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Massey Energy Co. (NYSE:MEE)

Q3 2009 Earnings Call

October 28, 2009 11:00 AM ET

Executives

Roger Hendriksen - Director - Investor Relations

Baxter F. Phillips Jr. - President

Eric B Tolbert - Vice President and Chief Financial Officer

Don L. Blankenship - Chairman and Chief Executive Officer

M Shane Harvey - Vice President and General Counsel

Analysts

Jim Rollyson - Raymond James

Kuni Chen - Bank of America/Merrill Lynch

Jeff Kramer - UBS

Michael Dudas - Jefferies & Company

Shneur Gershuni - UBS

John Bridges - J.P. Morgan

Curtis Woodworth - Macquarie Research Equities

David Gagliano - Credit Suisse

Brian Singer - Goldman Sachs

Pearce Hammond - Simmons Co. International

David Khani - FBR Capital Markets & Co.

Meredith Bandy - BMO Capital Markets

Paul Forward - Stifel Nicolaus & Co.

Mark Caruso - Millennium Partners

Fritz von Carp - Sage Asset Management

Justine Fisher - Goldman Sachs

Dave Katz - JPMorgan

Operator

Good morning and welcome to Massey Energy Company's Third Quarter 2009 Earnings Conference Call. Today's call contains copyrighted material. It may not be recorded or rebroadcast without Massey Energy Company's expressed permission. Your participation in our call requires consent. Please disconnect, if you do not agree with these terms.

Roger Hendriksen, Massey Energy's Director of Investor Relations will now provide opening remarks. Please go ahead Mr. Hendriksen.

Roger Hendriksen

Thank you, Jacquie and good morning everyone. Thanks for taking the time to join our call this morning. We appreciate your continuing interest in Massey Energy. As you know, we distribute our third quarter press release after market closed last night and its posted on our website, and its been furnished in the SEC on Form 8-K.

The members of our management team who'll be speaking with you today are Chairman and Chief Executive Officer, Don Blankenship, our President, Baxter Phillips and Eric Tolbert; he is the Vice President and Chief Financial Officer. We also have joining us this morning several members of our senior management team who maybe available for questions, as is required.

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

And actual operation results for future periods may differ materially from current management projections, as a result of factors outside the company's control. Information concerning those factors is available in the company's 2008 Annual Report on Form 10-K and other periodic filings with the SEC.

In providing projections and other forward-looking statements, the company does not make any specifically disclaims any undertaking or obligation to update them. With those formalities overview, I'll turn the call over to Baxter Phillips.

Baxter F. Phillips Jr.

Good morning and thank you for joining us. This morning we are conducting our call from Washington D.C. a location of the centennials of safety award ceremony.

Massey will be recognized as the recipient of three prestigious National Safety Awards later today. As the awards in today's ceremony are sponsored by the National Mining Association and the U.S. Mine Safety and Health Administration.

Massey is the winner of three of six awards in co-related categories. We understand that this is the first time that our company has won three centennials of safety awards in the same year. We are very proud of this accomplishment and our members who worked so hard to make Massey's mines among the safest in the industry.

According to the timing of the awards ceremony, we will need to end our conference call about 10 minutes before 12 today. Our presentation will be brief to allow time for your questions.

In the third quarter of 2009, Massey once again demonstrated the ability to generate solid cash flow in the face of difficult operating and market conditions, by controlling cash calls, reducing capital spending and managing working capital, we were able to generate over $100 million in cash during the quarter.

This was partially offset by the deposit of $72 million on our appeal bond related to the Harman litigation, but from an operations perspective, we were very pleased with the cash generation. Total production and produced coal sales were less than we had expected, as a result of weak demand in the thermal coal market and production loss due to the fire at the Bandmill processing plant. The loss at the Bandmill plant led to the addling of some of our Logan County mine service resource group.

We estimate that we lost approximately 300,000 tons of metallurgical and thermal coal production as a direct result of the Bandmill fire. To mitigate the lost met coal production, we are increasing production at some of our other resource groups, including the start up of the longwall and the Upper Big Branch mine at other field. (ph)

On the other hand, we have seven higher thermal coal mines or mine sections that remained down in response to weak thermal coal demand that is part of our efforts to reduce cost. Although we've added some mines, we are focused on increasing production at other mines with higher quality coal of lower cost. Most of these lines have returned to 50 hour work weeks.

Because of the idle mines, we ended the third quarter with 300 fewer (ph) numbers than at the end of the second quarter. We had 521 members less than a year ago.

Our cash outlook starting to trend in the right direction having decreased by 3%, as compared to the second quarter. On a year-over-year, basis cash cost were up 3%.

