’ve got very well, be very disciplined with our capital particularly at the moment. We do like to sell forward consistently. We believe that optimizes the operations and lets us run the mines at a good level and we’re focusing on matching production to demand. And I will talk about that and how important at the moment we have to look at reducing demand -- production but that’s because demand is lower.
So in terms of the external environment we are facing domestically, there are lot of things actually going in the right direction. If you think that coal burn has increased from last year, and actually it’s quite steady. PRB stockpiles have come down a long way, they are similar - close to about 74 million tons at the end of July, down from 93 in same time last year, that’s quite a big reduction. So the generation – coal generation is up about 10% year-to-date whilst gas is down. Unfortunately PRB pricing has not yet been supported and at the moment that’s the view as far as I can see to overcapacity. And so whilst the coal burn is up, it’s not yet back up to match or exceed capacity.
Obviously the regulatory environment with the MATS is putting pressure on some power plants and it makes it very difficult to invest in new coal plants. So I don't think there is any real chance of a new coal plant being built at the moment regardless of the latest announcement that we read about in the newspapers, basically because the uncertainty over the last few years has made it very, very difficult. I think as I said I think we expect the PRB burn to stabilize around the 2013 level and continue into ’14.
So what are we doing? What’s Cloud Peak Energy doing in response to that? We’re focusing definitely on delivering the tons that we’ve got contracted, making sure we meet our customers’ commitments. We’re doing everything we can to reduce our costs and we’re expecting in the second half of this year to have a big significant better cost per ton than the first half and that’s really driven by volume. We were slow on shipments in the first half, we’re projecting that those to pick up as they – as long as they do, then the cost per ton will definitely come down.
We’re very conscious of the cash position and so we are making sure that we’re very close – very tightly scrutinizing our capital spend. We are about looking at $60 million, $70 million at the moment and quite frankly that’s all done in making sure that we have cash on the balance sheet. Where there are opportunities with the cash that we do need to spend we are making sure that we are being frugal about and stay with it, so that we are buying second hand equipment, instead of new equipment where we need to. And one thing I would add is that in terms of investment in the business we’re actually having – we’re employing extra people and with using extra equipment to make sure that we can actually deliver the tons we’ve contracted, and that’s because in the Powder River basin every year to do the same amount of tons, because the coal dips, the hole distances increase, that you always need more – you have to do more work to get the same amount of coal. So whilst prices might be stable or flat to give the same 90 million tons of coal out, it’s actually more work and more effort. And that’s true for all producers in the basin because of the nature of the geography.
So the other thing we are now looking at, because as we look out to ’14, obviously price cut isn’t great. We are having to contract tons for next year. We are selling tons [lowering the minutes] we say we do because quite frankly the reality is that whilst we don’t know where prices would contracting for next year, the danger or the fear of actually not having coal to contract to anyone would be worse than actually selling some coal at the forward strip. So as producers we have to now look at each other and complain, why are people selling coal at such low prices? Unfortunately that’s where the market is and we do have to sell some tons at those prices too. So we are layering them in because we do believe that’s the right way to run fixed cost business. We are doing everything we can to manage costs. That does leave us though sometimes we definitely – we are not very happy with the prices of contracting coal, at least with our cost base, we believe we are in better positioned than many of our competitors to sort of weather the trough that the business is going through, this overcapacity is working through.
So with that in mind, when the Maysdorf II LBA bid came up for 150 million tons at Cordero earlier this month or last month, we put in for that LBA seven years ago, it’s a very long process to go through. We actually took the view that at this stage given the current pricing the forward-looking market, we didn’t want to bid and commit the cash of 150 million tons based on what we could see, and upon our assessment of how many tons we could mine from that area and the cost of doing it. So we didn't bid, nobody else did, which I believe is the first for Powder River basin. I believe it reflects the current economics, it’s not to say that, that coal won’t be mined in the future when things improve but at the moment we didn’t feel it would be a smart idea to commit to [get all] the money to purchase 150 million tons when we are not actually making that much money out of 8400 coal at the current forward curve. So we decided not to bid on that.
