Massey Energy Q4 2009 Earnings Call Transcript

Feb. 3.10 | About: Alpha Appalachia (MEE)

Massey Energy Corporation (NYSE:MEE)

Q4 2009 Earnings Call

February 3, 2010 11:00 am ET

Executives

Roger S. Hendrickson - Director of Investor Relations

Don L. Blankenship - Chairman of the Board, Chief Executive Officer

Baxter F. Phillips Jr. - President, Director

Eric B. Tolbert - Chief Financial Officer, Vice President

Analysts

Kuni Chen - Bank of America/Merrill Lynch

Michael Dudas - Jefferies & Company

Curtis Woodworth - Macquarie Research

Brett Levy - Jeffries & Co.

Shneur Gershuni - UBS

John Bridges - JP Morgan

Meredith Bandy - BMO Capital Markets

Brian Singer - Goldman Sachs

Dave Katz - JPMorgan

David Lipschitz - CLSA

Pearce Hammond - Simmons & Co.

Matish Sakr (ph) - FBR Capital Markets

Garrett Nelson - Davenport and Company

Justine Fisher - Goldman Sachs

Paul Forward - Stifel Nicolaus & Co.

Brian Yu - Citigroup

Operator

Good morning, and welcome to Massey Energy Company's fourth quarter 2009 earnings conference call. (Operator's Instructions) Roger Hendrickson, Massey Energy's Director of Investor Relations will now provide opening remarks. Please go ahead Mr. Hendrickson.

Roger Hendrickson

Thank you, Shay. Good morning, everyone. Thank you for taking time to participate in our conference call this morning. We appreciate your continuing interest in Massey Energy. As you know we distributed our fourth quarter press release after market close last night, and if by chance you have not seen it, it is posted on our website and has been furnished to the SEC on Form 8-K.

The members of our management team who will be speaking with you today are our Chairman and Chief Executive Officer Don Blankenship, our President Baxter Phillips and Eric Tolbert who is Vice President and Chief Financial Officer. Before we begin I need to remind you that the statements made in this presentation which are not historical in nature are forward looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. And they are based on current factual information and certain assumptions which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections and as a result of factors outside the company's control. Information concerning those factors is available on the company's 2008 annual report on Form 10-K and other periodic filings with the SEC. In providing projections and other forward looking statements the company does not make and specifically disclaims any undertaking or obligation to update them.

With the legal formalities out of the way I'll turn the call over to Baxter Phillips.

Baxter F. Phillips Jr.

Good morning, and thank you for joining us. As we reported our financial results for revenue per ton and cost per ton were on target with the ranges we provided at the end of the third quarter. Actually for the full year our costs per ton were slightly below the low end of our cost guidance.

Throughout the year of 2009 we were active in making coal reserve acquisitions. Favorable market conditions including opportunities from the bankruptcies of other coal companies allowed us to acquire ten existing properties at good value. After mining 38 million tons of reserves, we still concluded the year with a net increase of 72 million tons, bringing our total reserve base to 2.4 billion tons at year end.

Turning your attention to safety, we are extremely proud of our accomplishments in improvements in safety of our members and our operations here in 2009. We completed the safest year in company history by achieving a non-fatal days lost NFDL incident rate of 1.67 for the full year 2009. Our company's previous best rate for the full year was 41.93 achieved in 2008. Many of our operations work the entire year without a single lost time accident. We continue to make significant investments of time, personnel and capital to ensure that our mines are as safe as they can be and achieving this record low rate is a reflection of that commitment.

I know many of our operation managers and safety development group members will be listening to this call and I congratulate them on our safety record in 2009 and challenge them to continue this trend in 2010.

Finally we were pleased to conclude the year with another quarter of positive cash flow. For the full year we were able to reduce net debt by $99 million which we consider a significant accomplishment given the market conditions we faced all year. For a detailed discussion on the financial results of the fourth quarter and the year, I'll turn the call over to Eric.

Eric B. Tolbert

Thank you Baxter. For the fourth quarter of 2009 we reported net income of $24.4 million or $0.28 per diluted share compared to net income of $47.7 million or $0.56 per diluted share in the fourth quarter of 2008.

Produced tons sold totaled 7.8 million tons in the fourth quarter of this year compared to 10.2 million in the fourth quarter of 2008. Our plan was challenged compared to fourth quarter 2008 as a result of the weak economy and depressed thermal coal demand. Winter weather conditions which impacted rail service, port operations and power service affected our ability to meet our expected shipment volumes. Our average produced coal sales realization of $64.13 per ton in the fourth quarter was $1.44 cents per ton higher than in the fourth quarter of 2008. This was driven mostly by price increases for utility industrial coal and a relative increase in net coal in the proportional product mix. Average cash cost per ton for the fourth quarter of 2009 was $49.87 per ton compared to $48.27 per ton in the fourth quarter of 2008. These figures both exclude SG&A costs.

Labor costs, equipment rental costs and a higher fixed cost absorption on lower total volume was a major driver to the increase in cash costs. These were partially offset by lower costs for mining supplies including diesel fuel and equipment repairs.

As the CFO I'm always pleased when we can increase our cash and reduce our debt. In the fourth quarter we did both. Net debt declined by $30.3 million in the quarter and for the full year we increased our cash balance by nearly $60 million and reduced our net debt by $98.9 million. In addition as we mentioned in the press release, we also retired the remaining $21.9 million of our 6 5/8 % of seniors notes due in November 2010. We did this subsequent to the end of the quarter.

As of December 31, 2009 we had $98.4 million borrowing capacity under our asset backed credit facility. Our total debt at December 31, 2009 was $1.319 billion with total debt to book capitalization ratio of 51.2% and total net debt to book capitalization ratio of 29.3%.

To wrap up my discussion let me quickly just go over our revised guidance for 2010 and 2011. For the full year of 2010 we have not changed our outlook range for produced coal shipments. We are still expecting a range of 37 million-41 million tons. Our full year estimate for average price realization per ton has increased to the range of $67-$70 per ton. Our expectations for cash costs per ton have increased slightly to a range of $49-$52 per ton for the full year excluding SG&A.