The turnover was 13% on an annualized basis in the third quarter. This was the same level within the second quarter, but down compared to 19% last year. If this trend continues, we expect lower turnover rates to lead to higher productivity and to lower cost. Now let me turn the call over to Eric for discussion on financial details of the third quarter.

Eric B Tolbert

Thank you Baxter. For the third quarter of 2009, we reported net income of $16.5 million or $0.19 per diluted share compared to net income of $51.6 million or $0.61 per diluted share in third quarter of 2008.

Produced tons sold totaled 8.7 million in the third quarter of this year compared to 10.3 million in the third quarter of 2008. Third quarter volumes were impacted by approximately 300,000 tons related to the Bandmill plant. 300,000 tons for coal that we chose not to -- chose to purchase in the top market at favorable prices and about 600,000 tons that were differed in the future years at customer requests, but at increased prices.

Our average produced coal sales realization of $61.79 per ton in the third quarter was $2.80 per ton lower than in the third quarter of 2008. This was driven mostly by a 13% decline in met coal prices. Average prices were higher for thermal coal and industrial coal shipments in the quarter as compared to a year ago.

The third quarter average price per ton was lower than compared to the second quarter of 2009, partially as a result of reduced export shipments of high priced metallurgical coal in the quarter, which was primarily a matter of timing of the vessels and shipments. We expect fourth quarter average price to be in the range of $65 per ton.

Average cash cost per ton for the third quarter of 2009 was $49.81 per ton compared to $48.49 per ton in the third quarter 2008. These figures both exclude SG&A costs which are the change from where we have presented cash cost in the past. We made this change in order to be more in conformity with the reporting of our public coal company peers and also to eliminate the impact of the stock price volatility on our operating results, as a large portion of the SG&A expense is tied to stock price.

Labor cost, equipment rental cost and higher fixed cost absorption on lower total volume were the major drivers of the increase in cash cost. These were partially offset by lower cost for equipment repairs and sales related expense.

During the quarter, we completed a reserve exchange which resulted in a pre tax non cash gain in $24.9 million or approximately $0.18 per share. As Baxter mentioned, we increased our cash balance including restricted cash by over $100 million in cash during the quarter, ending the $655.1 million in unrestricted cash, cash equivalent and short term investments.

Including the $72 million cash appeal bond deposit which provided a favorable resolution of the Harman appeal, we expect to get a return to us in the fourth quarter, the balance would be approximately $727 million.

As of September 30, 2009 we had $74.4 million borrowing capacity under our asset-backed credit facility. This was lower than in the recent quarters due to a lower level of accounts receivable that backed the facility. However, as accounts receivable have again increased, we have borrowing capacity of $87.7 million under our ABL as of October 28, 2009.

Our total book debt at September 30, 2009 was $1.324 billion, with total debt to book capitalization ratio of 52.2% and total net debt to book capitalization 31.3%. For the full year 2009, we now expect to produce coal shipments to be in the range of 37.5 to 38.5 million tons. This is lower than our previous range based on continuing weak demand in the thermal coal market.

Our full year estimate for average price realization per ton in the range is now $63 to $63.50 per ton, at the higher end of our previous range. We expect our cash cost to be in the range of $50.50 to $51 dollars per ton for the full year excluding SG&A. This is approximately inline with our previous guidance.

As we continue to rationalize and reduce our capital expenditures, note that CapEx was just $43.8 million including the purchase of the alloy assets. We've reduced our CapEx projection for the full year 2009 to approximately $275 million.

As for 2010, we have tightened our guidance for produced coal shipment just slightly. We now anticipate shipments from the range of 37 to 41 million tons. We have increased our expectations for average price realization in 2010 to the range of $64 to $67 per ton based on our contracting activity and customer outlook. Our guidance for 2010 cash cost is now $48 to $51 per ton excluding SG&A. Our guidance for CapEx in 2010 remained unchanged at a range of a 100 to $200 million.

However, this excludes the capital required to rebuild the Bandmill plant which we believe will be substantially funded through insurance proceeds. With the results within these guidance ranges, we expect to continue generating solid cash flow through 2010.

And let me turn the call over to Don.

Don L. Blankenship

Thank you, Eric. Before we take your questions, let me take a few minutes to share my thoughts on that outlook for 2010 and beyond. The macroeconomic factors facing all businesses and particularly the coal industry have never been more challenging and forecasting; it has never been more difficult. Coal is America's and the world's best hope for improving economic prosperity and health. However our government is at least temporarily impeding the attainment of coal full value and thus creating opportunities for domestic production growth.

But coal will continue to be in demand throughout the world and often the people will demand the benefit that is derived from coal.