The other thing that we've announced is that we are looking at Cordero Rojo reducing production by around 10 million tons in 2015. We’re pretty well sold out in the most of 2014. So we are in good shape for that. The real catalyst for the decision was that -- to maintain the production in that area of the pit, we would actually have to have something like $50 million worth of capital for truck shovel fleet, more people, more cost to carry on maintain – maintain production as that area of the mine got deeper. So we decided at this stage that whilst we are evaluating the current forward price per tons to support that investment and then obviously without the LBA the reserves in that area over time – unless we were to get that LBA in a few years’ time, we will dwindle as it were. So we think the right thing to do at the moment is to look at reducing that – shutting down one drag on that and redeploying the equipment to other areas where we need most people would be expending capital. So for now that seems to be right thing to do. We’ll obviously re-evaluate that decision and it depends on the prices that we could sell 8400 coal.
In terms of the actual forward sales position for now, this year we’ve got about 92 million tons contracted, pretty all of it, about 2 million tons of fixed price, the middle of our guidance range is about 90 million tons of production, so of shipments, so we’re pretty comfortable that that’s wind up well. So this year is reasonably well done, we don’t need to sell, actually we’ve got more coal to sell.
For next year we’ve contracted 75 million tons as of the middle of the year, 19 July, of which 63 million tons is at fixed price around $13.40. Unfortunately as the indexed coal will fix over time and as we have to sell some more coal to get up to around 90 million tons, that will be at it lower prices given the truck current forward curve. Although around 5 million tons of that coal will be export coal which generally prices later. We will see – we are in a good position for next year but unfortunately we do have tons to sell. So we will have to carry on doing that and some of it at prices that certainly don’t excite us but as I said before, I think the alternative is not selling the coal, it could be worse.
Okay. Now we move on to the export strategy. Our export strategy is pretty simple really. We do see very strong international demand, so I will come on to cover. We’ve got a logistics business that we've been building up and we've established ourselves as the largest certainly Power River basin coal exporter. We purchased Youngs Creek from CONSOL a couple years ago to give us reserves plus to Spring Creek, and we also did a deal with the Crow Indian Tribe which I will explain to cover about – which covers about 1.4 billion tons of coal. So we’ve got a tremendous reserve position. The thing we are doing as well is we try to put in place agreements, the ports that are being developed, to make sure that we secure space with those terminals and we want to make sure that we are doing everything we can to maximize the chance of those large ports being built. So a pretty simple strategy, we think the growth there, we want to get the reserves together and establish our position and be well placed as large ports are built to export -- increase our exports.
The current international environment is quite interesting. The thing that I see is very strong thermal coal demand, particularly from China and India this year I think taking a lot more coal. So demand still seems to be there and the coal plants -- facilities being built. Obviously Japan is turning as the nuclear shortage they are turning more to coal to make sure they run what they got. And they are also building facility to allow them to take sub-bituminous coal where previously they have always taken the Australian high quality coal. They now realize they need the flexibility to take Indonesian and US coals, so they are putting – Capesize vessels for shipping the coal.
So between them and Korea, we are seeing quality countries who want to increase their coal burn and you’ve obviously got across urban industrialization and urbanization across China and across India mainly the coal demand, the power demand keeps going up, in China for instance, I think electricity demand in the first half of this year was 5.6% up on last year, obviously anything to do with China involves a very large number. So they are burning a lot of coal and they are actually increasing their coal import this year as well as obviously their domestic production. And obviously with India, the other country that’s increased imports by about 30 million tons this year. So those things are all good.
What is currently not good is the over-supply that’s come on because of the project that was sort of kicked off and committed to in 2007, ’08 when prices were high, and commodities, and people thought commodities wouldn’t come down for a long time, they are now coming on and as the commodity cycles, as you bring on production you actually can push prices down. So we are seeing production from Australia and particularly Indonesia coming on. At the moment it is larger than the demand growth but as it also happens with the commodity cycle, we are seeing the contracts projects being canceled in the future, so hopefully that will come into balance before too long.