We are now planning for capital spending of approximately $280 million in 2010. This figure includes the previously announced CapEx for the Roland property and approximately $70 million for the reconstruction of the Bandmill Plant and related infrastructure. The previous CapEx guidance range we gave you was $100-$200 million excluding the Bandmill reconstruction.

During the fourth quarter we received an advanced payment of approximately $15 million on the insurance claim from the Bandmill Plant fire which approximated the net book value of the plant at the time of the fire. Additional future insurance proceeds related to the loss of the Bandmill Plant will be included in other income as they are received.

As for 2011 our guidance range for produced coal shipments remains unchanged at 37-44 million tons. We have increased our expectations for average price realizations in 2011 to the range of $70-$76 per ton based on our contracting activity and customer outlook.

Our guidance for 2011 cash costs per ton is now a range of $47-$53 per ton excluding SG&A. We expect CapEx in 2011 to be in the range of $200-$300 million.

Now 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 some thoughts. While U.S. industry and coal demand declines, in Asia the combination of population growth, the urgent pursuit of prosperity and the transfer of developing country know-how has created an industrial revolution reminiscent of the American industrial age. Coal is fueling over 70% of the energy that is needed to support this growth.

Chinese and Indian economies are growing on a back of coal fired electric power and coal fired steel production. In view of the changing markets we are actively adapting our business strategies and our operations to optimize our opportunities to compete and grow in world markets going forward. We are placing an ever increasing focus on Asian markets. Following my trip to Asia last year we have identified several potential customers in Asia and we are hopeful of signing contracts for the selling of met Coal directly to Chinese companies.

The memorandums of understanding we have in place with Jindal Steel and Power and with Beecham are further examples of our strategy in action. These provide a framework through which we will jointly explore mining and production opportunities overseas.

The development of our high quality low and mid volatile metallurgical coal reserve at Rowland is also focused on increasing the competitiveness of our products in the seaborne met Coal markets by giving us more low (inaudible) that is in high demand in Asia and around the world.

In addition to direct Asian sales we will likely see an increase in opportunities to sell our metallurgical coal into the Atlantic Basin. In the Atlantic Basin existing blast furnaces are coming back on line. The demand for steel in Brazil is increasing and new steel mills are under construction to meet the current and future demands driving increasing met Coal demand in our natural market.

As for the domestic market we remain concerned that the U.S. economy, our industry and our business are being increasingly impacted by policies and regulations that are frequently based on misinformation. We fear that the result will be a continuing and accelerating transfer of industrial production in jobs from America to other countries. Accordingly we will continue to push for policies that promote the use of coal to fuel industrial growth in the United States. The coal that fueled America's prosperity in the past and that fuels the current economic growth in the developing world can also be the key to America's job recovery.

On a positive note while U.S. steel production remains well below the average of recent years, it has rebounded from the lows of January 2009. Likewise the domestic coal market is improving. For all these reasons we have increased our metallurgical coal sales outlook to a range of 10-12 million tons in 2010 and we have begun expanding our metallurgical coal production.

In our last call we said we had approximately 12 million tons of met Coal production capacity. The sections we added in the fourth quarter plus the sections that are being added in the first quarter represent approximately 1.5 million tons of additional annual met Coal production coming on line bringing us closer to full capacity utilization. These new mines should be at full capacity prior to summer vacation.

Bringing the Bandmill Plant back online later this year will give us an additional annualized capacity of approximately one million metallurgical tons versus 2010. The development of the Rowland property will add up to one million tons of annual capacity of high quality metallurgical coal in 2011. A total of approximately two million tons will be added when the project is completed in the late 2012 time frame. All totaled, our annual metallurgical coal production capacity is expected to be approximately 15 million tons by the end of 2012. we currently have contracts and commitments for approximately 10 million tons of met Coal in 2010 and six million tons or so priced at an average price of approximately $95 per ton. Four million tons remain unpriced.

We believe we have some upside opportunity on the unpriced tons as well as on our unsold capacity as we push for 12 million tons.

The extreme cold weather of the fourth quarter while troublesome for our operations did drive utility stockpiles downward. With the lower industrial demand for electricity however, we believe further reductions in production and utilities stockpiles will be required to achieve a sustainable supply demand balance.

The likelihood is that government constrained production and not increased demand will ultimately drive and significantly improve coal prices.

We continue to believe domestic thermal coal demand will remain soft for the next several quarters. We have approximately 28 million tons of utility and industrial coal sold under contract in 2010 with confirmed pricing and approximately one million tons sold, not yet priced.

There is some possibility that we could see a resurgence in international demand for our thermal coal as both China and India are increasing their imports at significant rates. One source has estimated that India's steam coal imports could double to 100 million tons in the next three to four years. This alone would absorb a significant portion of Australian and African export coal that might otherwise end up in the Atlantic Basin.

We are very enthusiastic about our opportunities going forward and we expect to continue generating significant amounts of cash. Our primary use of cash is most likely to be continued acquisitions of coal reserves and assets in Central Appalachia. We will also continue to analyze opportunities outside of Central Appalachia and possibly overseas with international partners where we believe we can add to shareholder value.

This concludes our prepared comments and we'd be happy now to take any questions that you may have.

Question-and-Answer Session

Operator

Thank you. In order to allow everyone an opportunity for everyone to ask a question we request that you limit your initial inquiry to one question and a follow up. If you would like to ask another question you may re-enter the queue. (Operators Instructions) Our first question comes from Kuni Chen with Bank of America/Merrill Lynch.

Kuni Chen - Bank of America/Merrill Lynch

Hi. Good morning, everybody. I guess first off, it looks like you made some good progress on your 2011 commitments during the quarter. What are you seeing and hearing from your customers? Are they more anxious to start to lock in supply for that year if you could just talk about some of the dynamics going on in the thermal market?

Don L. Blankenship

The thermal market we've not seen a lot of activity yet. In fact, there was some internal conversation here today. We expect that we will see quite a bit more activity for 2011 thermal coal in the second quarter. So far it's been pretty quiet. I think everybody's sort of waiting for the weather to settle down and get new projections.