Worldwide production and use of coal will likely increase about more than 120 million tons per year here in each of the next five years. As this growth occurs, we expect to have many opportunities to expand the export of our coal and of our mining skills.

We expect domestic thermal coal demand to remain weak for the next several quarters and perhaps through 2010. Utility stock piles remain very high and coal burn remains low.

Cash prices are now in the $5 range, therefore we do not believe coal to gas switching will get any worse, and there is a possibility that coal burn rates could begin to increase. When it does, we expect it to occur slowly rather then quickly. An absolute resurgence in international demand for U.S. thermal coal. We would need to see significant reductions and domestic stock piles before we would anticipate coal products and they measurably improved.

However, the weakening dollar and continued Asian economic growth could spur international demand for U.S. coals in the midterm. More production reductions will likely occur in Central Appalachia as a result of the generally weak economic conditions and increasing regulatory and permitting constraints.

Ironically, the circumstances should favor Massey and other well capitalized producers in the long run as we will gain market share. We will be able to leverage that share when we reduced supplier to gross higher pricing. Once 2010 production declines, we would expect to see a much better thermal coal market in 2011, because we anticipate the steam coal market being soft in 2010, we've sold forward aggressively to insure that we maintain or gain market share.

For 2010, we already nearly sold out for steam coal. We have 27 million tons sold in past and we have commitments for 2 million additional tons that are not yet priced.

We continue to be encouraged by the positive news, we're hearing from the sea-borne metallurgical coal export markets. Steel production in China was up 22% in the month of August and 5% for the first eight months of the year. China's met coal imports have remained strong absorbing a significant share of Australian met coal production.

Steel producers have restarted or announced plants to restart over 40 blast furnaces that have previously been out. Discussions with their met coal customers have switched from request to differ shipments to request to increase shipments.

In this market with increasing steel production on a relatively weak U.S. dollar, we should benefit from our vast met coal reserves and our significant met coal production capacity. Following our expansion last year, we have the capacity to produce over 12 million tons of met coal per year. We also have several immediate opportunities to expand met coal production including the recent start up of our longwall mining port and the addition of the recently acquired alleged property which will begin production at November.

Additional this week we were a successful bidder on the purchase of 15 million tons of potentially metallurgical coal and coal reserves in Barbour County West Virginia. In the longer term we have plans to develop our roll of coal field which we expect will be a 2 million ton per year operation producing at quality lower met coal.

Development will begin in the second quarter 2010 and we should be ready to ship coal beginning with the 2011 export season. Because we see the met coal market improving we have been more cautious at our forward sales of met coal. Approximately 60% of our plant 2010 metallurgical coal production remains both unsold and un-priced.

Going forward, we will continue to focus on cost reduction and productivity improvements. We may also benefit from lower diesel fuel process as our 2009 hedge rolls off and from our labor and benefit reductions implemented in May of 2009.

Even though market and regulatory conditions remain challenging, we are confidently that we have operating plants in place that will enable us to continue generating positive cash flow. Our primary use of cash is most likely to be continued acquisitions of coal reserves and assets and Central Appalachia.

We will also continue to analyze opportunities outside of Central Appalachia or in related lines of business such as natural gas, where we believe we can add further shareholder value. This concludes our prepared comments, we'd be happy now to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will pause for just a moment to assemble the roaster. Thank you, our first question is coming from Jim Rollyson of Raymond James.

Jim Rollyson - Raymond James

Good morning everyone.

Baxter Phillips Jr.

Good morning, Jim.

Jim Rollyson - Raymond James

Don, in the press release you've noted that your kind of proceed net potential right now over capacity is about 12 million tons, maybe plus the recent transaction you guys concluded. Can you maybe talk about what it might take in terms of timing and capital to get there and kind of what you are thinking about for a number right now for next year with the market you see?

Don Blankenship

Right now we are sort of boding in 9 to 10 million tons of met coal in our numbers. But the timing is little bit odd; we could do 12 million but probably would run at 14 million ton at least by mid year once we get the Bandmill plant rebuild.

So, if you look at us driven 12 million on an annualized basis or adding a lot of run rate in the first type, we could probably come to 14 million by July or so.

Jim Rollyson - Raymond James

And I guess as a follow up to that, just stick with the same topic here, on the pricing guidance you have for next year, knowing you've got 27 million of thermal sold and most of that pretty well locked up. It’s mostly met what kind of met price range are you assuming to get to that 64 to 67 range?

Don Blankenship

I don't want to be too specific, but we're probably in the low 80s on a net mine basis which we think is very conservative.

Jim Rollyson - Raymond James

Okay. Thanks.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Kuni Chen of Banc of America/Merrill Lynch.