I think the key thing for me there is a strong demand growth and it’s not obvious that’s going to go away, if the major fundamental movements in Asia and urbanization there actually to continue. So at the moment we are seeing low Newcastle prices and we are also seeing a drop in Australia and Indonesian concurrency don’t help, the Australians were heavily priced themselves (inaudible) business but they have obviously seen turnaround, the pricing drop, should give them some respite for a while but overall still what we are seeing is pretty tough, at current Newcastle prices.
Thankfully for us, we are making a very small return, not underwater current prices but nothing like it was when we are pricing Newcastle mix around about $110 rather than 80. The other thing we are seeing is the lot permitting process for the Pacific Northwest terminals being pushed by [province of coal]. Across Asia, we are supplying at the moment mainly to Korea, as we are producing – aiming to export about 5 million tons. What that means is that we can actually supply quality customers who could take the coal and do make long-term commitment. We’re very conscious that it’s important to build the base with the best cost that you can get, so we’ve got Korea, most of our coal goes there, we’ve got some sales to Taiwan and we are also starting some sales to Japan which is great. We’ve made one or two sales to China through traders but we are conscious we need to learn that business and we’ve got time to do that because it is a bit more rough-and-tumble than selling to a Korean utility, selling to a trader who might not answer the phone if the prices go against it. So we are making sure we understand how to do that and we’re very comfortable that the base is strong at the moment.
The other thing that is quite telling is how the Korean and Japanese [jenkos] are very conscious that they would like to have another form of source of supply, not just Indonesia and Australia and developing the long-term development of the Canadian and US coal supply which is very important to them, because they are very conscious, it was only in 2008 that China was exporting coal, and now they are importing about 330 – over 300 million tons a year which really is normal to China for its global market.
So I think all that’s good, we’ve got support from our customers to keep exporting. We do have low prices at the moment, but I think that one of the reasons why demand will overcome supply certainly the current pricing, it’s just a question of time.
In terms of our assets we’re very lucky for a couple reasons, I will run through this slide that Spring Creek complex, we have around that, it’s got the export coal for us, has a geographic advantage compared to the rest of the Powder River basin, it’s about 230 miles closer to the ports, which might not sound much on the 1600 miles, it’s actually quite significant in terms of the logistics of getting coal from the southern Powder River basin where the 8800 coal is all the way up to Westshore or Ridley. So I think that’s quite significant.
The other thing that we’ve got is Spring Creek quality coal is at the higher end, it’s 9300 BTU coal typically, so it’s higher energy than the 8800 PRB coal. The little diagram here shows that generally Indonesian coal there is a whole range that comes out, increasing the quality is actually decreasing its production is ramped up, and our Spring Creek coal is the top diamond is actually at the upper end of that. So we find there is – we don't have many quality problems, if any I am aware of, when we are selling to Indonesia – sorry against Indonesian coal into Korea, and we’re actually at the top end of the range which to me explains that. We are also better placed than the southern PRB 8800 coal. So luckily for us Spring Creek actually is geographic in the right place and its better quality coal for the export market which I think explains why we’ve dominated the exporting from the Powder River basin.
In terms of the projects we’ve got, we obviously put together the Youngs Creek acquisition, which is about – we bought from CONSOL about 280 of a 90 million tons of coal is currently classified as non-reserve coals, it’s not in a 1.3 billion but it’s definitely there. We do have a mining permit. The other thing that we purchased with that which is hopefully clear on the next slide is we purchased 39,000 acres of land, which is part of that even in Montana and importantly was across the area between our Spring Creek mine and Youngs Creek and actually went across to the Crow reservation. So we’ve got a great reserve position and the land position.
The other thing then we did was put together an agreement with the Crow Indian Tribe for options over an area covering 1.4 billion tons of coal, and the options are being set up to -- which has now been approved by the BIA, it’s all good to go and we should be drilling on it either late this year or early next year, sort of confirmation drilling to design our mine different pits. It’s set up to incentivize us to export coal with some sliding rates on the fees depending on export prices which I think make sense because the real option for it – the real chance of developing in a big way is ultimately with exports.