Kuni Chen - Bank of America/Merrill Lynch

Okay. And then as a followup just on the met coal side, of the 10-12 million tons for this year, how much of that would you consider crossover tons and then can you also remind us how much you're targeting for export?

Don L. Blankenship

Targeting for export we sort of let it take care of itself, but certainly most of the growth in '10 over '09 will probably be export, if not all. And I might (inaudible) take that back and say a half a million tons might be domestic, the rest will be mostly export increase. As far as how we see that market going forward we see it being more of a change than in the Atlantic Basin. We see a lot more of it being Asia as I said in the opening comments so I think that that's where we'll be headed.

On the crossover tons it's always hard to judge the crossover tons because a weak steam market plays a role in it as well as the hot met market, but I would say that in our numbers there's probably almost a million crossover tons.

Kuni Chen - Bank of America/Merrill Lynch

Great, thanks.

Operator

Thank you. Our next question comes from Michael Dudas with Jefferies & Company.

Michael Dudas - Jefferies & Company

Good morning, gentlemen. First question, Don, like most all Central Appalachian or eastern coal producers, there's been big pressure downward on productivity. Given your mix of business over the next couple of years, the geology of your mines relative to competitors and the new capital you're putting in, how much do you have internally of an improvement in productivity at Massey over the next two years? And will that drive the difference in shipments from low end to high end, your ability to get the productivity and the labor to ship that coal or is it more a function of the market will the market want your coal for the price you want to sell it?

Don L. Blankenship

Yeah that's a tough question, complex. What I would say is there has been for some period of time now, tremendous pressure on productivity throughout the Central Appalachian area due to both the environmental regs and the safety regs. And what we think that does given the better than average amount ability of our coal is it spread our cost advantage over time and that will continue to happen. It's always hard to project whether the productivity will be going up at one rate or another or going down or be flat, but certainly Massey's productivity and costs relative to its competition should necessarily be continually improving because of the large reserves that we have and the more favorable mining.

I think that on the met side the demand for the product will drive price. On the steam side I suspect that the regulations will be a major player in the price plus the fact that a lot of the steam coal that is in the market is on the forward coal for most states and therefore there's a lot of coal that's making a profit in '10 that can't make a profit in the latest markets so you'll see steam coal come off because of the cost versus price curve and you'll see it come off because of regulations and therefore there'll be a shortage of steam coal and an excess of demand for met coal.

Michael Dudas - Jefferies & Company

Do you think your labor force currently is in place to meet your internal targets over the next couple of years on the volume side? How does that play out?

Don L. Blankenship

Well, what's happening of course is there's beginning to be a significant spread in the cost of underground labor and the cost of surface labor and we've already responded this year to the underground labor rates and needs and on the surface mines we've held our rate constant this year so we realize that if the Asian met market is as strong as it appears it will be in the world met market and the blast furnaces keep coming back on the states, the deep mine labor is going to be under pressure and we've already made a preemptive move to retain our workforce and attract whatever else we need. And on the surface mine side we're still waiting to see what the EPA does as whether the surface miners will be in demand or not and who knows what's going to happen there. I do think they'll have to release some permits, but I figure the schedule will be slow or the pace will be slow.

Michael Dudas - Jefferies & Company

My followup question, Don is there's a lot of expectation of US met coal shipments overseas from many of your competitors and yourselves, how do you think your partners in the rail and port logistics are set up to handle such a move and could that be a limiting factor in the response going forward?

Don L. Blankenship

I think it can be more out there in the '12, '13, '14 timeframe. There's a lot of expansions going on in Asia that will hit in '14 and if you get to the point that it appears you could, piers could get to be an issue, of course rail is always an issue. You know how we feel about the railroad, they always cut back to something less than what we need and they've done that even now. They get a 20% drop in demand they drop their service 30% so you're always struggling with that end of it and I doubt that'll change, but the piers could come under pressure in two or three years. We've made some moves in the last 60 days to extend some of our export capability and also to expand it.

Michael Dudas - Jefferies & Company

Thank you, Don.

Operator

Thank you. Our next question comes from Curtis Woodworth from Macquarie Research.

Curtis Woodworth - Macquarie Research

Yeah hi, good morning. Don, in terms of the 6 million tons of met that you've priced for this year at 95 bucks, how much of that is domestic customers versus international customers?

Don L. Blankenship

I don't know that we have that number off the top of my heads, but I would say almost half and half as I think about it. Most of the unsold tons or a lot of the unpressed unsold tons will be export tons because they're on a April 1 year and most of the domestic tons are settled because they're on a calendar year.

Curtis Woodworth - Macquarie Research

Okay. And can you comment on where you see the pricing right now for your high vol product in the export markets? And what is the strategy to ship more of that product into Asia? Can you talk about some of the initiatives that you're looking at right now?

Don L. Blankenship

Well, we're very active in Asia and in fact Mark Clemens is in Asia today along with our Head of Sales Steve Sears. It seems like they are spending more and more time there. The market on an FOBT basis for a high vol coal is probably north of 150. It could be in the 160s if it is a little bit better quality and of course the mid vols and the low vols are $20-$40 higher than that depending on their quality.

Curtis Woodworth - Macquarie Research

Okay, thank you.

Operator

Our next question comes from Brett Levy with Jeffries & Co.

Brett Levy - Jeffries & Co.

Hey, guys. You mentioned that obviously the focus of your M&A was going to be either international or central, can you sort of talk about why not the Illinois basin or something further west? And then I had a follow-on question.

Don L. Blankenship

Well, the Illinois basin is always a possibility. We're not saying it's not, it's just that we don't have anything currently that we see available that would meet our criteria where as we know that there will be central properties struggling and would meet our criteria, and internationally we know that's where the volume is going to grow. I mean, the world's at about 7.5 billion tons of coal burn right now and about 900 million is US so 6.6 billion's outside the US and it may grow anywhere from 300-600 million tons a year so it's more or less where the theater is at so to speak.

Brett Levy - Jeffries & Co.

All right. And then in terms of the amount of met coal you've got price forward and then your strategy, where are you seeing prices if you wanted to lock in for the balance of 2010 or 2011 you can think high vol or low vol, where do you see those prices and have they finally gotten to a point where you think that you'll lock in a lot more of your capacity?