Kuni Chen - Bank of America/Merrill Lynch

Hi, good morning everybody.

Don Blankenship

Good morning Kuni.

Kuni Chen - Bank of America/Merrill Lynch

I guess just a question on the utility inventories, what do you see as a bigger driver to work down those stockpiles as we go forward from here. Is that more switching back into coal from natural gas or more production withdrawals from your region, just want to get your sense as to how that could play out?

Don Blankenship

No, the big driver of course would be a significant economic upturn which would have the effect of driving the gas prices and the burn. So I think pricing would be extremely strong in that scenario, you know within three or four quarters, because the supply also constraints, so you would end up with a combination of gas prices going up, burn going up and supply being constrained late, in '10 you could see some substantially price improvement.

Kuni Chen - Bank of America/Merrill Lynch

Got you. And then just as a follow up on 2011; how much is the committed price at this point?

Don Blankenship

I'll let Eric give you some numbers on that, but...

Eric Tolbert

Yeah. In terms of total commitments, both priced and un-priced, we just signed a 27 million ton. On the price side there's about 17 million tons which are priced in the mid 60s, perhaps 66-50 per ton.

Kuni Chen - Bank of America/Merrill Lynch

Thanks.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Jeff Kramer of UBS.

Jeff Kramer - UBS

Hi, good morning guys. Can you just touch a little bit more on cost in the quarter, it’s actually a pretty impressive result given the lower tonnage than expected. And what were the specific levers and how sustainable is that?

Don Blankenship

We think it’s sustainable, the longwall that came back with more focus and a little bit better than we expected. As we always worry about the fourth quarter then we have all these holidays, all the confusion and so forth that comes that. But generally speaking we think that our costs are on the right track now and that they should decline slightly as opposed to continue to increase like that for the last several years now.

Jeff Kramer - UBS

Okay. And I guess speaking of fourth quarter as a follow up. Do you have still 1 million ton range, tonnage for the quarter? I guess what negotiations are you having, as demand is full in size and I would assume that would have an impact on cost as well?

Don Blankenship

No, being in terms it’s only about nine weeks left, there is not a lot of uncertainty in those numbers. We should be okay, there is always a possibility that an export vessel would slip out of schedule for some reason. But there is not been any significant negotiations going on or any thing that would impact that forecast in the fourth quarter.

Operator

Thank you. Our next question is coming from Michael Dudas of Jefferies & Company.

Michael Dudas - Jefferies & Company

Good morning gentlemen.

Don Blankenship

Good morning Mike.

Michael Dudas - Jefferies & Company

Don, recognizing your very conservative view on the thermal markets. Seems like you are a bit more optimistic about potential for net coal. What indications from your sales team have you found for demand or indications for Massey's quality of coals? And when you look at what you could run rate at and how quickly you can get to, is that something that is just with regard to running extra ships, couple of more sections opened up and how quickly can you get to those levels given the composition of the incoming order flow from your customers here and abroad?

Don Blankenship

Second part of that as far as ramping up, I mean it’s mostly ships and days, we also have -- if you recall quite good new equipments sitting in the warehouse. And as a matter of adding a section or two in active lands where there's no additional permits required so it could happen rather quickly.

Since there's always the macro things to all of the shred as far as the general meddlers for coal markets aren't sea-borne, but at times that we see specifically in the market is interest in Asia. Any time we see Asian interest in Central Appalachia and coal, it means that is going to have very good markets in Brazil, Western Europe and Eastern Europe.

So we're probably encouraged by the fact that we see specific customers seeking specific Massey quality tons in the Asian market.

Michael Dudas - Jefferies & Company

Are there customer you haven't seen in a while or ever?

Don Blankenship

Well, we've seen them all and ever probably.

Michael Dudas - Jefferies & Company

Yeah, sure.

Don Blankenship

In terms of we haven't seen in recent years and some of the ones that we have had business with asking for more tons than we anticipate.

Michael Dudas - Jefferies & Company

My follow up question, first is congratulations on the Safety Awards, it's a very impressive. I think, Baxter might have mentioned, Eric mentioned about the Harmon situation could you maybe refresh us on where we stand in the process, timing and your comfort level?

Don Blankenship

I can let Shane speak to that; generally we're just waiting on a court decision.

Shane Harvey

Yeah. We've briefed the case, its been argued again before the West Virginia Supreme Court that happened on September the 8th, just given a course of normal timing in terms of how disperse the case is, we would expect a decision this quarter, the fourth quarter. As we've said before that the fraction is same and the law has not changed since we won the case the first time.

So, given all that we have to prevail again.