So the way that actually looks on this map is the top right hand corner is Spring Creek mine, it’s the dark areas where we are going to mine the other 300 million of coal we’ve got in the mine. Down south, the dark area is the 290 million tons of coal at Youngs Creek and then across to the left as you look at it are the Crow Indian coal. The other thing that is interesting about this is we actually have one mine with pits in three different jurisdictions which someday I think could be advantageous. We’ve also got the rail access, we look at how we put that in. So I think the important thing about this is, depending on how ports are developed we’ve got the ability to bring this coal on and develop it as we see fit. If things go slow, maybe we just do 4 million tons from Youngs Creek or from the Crow. If it’s ports coming on them, we could go in and develop a couple of pits either on the Crow reservation or Youngs Creek as well as ramp up Spring Creek. So we’ve got an awful lot of options, we can also manage our capital. We don’t have to have everything there on a certain day as it works, drawing on ports and contracts ease into this, as terminals becomes obviously being developed, we will be able to actually manage our capital to develop in time for that. So we are not actually sort of betting a farm on this, because we’ve already got the existing operations and we’ve got some sign – so many different alternatives of how we develop it.
In terms of our port position, we have a position at Westshore, we’ve got contract till 2022, matching rail contract. This year we’re looking at exporting about 4.5 million tons, maybe a little bit more – maybe a little bit more on the side of five, we'll see how that goes going forward. But we’ve got a good position at Westshore terminal that we built up over several years. We have an option over 16 million metric tons of Gateway Pacific terminal. So that we’re obviously working to try and get that developed, that is coupled with the different ports that we talked about to me that was always the best one, the most economic, take Capesize vessel on an existing industrial site, near the mouth of the river, so it’s got all the right things. So we are working on that and I think we’ve got the 16 million option there which should be pretty significant.
I said when I talked about that, -- mentioned, obviously there is an awful lot of efforts you will hear about opposing the development of ports from the Pacific Northwest, to me what that means is that the process as we go through in terms of environmental reviews, we have to be very, very thorough because they can be litigated, because that’s what owners of projects in America do, it’s just got lot of lawyers. And so that will go on, I think all the work we do with the pro-coal efforts, whether the count on coal in Montana or the Alliance for Northwest Jobs and Exports, which in lies between railways produces, organize labor, different people who actually want to the jobs to manage and support, there are actually quite a lot of people who see the economic benefits with this and do feel that part of the role of Washington State is to be an exporter, we thought for the US is part of what they do there and there are extra benefits in terms of building ports in terms of what it can do for rain and agriculture. So there are more people than you realize maybe when you read some headlines actually support with this, where it ends up I don’t know. But we will have to wait and see, as certainly a lot of that’s going into, and we are active because we think there is a tremendous opportunity there. But it will take time, it might be 2018, or ’19 at the best but it does two things, methodically slowly and properly than try and rush in, because at the moment anything that’s not done correctly will be called for a lawsuit. So we are very working on that, we are realistic, it takes some times but it’s a great opportunity for us.
So just to wrap up, if we look forward we’ve got a strong balance sheet, to see through the cyclical trough. We are doing everything we can to manage our production at the moment and at make sure we are maximizing the amount of cash we’ve got. So what that means is that we're being true with our capital and holding back on some things that we believe that’s the right thing to do at the moment given the environment. We do believe that the prices will pick up before too long. But we’re making sure that we got no debt maturities before 2017. We are actively working on the port position, and we will look for opportunity to invest in something that, if there is opportunity out there, but we are very cautious and think that actual opportunity we think at the port, we’ve got a great portfolio. So we want to actually maximize that. We don’t feel the need to rush up to do anything else.
So with that, that’s all over, I’ve got to say and I think we go to break-out with this.