Don L. Blankenship

Were you asking about steam or metallurgical coal?

Brett Levy - Jeffries & Co.

met coal.

Don L. Blankenship

Again, I always hate talking about met coal in a generic way because the animals are so different even between low vol and high vol, but low vol coals are probably in the 180th OVT mine which means you're probably in the 125-135 at the mine depending on timing rates and a whole host of other issues, maybe agent fees and all that. High vol as I said earlier can be $20-$40 less depending on what quality it is.

Brett Levy - Jeffries & Co.

And at those levels are you inclined towards taking a larger position for 2010 or '11 of locked in prices?

Don L. Blankenship

We probably are on the generic high vol. On the marfort (ph) type high vols which are really 31 vol 107 reflects low ash low sulfur coals with very good pressure numbers, we would want more than the typical high vol number probably $10-$15 more and we're holding out for better numbers on those high qualities. On the generic high vols we probably would take those numbers as they're available.

Brett Levy - Jeffries & Co.

Last question, in terms of mining equipment moves and that kind of thing as it relates to different quarters and that sort of thing, do you talk about 2010 and any sort of one-time items that we should expect to make the numbers not even across the quarters?

Don L. Blankenship

Well, we hope to finish the Bandmill plant late third quarter. It's always hard to predict something like that because again you got regulators involved and getting everything lined up and moved in and built so it's hard to project it that close, but we don't have anything coming out of the Bandmill plant in our numbers and if you ask the people that are building it they expect to finish it September timeframe, but other than that not much unless some acquisition opportunities showed up.

Brett Levy - Jeffries & Co.

Thanks very much.

Operator

Thank you. Our next question comes from Shneur Gershuni with UBS.

Shneur Gershuni - UBS

Hi, Don. Just wanted to followup to some of your comments about acquisitions about deployment of capital and I think it's also a followup to the previous question. I was wondering if you can sort of expand a little bit in terms of where you would go — are there any more capital opportunities to go underground on a met side or as an alternative, would you consider share buybacks as an alternative to deploy some of the capital that you have on hand?

Don L. Blankenship

I think share buybacks are a possibility. I do think though that we'll find some better than share buyback opportunities given the volatility of the market and the hotness of the met market and the infrastructure and capability that we have in house.

I think there are other opportunities internally. They probably can't be done in '10, maybe not even in '11, but we do have reserves that are underground metallurgical coal reserves that are in either exploratory stages or in conceptual design stages. It's possible we would have another roll and tap opportunity or maybe not as large, but similar. And there are other properties that we have in our stable of reserves that could be developed. We're trying to find the ones that perhaps are more brown fill related or perhaps we think for some reason they can be developed quicker, but of course we've got a lot going on. We're focused on Rowland and Bandmill at the current time.

Shneur Gershuni - UBS

I completely understand that. You gave some good commentary about the Asian markets and kind of the demand and so forth, I was wondering if you could give us a little color about European markets if you pay attention to them and what you think of inventories there and whether you think there's an opportunity for you to sell thermal coal there if (inaudible) started to recover?

Don L. Blankenship

Well, I think their inventories on the thermal coal side in Europe have been okay. They're not under a lot of stress, but I do think that it's very easy to see that Asia could in the next or two or even sooner depending on how well other people produce around the world that the Asians could suck up all the South African coal and a significant part of the Indonesian coal and therefore the natural source for coal for Europe would be Columbia and the US and that would drive thermal coal prices fairly quickly. Again, when you're talking 140 million tons of central thermal coal and you're talking about a worldwide market in the billions, it doesn't take much disruption or much change to cause that 100 and some million price to double. We saw that twice in the last decade in 2005 and 2008 I think.

Shneur Gershuni - UBS

Do you think we're close to seeing the European (inaudible)?

Don L. Blankenship

I think that it depends on how you define close. I think it could happen late this year, early next year. You got so many factors on the exchange rates and so many factors on the economy in Europe and so forth, but I think that you could definitely paint that picture if you weren't planning to.

Shneur Gershuni - UBS

Perfect, thank you very much.

Operator

Thank you. Our next question comes from John Bridges with JP Morgan.

John Bridges - JP Morgan

Good morning. The bad debt provision, you've not had anything like that that I can remember and we were being led to believe that the economy is picking up, is there anything we can conclude from that? Can you give us any indication as to where it's coming from?

Don L. Blankenship

Well, it's a one off situation and it's not related to coal transactions, it's related to some other income which is the reason it was categorized that way.

John Bridges - JP Morgan

Okay. And then your coal derivative trading, is that realized or is that just a mark to market?

Don L. Blankenship

It's realized. It's an account that wanted to buy out of the physical contract rather than take delivery. Eric might say —

John Bridges - JP Morgan

Okay, that's helpful.

Eric B. Tolbert

John, the remains on our book at the end of the year is about a $31.3 million derivative asset that we'll actually realize the cash on that through 2010.

John Bridges - JP Morgan

Okay, but the 33 that you report — 31, is that 33, only going to be realized next year?

Eric B. Tolbert

Yes.

John Bridges - JP Morgan

Okay.

Eric B. Tolbert

In terms of cash flows.

Don L. Blankenship

Right, in terms of cash.

John Bridges - JP Morgan

Okay. And maybe finally the increased coking coal that you report, what would be the mix of the coking coal that you report now with respect to high vol PCI and so on?

Don L. Blankenship

Well (inaudible) little PCI in our numbers. I guess I would say that there's about 1-1.3 million that's mid vol, straight up mid vol, and then we're using about 700,000 tons of low vol to cause another 2 million tons of mid vol so we're blending about 1.3 million of high vol with 700,000 of low vol and making a mid vol for some accounts so that makes about 3.2 that are being shipped as mid vols and then the other 8-9 million would be high vols.

John Bridges - JP Morgan

Okay that's great. Many thanks, guys. Good luck.

Operator

Thank you. Our next question comes from Meredith Bandy from BMO Capital Markets.