Michael Dudas - Jefferies & Company

So for the up stream (ph) it has been changed we assume?

Shane Harvey

Yes

Michael Dudas - Jefferies & Company

Terrific. Thank you gentlemen.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Shneur Gershuni of UBS.

Shneur Gershuni - UBS

Good morning everyone.

Don Blankenship

Good morning.

Baxter Phillips Jr.

Good morning, Shneur.

Shneur Gershuni - UBS

Many of my questions have been asked and answered. But I just actually wanted to clarify one point, two points rather with respect to your average realized price for met for this year and cost as well for next year. With respect to metallurgical coal, Eric did I hear you correctly that you've basically said that the average realized price was lower this quarter and it will be higher next quarter, just really more due to timing of the when some of the boats go.

And secondly I was worrying if you could give us an apples-to-apples comparison either with SG&A or without SG&A as to how the 2010 cost guidance changed?

Eric Tolbert

I guess. Yes, the answer for your first question is yes. And on the cost guidance, in terms of 2010. Essentially in 2010 would SG&A being about $2. Our cash cost guidance we actually brought down to the upper end of the range before we are showing, apples-to-apples our cash cost guidance before would have been $48 or $52 and now it's 48 to 51.

Operator

Thank you. Our next question is coming from John Bridges of J.P. Morgan

John Bridges - J.P. Morgan

Good morning Don, Baxter, how you are doing?

Baxter Phillips Jr.

Well John, Good morning

John Bridges - J.P. Morgan

I wondered how much met you're assuming in the 2011 estimates?

Don Blankenship

I think that we're probably assuming 10 million tons, but that number could be changed to other direction spend on market and what we needed to do.

John Bridges - J.P. Morgan

Okay. And then I was in-turn looking at the severance presentation last night, how shipments were picked into levers which are quite similar to those at the peak last year, even though the utilization of steel in Europe is still only 60 odd percent. How sustainable do you think this pick up in demand for working (ph) coal is?

Don Blankenship

Well, I think that to the extent that is sustainable over the Asian driven and Brazilian driven, it won't be Western, European or U.S. driven. I think US and Western Europe will be okay if you will, but I don't look for them to perhaps the market as much as India, Brazil, Korea and China.

So its whatever one believes about the Asian Group story and what's going on there that they would derive their opinion on it from what we see there as we see continued robust markets as we've said in our opening comments, China is way up in all this.

Operator

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

Curtis Woodworth - Macquarie Research Equities

Yes, good morning.

Don Blankenship

Good morning.

Curtis Woodworth - Macquarie Research Equities

Don, can you describe little bit more of insights into what you're seeing in the export markets for your met coal. And maybe if you can talk regionally about any pickup in activity you are seeing in Brazil, Europe or Asia?

Don Blankenship

No, we're seeing as I alluded earlier lot of attention from both the current customers and potential new customers in Asia. And we're seeing increased interest in Brazil, I mean we've even began to see a little bit of a -- people talk about thermal coal but we're still several dollars away from it being in the money.

The issue again will be, clearly whether the Asian market gets stronger and stronger, and South Korea and China and India will play major roles in that. So, but we see the customers expressing interest and that's a positive sign.

Curtis Woodworth - Macquarie Research Equities

And in terms of thinking out to 2010, I think this year roughly other export mix from that maybe 20% is going to Asia. What you think that mix could look like next year? Do you think you have opportunity to significantly ramp the level of business you do in Asia?

Don Blankenship

I think that we do yes, I mean we let the market lead us to where we've placed the coal, of course based on price and some of the Asian qualities little bit tougher than the Brazilian or Western Europe qualities, but we've sold it to market leaders and we are preparing to have a coal quality that is a better match for Asia, both in mid '10 and in 2011. Best part of our role in it is, it allows to be very competitive in that market.

Operator

Thank you. Our next question is coming from David Gagliano of Credit Suisse.

David Gagliano - Credit Suisse

Great, thanks. My first question is how much steam coal did you sell forward in Q3 for 2010 delivery and what was the average price?

Don Blankenship

Frankly we don't know what that exact number is...

Eric Tolbert

Probably it’s still left for dealing (ph) in first quarter for 2010 and would be demand at that time.

Don Blankenship

Eric is going to try and look at it. We can probably give it to you in a minute; but we don't want to be horribly specific, but we had so many deferrals and change process because people were willing to differ the tons and pay you a bigger number in '010 or '11, so it changed a lot. But it looks like we've sold just over a million tons, probably in the $60 range.

David Gagliano - Credit Suisse

Okay. So it’s not much. And then my follow up, regarding your 2011 targets, I was wondering if you could just share with us your underlying pricing assumptions you are making for the un-priced thermal and met coal to get to your 2011 average price targets? Thanks.