Dave Gagliano - Barclays Capital
I think we are running into a bit of time constraint. But I think we’ve got a few minutes for questions. Why don’t I just get the first one out there. You mentioned PRB pricing or you mentioned low prices but can you tell us what the price is for 2014 contracts right now?
Well, I think you just look at the forward strip is actually – it is actually matching, it’s down from what $11.50, $12 depending on where you are, so for the next year, which is not great if you look at people’s costs.
Colin, I am curious how would you approach, maybe this is the same thing as asking about 2015, but how would you approach 2014 contract and if you did not have any previous tonnage booked in the $14, ’$15 range, the book was entirely open, how would you think about your strategy?
That’s a tough question, because clearly we don't do that. In reality the customers don’t – you couldn't actually sell all of it from now to next year because they don’t buy that way. So our contracting is a function of what we will sell but also what people will buy. So it’s sort of question that I can’t really answer. I think clearly what we are looking for the marginal tons is, we’re sort of holding on those at current price and saying do we have to contract now and we will bid maybe $0.50, we just want to arguably assume will be the higher and then you find it – now they went to somebody else that’s priced significantly lower, so then you miss a few, and then you think, well if I don’t get the next one, I might not get to the tonnage I need for next year [inaudible] you look at price and you work out what you have to bid to get some business.
Let me ask it a slightly different way then. To what extent do you think the low pricing we see today is at all enabled by the fact that companies like yours previous sales at higher prices allow you to sell coal at these prices, and still be [inaudible]?
Yes, if you think it enables us, I think it’s more or less you actually look we got a high fixed cost business, all of it, and so whilst – as long as it’s overcapacity, and obviously capacity is coming off and we are looking at taking it off, the dilemma is that if you – you might not like $11, $11.50, but worse still is to have a mine there and not have a sale at all. That’s the tension that people are working with. Until utilities phone up and can’t get coal, then the price can rise, unfortunately that clearly hasn’t happened yet. It should do at some stage, they are holding more tons open and I think stockpiles [inaudible] I think they are moving in the right direction but at the moment they obviously feel that they can get coal and as long as they can and people will sell them coal for next year or whatever the current prices then that’s where the market is.
Dave Gagliano - Barclays Capital
I will ask one more. Could you comment a bit about some of the financing issues at Ambre and if that has anything to do with the development in the ports or anything, in terms of delays?
Okay. Obviously with Ambre we like to – we got a deal we negotiated with them last December, which unfortunately they have not been able to close. The thing I will say on that is they are very keen to purchase our half of the Decker Mine, we are still keen to [inaudible] currently at the moment with international markets, and their ability to raise financing, and we’ve said, let’s put it on hold and I think we will carry on working with them both to minimize the cash flow from the Decker Mine and to maximize the opportunity for them to purchase the other half, I think is where we are at at the moment.
With the 10 million tons coming off in ’15, can you discuss your strategy or how you are thinking about that impact on cost, do you think you can mitigate that headwind?
Okay. With the 10 million tons that we are looking at Cordero and seeing the current forward contracting really doesn’t justify, but what really is unjustified is there is $50 million we have to spend on a new truck shovel fleet to maintain that production. So whilst we're looking at producing just under 40 million tons at Cordero, it’s not the same sort of rate for this year, next year – sorry, in ‘15 the pricing doesn’t justify that capital spending. So what we are looking at is well, how do we smooth into that, that’s the work we are doing at the moment both in terms of employees, how we would reduce those, to redeploy them at the mine and equipment, you could save a fair bit of capital that would be otherwise spent elsewhere. So we are looking at all those things and we will do as best as we can to then also take cost out of our overhead, because that’s the one thing – mostly it’s to reduce cost when you are increasing production and reducing it. So we’ve got a work on our hands but at current prices, we think it’s the right thing to do lower the capital and to make sure we don’t spend money that (inaudible).
Dave Gagliano - Barclays Capital
With that, we have run into the end of the presentation session. I know that they are going to be in the breakout session. So obviously we will be there as well. Thank you very much.
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