Meredith Bandy - BMO Capital Markets

Hi, good morning. I was just wondering of the long-term capacity, long term, what's your export capacity and how do you expect that to be maybe the same or different this year relative to your long-term average?

Don L. Blankenship

The word capacity, there's been a lot of discussion like when you're talking about our ability to export the coal if we're producing it and had the market for it, i.e. terminating and transporting capacity?

Meredith Bandy - BMO Capital Markets

Right.

Don L. Blankenship

I would say that that number is pretty large, it's probably 12 million tons keeping in mind that we can export through the Northrop Southern, through the CSX, north across the lakes, or out of New Orleans so it's probably bigger than that, but it's certainly not an issue at this time.

Meredith Bandy - BMO Capital Markets

Okay. So the mine is really where the bottleneck is, not the export capacity? Would you say that's true?

Don L. Blankenship

I'd rather say the mine is where the opportunity to increase the volume is now.

Meredith Bandy - BMO Capital Markets

We can do that (laughter). Okay, and then so what percent of your 2010 do you think is probably going to be exported?

Eric B. Tolbert

Well in 2009 we did just shy of about 5 million export, in 2008 we did about 6 million export including Canada so I would expect that in 2010 it'll be at the 2008 or higher level.

Don L. Blankenship

Yeah. Most of the growth will be export as I said earlier so you're probably going to get close to two thirds.

Meredith Bandy - BMO Capital Markets

Okay. And if I could also just ask you if you had any thoughts on the Obama administration's budget? I guess there's a lot of talk about the cap and trade not being included in the budget, but then there were some other tax changes for coal producers, and how likely do you think that's going to affect Massey? How would it affect, if any?

Don L. Blankenship

Well obviously the budget is voluminous and complicated and everybody's still trying to digest it, but it does have some language in it that's bothersome on depletion and so forth and it looks like it has some importing tax on oil so to guess what's going to get through Congress we have no idea, but obviously there are tax increases in there on a lot of the energy and other industries.

Meredith Bandy - BMO Capital Markets

Okay, thank you.

Operator

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

Brian Singer - Goldman Sachs

Thank you, good morning. You mentioned the 1 million tons of crossover tonnage that's part of the 10-12 million in met, has that been priced or is that part of the unpriced un-contracted tons?

Don L. Blankenship

Again that's a tough question because it's pretty much spongeable. We have cross tons that are, met cola that is, soft coal in our numbers, but because it's spongeable it's a hard question to answer. I guess if I was thinking through the specific business and the specific mines and where it's going to go I would say that about 500,000 tons of it is probably priced because I can remember a couple of deals that relate to the soft quality coal.

Brian Singer - Goldman Sachs

Great, thank you on that. And then bigger picture, given your less than positive view on US industrial growth, at least as it stands now, does it make sense for Massey to become more vertically integrated and in terms of owning ports and more the transport side if you see the export markets being your major source of additional growth?

Don L. Blankenship

I think it could. Massey built two ports in the early '80s, but I think the first thing for us to do is make sure we've got good long-term relationships and contracts and understanding of the term-link rates and so forth and then the next phase might be to do that, but it'll be a little while yet. I think, there's ample capacity at the terminals that you can secure that prevents you from spending a large amount of capital and placing a large bit in that direction, but certainly over the next couple, three years, that's a real possibility.

Brian Singer - Goldman Sachs

Thank you, and if I could ask one followup on that, you mentioned earlier or highlighted earlier the acquisitions that you've made, especially here in the US, bankrupt assets, et cetera, is that opportunity still there or have valuations and financial positions improved whereby much more of your focus will be on the export markets for acquisitions or on international markets for acquisitions?

Don L. Blankenship

I think the opportunities domestically are still there because there's still a lot of production that's going into inflated prices at inflated costs so there will be more opportunity I think there as some of the high prices roll off. And all we got to do internationally is we just got to make sure that we choose the right partner and the right location and the demand for the skills is going to be there. The demand for the coal is so large that the demand for the skills and the capability will be available.

Brian Singer - Goldman Sachs

Thank you.

Operator

Thank you. Our next question is coming from Dave Katz with JPMorgan.

Dave Katz - JPMorgan

Hi. Using the midpoint of your previous and your current 2010 capital expenditure it looks like the range has increased by about $130 million. I understand that a portion of that represents the Bandmill expenditure, I was just hoping you could break it down into a little more detail than that.

Don L. Blankenship

A portion of if it is Bandmill and a portion of it is the Rowland. That's probably 70%-80% of the whole increase. The rest of it of course is the adjustment that we've made because we've idled some surface mines and added some deep mines section reaching for this 12 million tons so it's just the $30 million is sort of the reality of getting it more detailed and we still think there's opportunities to negotiate better numbers, but most of it is Bandmill and Rowland.

Dave Katz - JPMorgan

Okay. And you had said Bandmill was 70 million, did I hear that correctly?

Don L. Blankenship

I think it's officially in there at 67 or something.

Eric B. Tolbert

Yeah it's 67-68, the entire infrastructure of the project including the plant and the belting and everything else that goes with it.

Don L. Blankenship

Yeah. What we're doing there is taking the opportunity to put back a better plant than we had. The one we had was probably 40-year old technology so the one we'll have this time which sits in the middle of 100 million tons of reserves or so will be state of the art so we're building back a very nice plant.

Dave Katz - JPMorgan

Okay. And then you guys experienced a large drop in your accounts receivable balance this past quarter, I was hoping you could talk about that.

Don L. Blankenship

Volumes were down was the biggest driver.

Eric B. Tolbert

Other than just favorable cash collections at the end of the year from our customers, there wasn't anything specific in those numbers. Actually we did have, as I mentioned on the call, $15 million worth of insurance proceeds that were received that in the prior quarter was in the receivable balance so you had a couple of things in there, but it was primarily due to December volumes and overall good collections.

Don L. Blankenship

Yeah. There may be a small amount in there where we've tightened up days or insisted on payments with customers that might be struggling, but nothing huge.

Dave Katz - JPMorgan

Okay, thank you.

Operator

Thank you. Our next question comes from David Lipschitz with CLSA.