Don Blankenship

Eric's going to look up some of the assumptions. But the good thing about '11 probably as lifting at us is the 15 or 17 million tons steam coal that we've sold, is it process or considerably higher than they were in '09 or '10.

Eric Tolbert

And if you're looking at its averages in the low 60s on the steam coal side and breaking around the $80 range per... around the $80 range at the met coal side.

Don Blankenship

Certainly, that's the total, like if we do 27 million in the 60s and save 10 million met, probably staying low.

Eric Tolbert

Yes, about $80 or to mid 80s.

Don Blankenship

I think the numbers are conservative, but in '11 we wanted to give you all a fairly broad range so that you can make your own assumptions as to steel prices and so forth.

Operator

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

Brian Singer - Goldman Sachs

Thank you, good morning.

Eric Tolbert

Thank you.

Don Blankenship

Hi Brian.

Brian Singer - Goldman Sachs

Can you provide a little more color on the pricing, and what you're hearing from your customers between some of the lower low mets versus higher law met? And how does that go into your guidance and your decisions and your decisions for contracting in terms of the realization relative to say some of the benchmark prices that are out there.

Don Blankenship

Even as between the low wall and high wall it's not that simple in the sense that there is high quality low wall and mid to low high quality, high wall and there is a mid wall. So it gets really complex.

Its one the reasons again that we are focused on bringing on a substantial CSX low wall mine we got a lot of where our metallurgical coal is on the CSX and it will allow us to do blends and improve our quality position and liaison in other markets.

But we've don't pretty well, in other the market we have season salesman on staff, we've been doing this for a long time and there are metrics which vary depending on the type of coke, coal and blast furnace half metal cost that are achieved by the steel company and we basically look at all those factors and who else might be competing with us in the market place and trying to get as good a price as we can for the stockholders, but it's always complex.

Tonnage probably more important than anything. And we are trying again to improve our quality for all those markets and we have the highest quality high wall coal in the world probably at mine port. So, it's a coal that brings a substantial premium over generic high walls that doesn't bring quite the price that a mid wall or a high quality low wall could bring.

Operator

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

Pearce Hammond - Simmons Co. International

Good morning and congratulations again on the centennials of Safety Award.

Unidentified Company Representative

Thank you.

Pearce Hammond - Simmons Co. International

Don, for your guidance for 2010 and '11, are they fully reflective of permitting challenges basically are these safe volumes or do you need X amount of permits to hit the upper end of the range for both years?

Don Blankenship

They are very safe in detail in '10. In '11 if we had a issue with permitting on a surface mine, we would go to more deep mines, that's one of the reasons for the broad cost range that we would, we will be and keep ourselves in a position to make growth volumes that are more ill regards of which way the permitting issue evolves.

But certainly if we get a lot of pressure from the permitting side that continues on into '11 we will begin to get restricted to some extend and we'll probably see a little bit higher cost on surface mine because of the placement of the material and perhaps moving a little bit more to deep mine.

Pearce Hammond - Simmons Co. International

And then as a follow up, can you just provide us a quick update on what you see in the world of permitting? It seems like all the press releases are negative, but is there anything positive that you see out there on that front?

Don Blankenship

I'd like to say there is something out there positive, I don't see a lot positive in the macro sense, I mean we have a lot positive at Massey. We believe we have a 100 million tons of thermal coal or surface mining coal permitted and that we have lots of opportunities to get permits in manners or in ways that comply with these laws, but we always worry about what DPA and others will do next, as far as frustrating that process.

But relative to the other companies we feel very good and we think that at least in the short term that we would benefit from the permitting process being illustrated but we're certainly not in favor.

Pearce Hammond - Simmons Co. International

Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from David Khani of FBR Capital Markets.

David Khani - FBR Capital Markets & Co.

Yeah, hi guys. Can you talk a little bit about your use of free cash flow, because it looks like if things worked out the way they do even in sort of a weaker 2010 environment that you should generate some good free cash flow. What do you think, what is your main use of the free cash flow and talk a little bit more about your views on natural gas and acquisitions, because obliviously it’s a bit different animal than what you're dealing with right now?

Don Blankenship

Yeah, as far as the cash flow, of course we've said that we will continue to look for reserves and acquisitions in Central App. We view Central App as our bread and butter at the current time and to the extent that we can increase our reserve base and provide locking acquisitions that illustrate reentry in a harder market, I think it's a good use of the shareholders cash.

On the gas side, allow the gas development in the Marcellus Shale is in West Virginia we know those landlords, we know those areas. We know the people and of course we've been here a long time we know the culture. So, we think that we're comfortable with that as well as with natural gas and other places because customers also are sometimes common.