David Lipschitz - CLSA

Good morning, everyone. Quick question of your coal production in the quarter, I know you missed some shipments. Were those all steam or were they met or what were they?

Don L. Blankenship

Well, I think Eric may have some numbers there, but about 60% of the inventory growth was probably met coal even though it only represents 20 something percent of the volume. The biggest problem we had was we had a much larger inventory at the piers than we would like to have due to the delays on the weather and then we also had a lot of coal at our met mines on Route 3 so I think we had about a 500,000 ton increase and about 60% was met coal.

Baxter F. Phillips Jr.

We had some vessel loadings that carried over into the end of December into January.

Eric B. Tolbert

Yeah.

David Lipschitz - CLSA

Okay. And also just in terms of where are you now in terms of your run rate for met coal? Are you pretty much running at a 10 million ton run rate right now you would say, or higher?

Don L. Blankenship

Well, the last three or four weeks we've been struggling with running anything, but we are setup to run and that is the pace we expect to be at before we add these mines that are coming on so we're probably at 10 million going to 11.5 or something shortly, but we've had very tough weather as you know in January and we'll start catching up here I hope.

David Lipschitz - CLSA

And then just finally in terms of the 15 million ton number you talked about, is that including the Appalachian fuel production and things like that?

Don L. Blankenship

Yes, it includes all the metallurgical coal that we think we would market as metallurgical coal. Extremely hot market you know. We used to sell 160%-170% sulfur coal as met coal. We haven't been able to do that for years, but we of course note that (inaudible) has been doing some of that so this just depends on where the market goes in '10 and somewhat in '11. We don't have that much opportunity, but if people are going to coke 2% softer coal we can produce more of that too.

David Lipschitz - CLSA

Okay, thank you.

Operator

Thank you. Our next question is coming from Pearce Hammond with Simmons & Company.

Pearce Hammond - Simmons & Co.

Thank you. Don, if BHP is successful in getting a quarterly met coal settlement, how will that impact the way in which you settle with customers? Will you still try do an annual settlement or will you migrate to quarterly?

Don L. Blankenship

Well, I mean BHP's big in the market so they have a lot of influence on that. We're not in favor of quarterly pricing because we think it makes it very hard in a capital intensive business to plan and so forth, but certainly we're part of the market and we're a significant part of the market, but the Australians moving into Asia are the dog so to speak so we'll follow that. I think if you're going to do quarterly pricing it would be good to have some sort of callers on it because you don't want to go to $300 and then go to $80 and back to $300 only to average 200 and some dollars. So we're not really excited about it. Clearly open, but we will do it if it becomes the norm. In the conversations with our customers, they're not excited about it either.

Pearce Hammond - Simmons & Co.

Do you think you can get some market share gain for customers that don't want to sign the quarterly agreement?

Don L. Blankenship

I think we're going to be able to sell all the coal that we can produce. metallurgically I probably couldn't attribute more market share to that type of an approach in '10 or '11, but certainly as the years go forward I think we could. I mean, I think if we were trying to get to 18 million tons or something that the customers prefer more stability in the price so they can work off of that.

Pearce Hammond - Simmons & Co.

Great. And then my final question is what is your expectation or what are you hearing on utilities switching away from central Ap coal to Illinois basin coal?

Don L. Blankenship

Well, I mean there's been a lot of that. I think the Illinois basin coal that it's true what some say it's built a wall on movement of PRB coal to the east because the Illinois basin coal is as good a cost BTU wise or kilowatt hour as the Plata River Basin. Now they have discovered it so the advantage is sort of gone so I think that Illinois coal will be a factor in that way and it will also, the ones that have brought on scrubbers will be able to use it on the Illinois coal instead of central Ap coal, but most of that's already happened.

Pearce Hammond - Simmons & Co.

If you did see some big switchovers, would that free up some coal to move to the met market that was thermal coal?

Don L. Blankenship

I think the met coal prices trump the steam anyway so I don't know if it's a matter of freeing up more coal. A lot of our coal does not have metallurgical quality. Generally speaking the coal we produced in East Kentucky, for example, has very little metallurgical quality and it has no opportunity to go to the met market and that's true of some of our other coals and that's what's determining where it goes to as opposed to freeing up steam coal because somebody displaces that volume.

Pearce Hammond - Simmons & Co.

Thank you.

Operator

Thank you. Our next question comes from Matish Sakr (ph) with FBR Capital Markets.

Matish Sakr - FBR Capital Markets

Yeah. Hi guys, real quick question on your inventory on hand. How much coal inventory do you have on hand and how much of that is steam and how much is met?

Don L. Blankenship

We have way too much on hand. I think I saw an inventory number about $180 million, Eric?

Eric B. Tolbert

Yeah. Overall in terms of at our mines at our customers on consignment, our piers, and so on, we have I think the number's right at 4 million tons. We have a report also that we prepare daily that has coal inventory to load at our groups and so on of about 2 million tons so we have a fairly substantial amount. I don't think I have an exact number breakdown between met and steam, but I'd probably say just offhand it might be 30% met and the rest steam.

Matish Sakr - FBR Capital Markets

Okay. And just on the export market which we talked about, do you have a view on how much exports in terms of steam and met would US have growth in 2010 overall?

Don L. Blankenship

How much export met growth 2010 over 2009?

Matish Sakr - FBR Capital Markets

Yeah.

Don L. Blankenship

I don't think anybody knows yet. I think it would be a guess because we don't know how much China's going to do and all that, but if I had to guess I'd probably guess 8-10 million tons.

Matish Sakr - FBR Capital Markets

8-10 million tons?

Don L. Blankenship

Maybe more. I haven't really thought through that number because you've got obviously some Pittsburgh 8 coal moving export met as well so it's not central Ap, but the numbers are very meaningful as a percent of central Ap met coal production.

Matish Sakr - FBR Capital Markets

Okay. And just a followup on your export number, how much of that is sold to, say India, or your joint venture partner?

Don L. Blankenship

I don't know if we want to get that specific or not. If it's all right I'll probably skip giving specific numbers on specific customers.

Matish Sakr - FBR Capital Markets

No problem, just totally to India as a country can you specify that?

Don L. Blankenship

I will say that that number will approach in 2010, 2 million tons.

Matish Sakr - FBR Capital Markets

2 million tons, sounds good. Thank you very much.

Operator

Thank you. Our next question comes from Garrett Nelson with Davenport and Company.

Garrett Nelson - Davenport and Company

Good morning, everyone. In late '07 early '08 prior to the global economic downturn you announced a major organic expansion plan. Would you consider resuming that expansion plan at least to some extent if economic and market conditions are appropriate?

Don L. Blankenship

I think the answer would be yes. That's the only reason we don't like quarterly pricing. We believe strongly in the generic things out there, but to the extent that we can either have minority investors in a project or long-term contracts and so forth we would. As you know we struggled mightily with the labor shortage that came out of that effort and we spent a lot of that capital only to have the volumes get mitigated by the productivity that we talked about earlier and we're probably the only coal company in central Ap that could do that in a big way so we would do it under the right circumstance.

Garrett Nelson - Davenport and Company

Okay. I guess what I'm asking is what's their growth strategy going forward? Is it more organic or are you continuing to grow through smaller (inaudible) acquisitions?

Don L. Blankenship

It's always hard to answer because it's opportunistic in the situation. If somebody comes along and they offer us a piece of property that's in bankruptcy for $0.20 on the dollar that already has a permanent impoundment and prep plant and the high-priced business, I mean we'd certainly take it. We just don't know how many of those opportunities will surface so it's hard to say we're going to do more of one or more of the other, but we are continuing to do geological work, permitting work, surface control efforts, and looking at properties that are either in bankruptcy or in trouble or that are brought to us by others so we're doing all of that, but I don't know that I can forecast which we'll do more of.

Garrett Nelson - Davenport and Company

Sure. All right, thanks a lot.

Operator

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

Justine Fisher - Goldman Sachs

Good morning. So the first question I had was it seemed as though when you said in the beginning that you built some inventories because you had trouble with the weather, et cetera, I thought it was going to be on the steam side because the shipments were so low, but you guys indicated that it was actually more on the met side that you built more inventory. So with 1.9 million tons of met sales it seems as though you actually produced 2.3-2.4 million tons of met, but that implies on the steam side that you guys actually didn't produce much more than 5.5 million tons or even 5 million tons so is that the run rate that we should look for in 2010? Because I would've thought we would've seen the catch up in sales on the steam side in the first quarter if that is what you couldn't ship.

Don L. Blankenship

Okay. Let me see if I can unwind that where I can figure it out, but on the steam side you're right that we didn't produce a lot of steam coal in the fourth quarter. If you remember, we took several surface mines down and so forth and we spoke earlier about this derivative buyout thing which took out some volume and we are running, as you described properly, the met inventory and where we are on the met side. So we've had a lot of thermal customers wanting deferrals and wanting delays and we've had probably more trouble with private cars getting back from domestic thermal customers. So your description of it is accurate, I believe, except that we will turn the steam tons back on as they are needed or as the cars cycle.

Justine Fisher - Goldman Sachs

But are you guys thinking still kind of mid-5 million tons per quarter for steam next year?

Don L. Blankenship

Well, we're thinking more like six, but we got to cycle the cars and not have the deferrals that we get in the second half of '09.

Justine Fisher - Goldman Sachs

Okay. And then the second question is regarding your cost guidance. So it seems as though the average cost for '09 which was I think between $47.50-$50, that still falls within your guidance for 2010, but I would've thought that with a much higher percentage of met in the mix the costs would go up because I know those are higher cost mines so is this because of the productivity initiative that you guys spoke about in response to, I think it was the first question on the call? Or what's keeping the overall cost down even thought he met mix is much higher?

Don L. Blankenship

Well there's two or three things, a couple of which aren't good. We had a buy forward on diesel fuel in '09 that hurt us quite a bit. We did well on our diesel hedging in '07 and '08, but we didn't do so well in '09 so we're going to get a break on diesel fuel and some other things. In addition as I think I described in the last call we sort of got hit in the side with all these new rigs and tracking devices and shelters and seals and all that so we lost a lot of productive days in 2009 because of the sort of gotcha situation that we were in trying to get adjusted. We don't expect as much of that this year and of course at the end of the day it's just when you build up the numbers from the bottom like we do it's the number that comes out of the computer with all the assumptions that are driven into it and it seems to make sense to us.

Justine Fisher - Goldman Sachs

And then finally, open market repurchases of your (inaudible) I know you guys bought back some debt during the quarter, is that something that you would look to do on an incremental basis in 2010?

Don L. Blankenship

Opportunistically we would. I don't think we're going to be out there looking for people to sell us bonds, but people that call us occasionally we might do some of that. The problem we've got of course which you all are well aware of is that we've got a lot of cash that doesn't draw a lot of interest income and yet we like having a lot of cash because it causes us to be opportunistic and we're still not 100% sure where the financial markets are so there's sort of a tradeoff, but occasional when someone brings debt to us and it's properly discounted. We seriously consider it then.

Justine Fisher - Goldman Sachs

Okay thanks a lot. I appreciate it.

Operator

Thank you. Our next question comes from Paul Forward with Stifel Nicolaus & Co.

Paul Forward - Stifel Nicolaus & Co.

Good morning. On the first quarter as it sounds like you're continuing to have some issues and everybody's having issues with the coal deliveries. 7.8 million ton level that you actually shipped in the fourth quarter, and your guidance if you take the midpoint is about 9.7 million tons per quarter in 2010 for coal shipments, I was just wondering if you're seeing can you confidently say that you'll get sequential improvement on volumes in the first quarter or is that something that's really going to be second through fourth quarters when you'll be able to hit the rate of 10 million tons a quarter or so?

Don L. Blankenship

Well, this is interesting. As you know we've had a lot of issue snot so much on our end in January as cars with frozen coal in them and all that, but I know we had more coal leave the mines in the fourth quarter than show up on the front page because we've built inventories at the piers, we've built inventories on consignment in Canada. We've built inventories in other places so we produced more coal and to some extent that'll come back. We'll have less consignment inventory at the end of the first quarter than the first and hopefully we'll have less coal on the ground at the piers, but you can get flopped around several hundred thousand tons just on a few boats off Northrop Southern CSDX or New Orleans so it's a hard number to predict with that range of accuracy.