So we feel pretty good about our ability to utilize our experiences and skills in the international gas fill. And we also feel good about transferring our skills into other parts of the world if the circumstances are right for us.

David Khani - FBR Capital Markets & Co.

Could you give us a sense of what parts of the world do you think match up with your skill sets?

Don Blankenship

Well I think that mostly any part, as far as mining would match up with our skill set, but are willingness to use cash would certainly be limited in certain areas. I mean I think, we can bring improvements to mining whether it would be in Australia channel or India, but I think that as far as investments, places like Australia and then maybe India or other areas might be more comfortable for us than say China.

But we will look at those individually and look at the companies that would be involved in and assist something on individually basis. But generically speaking, our first entries outside the country would need to be where we feel comfortable.

Operator

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

Meredith Bandy - BMO Capital Markets

Good morning gentleman. I was just wondering if I could go back for a little bit on met. I know you've talked about that a lot too far. But when you said 60% is unsold and un-priced, did I hear you write that you're baking in somewhere around 9 or 10 million for 2010. And would that imply somewhere around 4 million that are actually priced?

Don Blankenship

Let me try to get that clarified for you. We're showing the 9 under 10 million ton range within the U.S. downside with guidance.

And we're showing actually about 7.5 million tons of it un-priced but some of it is colored and it always gets complicated when you get into that.

Meredith Bandy - BMO Capital Markets

Right.

Don Blankenship

So basically we're about 60%, that's neither priced nor colored.

Meredith Bandy - BMO Capital Markets

Okay. And then so, so you are breaking in from the 9 to 10 within, but it sounded like you were saying, you could be by the end of it -- if you're at the high end and you think the met market is really strong, you could get up to a rate of like, did you say 14.5 by the year end?

Don Blankenship

Yes, it did. In fact in July when we rebuild this plant at Bandmill (inaudible) we couldn't run at a 14 million ton annualized rate.

Meredith Bandy - BMO Capital Markets

Yes, 14 million tons annualized? And then close to that, just the only CapEx that we required for that would be Bandmill, is that right, and that know would be covered by insurance. Is there other CapEx you had to put in there to get to that range?

Don Blankenship

There wouldn't be any meaningful CapEx to get to that right now.

Meredith Bandy - BMO Capital Markets

Okay.

Don Blankenship

It would get meaning above that.

Operator

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

Paul Forward - Stifel Nicolaus & Co.

Hi, good morning.

Don Blankenship

Hi, Paul.

Paul Forward - Stifel Nicolaus & Co.

On the -- I actually noticed from the industrial coal side, you had a sequential improvement from the second quarter which was good, I was just wondering, when you look at 2010, are you assuming that we can get back closer to your historical rate of 3.5 to 4 million tons at some point up from then maybe 2.5 this year on industrial coal or is that going to take a couple of years in your estimation to get back to a normalized level?

Don Blankenship

Well I think yes, it still depending on the economy. I mean if you now reach industrial accounts even in West Virginia we are running a fraction of the normal capacity. So, without having a crystal ball of the entire economy it’s hard to say. We'll be in a position to do that, we just don't know if the market will be there.

Operator

Thank you. Our next question is coming from Mark Caruso of Millennium Partners.

Mark Caruso - Millennium Partners

Good morning guys. Just a few clarification questions. Eric, earlier did you say that the fourth quarter revenue per ton was going to be 65?

Eric Tolbert

Approximately yes.

Mark Caruso - Millennium Partners

Okay. And then the second question was, and I think Don just answered for Meredith. But guidance for '10 and '11 you guys are assuming it is any where from 8 to 10 or is it 9 to 10 in each year, in the actual guidance that you guys gave in shipments?

Don Blankenship

I think its 8 to 10 and 10 and 9 to 11, in '11. Did you followed that all right?

Mark Caruso - Millennium Partners

Yes. Okay. And then, if the Bandmill plant comes on, I think if I heard you say it was 14.5 and does that include the annualized property that you've picked up or is that are your annualized property is incremental?

Don Blankenship

They would be incremental to the 12/14 number we've been talking about.

Mark Caruso - Millennium Partners

Okay. And then are we talking like 16 or is it more like 15, if the markets there and you are able to take advantage of those assets?

Don Blankenship

I mean if you went to total sale '11 and you had definitely (ph) Bandmill and the capacity you would probably push 16, but you would probably get into, I don't know a $100 million worth of capital between lets say the 14.5 and the 16.

Operator

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

Fritz von Carp - Sage Asset Management

Yeah. Hi, I just wanted to enquire into the thermal met coal, what you said that there was some hope that the stock piles were so high that we're not going to see an upturn in prices unless there's some hope that the foreign -- the sea-borne market might slow down or stock pile.

Could you just update me on where our shipping rates be, I mean that would presumably be, as far as we go to Europe, if the South African goes back to Asia or whatever. So what are the shipping rates to Europe these days? And where's the API 2, and sort of how you said the U.S. coals a few dollars out of the money, how many dollars is it out?

Don Blankenship

Again anything a not fully indicative, but we think we're about $10 half of being exerted in the European market. Shipping rates, we don't pay them, so I don't pay attention to them all time, all where coal is going to be, but I don't know what that number is for this $12 or where it’s at today, so I probably should leave it some day looking up that's posted in one place.

Fritz von Carp - Sage Asset Management

Okay. Thank you.

Operator

Thank you. Our next question is coming from Dan Cuscus (ph) of Morgan Stanley.

Unidentified Analyst

Hi guys. Following up on the comments for cash and the use of free cash flow, have you considered buying back any of your bonds that's below par in the open market?

Don Blankenship

Yeah, we watch it and have considered it. We haven't, I think actually we might have done one year. So...

Eric Tolbert

Yeah, we have done in reclaiming regiment within a few quarters.

Don Blankenship

But ...

Eric Tolbert

It fits the volatility.

Don Blankenship

Yes.

Operator

Thank you. Our next question comes from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs

Good Morning.

Don Blankenship

Good morning.

Justine Fisher - Goldman Sachs

Don, I just wanted to clarify earlier you had said that your expectations from met are in the low 80s sales price going forward. And so that seems to imply in the high 60 steam, but you guys are currently just doing in the high 50s and if you're mostly priced I'm just wondering what is getting you up to that steam level, is any of that assumption wildly off?

Don Blankenship

I don't have a though on it. But keep in mind what we're gathering to or what we expect sometimes is a little bit different and that we don't want to be overly optimistic we think in the market, because we are far stronger than we're gathering and we're giving new transparency, so you can make different judgment if you wish.

But on the forward market in '11 and '12 has been in the 70s support market in the teams and 2010 has been around $60 or less. And we went ahead and tried to sell up our 2010 tons, believing the opportunity to sell it at all was quickly passing due to the high levels of the inventories and that's what we were referring earlier when we were asked how much coal we sold in the earlier quarter.

Operator

Thank you. Our next question coming from Dave Katz of JPMorgan.

Dave Katz - JPMorgan

Hi, in the face of more active EPA, are there any actions that you guys have been taking with regard to your existing reserves or have there been any changes to the way you evaluate possible reserve additions.

Don Blankenship

Yes. I mean one of the reasons that we bold in for delivery of coal and third quarter and let our fixed coal volumes suffer was is that it allowed us to add couple of mines that are fully permitted that were sort of left in storage in case the permit issue worsens and the prices improve.

And in addition to that when if we look at acquisitions or properties we might acquire we pay quite a bit of attention to which of them are permitted and what stage of the process the permitting efforts are in.

Operator

Thank you. Our next question is coming from Jeff Kramer of UBS.

Jeff Kramer - UBS

Hey, just on the deferral front are those conversations still ongoing, have those gone away or any comments there?

Don Blankenship

Once that relate to '09 going to '10 or '11 are pretty well done. I mean we're having conversations with a few of our customers about deferrals of 10 to 11 or 12.

So, that's one of the reason we're pretty comfortable of the market is going to be weak domestically, bringing then to some forward its pretty well done. There will conversations about '10 to other years and we think that we have that properly considered in our guidance.

Jeff Kramer - UBS

Okay. And on the Bandmill plant, what I guess, if this is expected to come back next July what's the total tonnage impact from that being down and I guess are the in-turn proceeds also going to cover business interruptions, i.e. loss profits.

Don Blankenship

They won't cover business interruption, but they do cover to a limited extent additional cost. So to the extent that we had to take some of that coal to other preparation plans or do things that are certain coverage as you might have imagined are not always black and white and there will be some complication in there. But it is a policy that should help us in that regard.

And that facility would be about 300,000 tons facility if it were about pulling back on land which would happen in the third quarter of next year we can make the timing that we anticipate.

Operator

Thank you. There are no more questions. Now I'll turn the program over back to Mr. Hendriksen.

Roger Hendriksen

Well, thank you everybody for joining our call. If you'd like to have pursued follow up questions on some of the points, I've made myself available to the extent that I can. You can call me at the office or send an e-mail I'll get back to you shortly. Thanks for joining our call.

Operator

That concludes our conference call today. Thank you for your participation and for your continuing interest in Massey Energy.

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