Paul Forward - Stifel Nicolaus & Co.

Well, would you anticipate though that the first quarter is the weakest quarter of the year on volumes or is it just too difficult to predict later on what might happen?

Don L. Blankenship

Well, I would say the first quarter and the fourth quarter will be the two weakest quarters and the second and third will be the two stronger quarters, but we can't really judge yet whether the first or the fourth will be the roughest. That vacation around Thanksgiving and Christmas and the weather and all that makes the fourth quarter tough, but it's just hard to judge it that fine, but we think we're going to be okay in the first quarter with the guidance that's out there.

Paul Forward - Stifel Nicolaus & Co.

All right, and maybe lastly, you mentioned the crossover business earlier, can you give us a rough figure of what level in 2010 steam coal would have to rise to in order to I guess keep that coal in the steam markets and not have what's available just bleeding off into the high vol met markets?

Don L. Blankenship

It probably takes mid-70s for it to, if it is a crossover coal.

Paul Forward - Stifel Nicolaus & Co.

All right, thanks very much.

Operator

Thank you. Our next question comes from Brian Yu with Citigroup.

Brian Yu - Citigroup

Thank you. Don, I think earlier you mentioned that for 2010 your price met is $95. Do you have similar figures for '11 and '12 or maybe I just missed it?

Don L. Blankenship

We haven't got a lot of met coal sold in '11 and '12 so I don't know that the number would be meaningful. Eric's looking to see, but there's not a lot of sold end priced '11 and '12 met tons.

Brian Yu - Citigroup

Yeah. I think you guys had said like 1.6 million priced in '11 and so I'm just trying to back into a thermal number as that would help us.

Don L. Blankenship

It looks like the 1.6 million tons you're talking about is $110.

Brian Yu - Citigroup

Okay and then for '12 is that a number that you have?

Don L. Blankenship

I don't think that we've got much coal sold at all in 2012, a few hundred thousand tons and it's probably $180-$190, but there's not a lot of it.

Brian Yu - Citigroup

Got it. And then with the crossover times, I believe one of your competitor said that that's pretty much marketing and there's no incremental cost. Would that hold true for your crossover tons too?

Don L. Blankenship

The only additional cost you have on the crossover tons is you may lose yield. A lot of time you're shipping, just by way of an example, an eight-ash coal that's yielding at 44% recovery and if you cut it to a seven ash coal it may yield 40% recovery so you may lose $7 in coal to refuse and then of course your sales factor, but that would be — I don't know, not maybe the average, but that's the only thing that happens to you is you cut gravity to get ash down to make it metallurgical and then you lose yield.

Brian Yu - Citigroup

Got it, thank you.

Operator

Thank you. Our next question is a followup from John Bridges with JP Morgan.

John Bridges - JP Morgan

Hi, Don. Yeah, I just wanted to follow up on your comment regarding the consul sale of the high ash coal. I'm trying to come to terms with what this means to the steel industry. As you say this is a long time since this has been done, I just wondered what your thoughts were on the implications?

Don L. Blankenship

Yeah, actually more surprised by the softer than the ash, but I guess you have to say that you think it indicates an acute shortage of high-quality met coal out of Australia or central Ap when you see those coals because it all depends on what kind of steel you're ultimately trying to make. Sulfur's an impurity that if not removed either in the mining process or through the limestones and others ways at either the coke oven or steel mill ends up making it lesser quality steel which is a lot more technical than I can, but it just indicates that someone's able to use it and there's a shortage of quality metallurgical coal.

John Bridges - JP Morgan

I'm just thinking that surely there must be a cost for getting that sulfur out of the melt and perhaps at these levels then it begins to be worthwhile for steelmakers to investigate that. Does that make sense?

Don L. Blankenship

It can. It depends on what they're making. You can read books that tell you the Titanic sank because of high sulfur coal that made the metal weak so it depends on what you're making. I mean, if you're making something that will build a 140 floor building or — all of that is a factor. And I don't know where these coals are going or what they're being used for.

John Bridges - JP Morgan

Thanks for the warning. I'll stay off the cruise ships (laughter).

Don L. Blankenship

Thank you very much.

Operator

(Operator's Instructions) Our next question is a follow up from Matish Sakr with FBR Capital Markets.

Matish Sakr - FBR Capital Markets

Hi, guys. Just wanted to check with you, how much of the (inaudible) met tons is not priced in 2010?

Don L. Blankenship

Eric's going to go ahead and look rather than guess, but a lot.

Eric B. Tolbert

Yeah. Of the committed that's essentially unpriced we have about 4.8 million met committed unpriced.

Matish Sakr - FBR Capital Markets

And how much of that is met?

Eric B. Tolbert

That is the met number.

Don L. Blankenship

All of it.

Matish Sakr - FBR Capital Markets

Oh all right.

Don L. Blankenship

Yeah. We don't have hardly any unpressed thermal coal.

Matish Sakr - FBR Capital Markets

And the second question is are you guys adding any new mines this year or next year that might use some of your 404 permit inventory?

Don L. Blankenship

Do we have plans that will use the 404 permits?

Matish Sakr - FBR Capital Markets

Yeah.

Don L. Blankenship

I don't know if I'm following the question. Let me just comment and see if I hit it. All the surface mining that we have in 2010 is doable without the need for the permits the EPA's holding. It does begin to impact our costs late in the year and then next year it might hold us down a couple million tons and/or drive up the cost, but we feel like we're in a better position than most central Ap producers as to 404 permits and we're continuing to work with EPA and the core on getting additional permits.

Matish Sakr - FBR Capital Markets

Okay sounds good, thank you.

Don L. Blankenship

Thank you.

Operator

Thank you. At this time we have no further questions. Now I'll turn the program back to Mr. Hendrickson.

Roger S. Hendrickson

Thank you, everybody for your questions today. We've enjoyed the conversation and we look forward to future conversations. This will conclude our conference call today. Thanks for your continuing interest in Massey Energy.

Operator

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

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