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Walter Energy, Inc. (NYSE:WLT)

Q4 2009 Earnings Call

February 04, 2010 8:00 am ET

Executives

Mark Tubb - VP of IR

Vic Patrick - CEO

George Richmond - President & COO

Lisa Honnold - SVP, Controller

Analysts

Jim Rollyson - Raymond James

Shneur Gershuni - UBS

Brian Gamble - Simmons

Meredith Bandy - BMO Capital Markets

Alex Rackwitz - Nevsky

Dan Mannes - Avondale

Jeremy Sussman - Brean Murray

Mark Parr - KeyBanc Capital Market

Garrett Nelson - Davenport and Company

Curt Woodworth - Macquarie

David Lipschitz - CLSA

Wes Sconce - Morgan Stanley

Operator

Good morning and welcome to the Walter Energy fourth quarter and full year 2009 earnings call. All participants are in a listen only mode. (Operator Instructions). Now I would like to turn the meeting over to Mr. Mark Tubb, Vice President of Investor Relations. Sir you may begin.

Mark Tubb

Thank you, Valerie. Good morning and thank you for joining us for Walter Energy's fourth quarter and full year 2009 earnings conference call. Today’s call is being webcast live over the Internet and a recording of today’s call will be archived on our website for up to 30 days.

Joining me today are Walter Energy’s Chief Executive Officer Vic Patrick, President and Chief Operating Officer George Richmond and Senior Vice President Controller, Lisa Honnold. Following our prepared remarks, we will open the call to questions from our dial in participants.

Today we will discuss earnings for the fourth quarter and full year 2009, our current perspective on the market and our business outlook for 2010. We may refer to forward-looking statements made in yesterdays press release and may make those and other forward-looking statements on today’s call. For more information regarding risks associated with the forward-looking statements, please refer to the Company’s SEC filings.

At this time, I will turn the call over to Vic.

Vic Patrick

Thank you, Mark and good morning everyone. Before we discuss our results for the quarter, I would like to spend just a moment highlighting some of our key accomplishments from 2009. We completed the transformation of the company from a diversified conglomerate into a pure play natural resources and energy company and this has been very well received by the market.

We paid more than $21 million in regular dividends to our shareholders and also repurchased $34 million in stock. The spinoff of Walter Investment Management Corp. represented approximately $150 million in value distributed to our shareholders.

At Jim Walter Resources we completed mining our Southwest A Panel in mid December and began the production in the Longwall Panael at our Mine Number 7 East expansion.

This five-year $175 million expansion will increase our annual capacity for premium hard coking coal, up to 9.5 million tons, in 2012. The expansion also makes our Number 7 mine the largest metallurgical coal mine in North America.

Walter Minerals generated solid cash flow in a challenging market. And on a normalized basis, excluding the fiber plant closure charge, Walter Coke was profitable in 2009 despite an unprecedented decline in domestic field capacity utilization. Overall we were very pleased with our performance in 2009. But more importantly, we're looking forward to significant revenue and income growth in 2010, led by increased hard coking coal production and higher prices.

In addition, we are very well positioned to capitalize on opportunities to grow the company and add significant value for our shareholders. Seaborne coking coal demand which declined to about 210 million tons in 2009 is expected to rebound to about 240 million tons in 2010.

China will continue to be a key driver with coking coal imports continuing at a strong pace in 2010. Other Pacific basin countries are also expected to grow strongly. Because of demand in Asia, some metallurgical coal supply from Australia, Canada and the U.S. that normally would have moved into the Atlantic basin will likely be diverted into the Pacific basin.

Recent increases in commitments of both low-Vol and high-Vol coal out of the U.S. are examples of this trend. This will add to the pressure on supply into our strategic markets in Europe and South America. We also see a rebound in Europe and South America, with 27 metallurgical imports expected to increase 15% in Europe and 7% in South America.

We will talk more about the specific outlook in a few minutes but now I will turn the call over to Lisa to discuss our financial results for the quarter. Lisa?

Lisa Honnold

Thanks Vic and good morning, everyone. Yesterday, we reported fourth quarter 2009 results from continuing operations of $33.3 million or $0.62 per diluted share. Fourth quarter operating income was $36.9 million on revenues of $236.3 million.

Results for the current quarter were lower versus the prior year, primarily on lower average selling prices and lower volumes for coking coal and metallurgical coke as compared to the previous year's record high levels.

Fourth quarter 2009 operating results also included several unusual items. Operating income included a $4.5 million charge related to the closure of Walter Coke's fiber plant in December. In addition to this charge, income from continuing operations included favorable tax adjustments of $9.7 million with $3.8 million attributable to a prior period.

Excluding one time unusual item, our full-year 2009 effective tax rate was 27.4%. Our projected 2010 effective tax rate is 29.4%. Corporate SG&A which is included in other in the segment data increased in the fourth quarter of 2009, as compared to the prior year period, due to $4.1 million spent for our transformation strategy and planned relocation.

We also expect to spend $6.5 million in 2010 for relocation. We ended the year with very favorable cash liquidity and net debt position. Cash at December 31, 2009, was $165.3 million, compared to $87.8 million at September 30, 2009. Available liquidity was $401.6 million at year end compared to $322.9 million at the end of the third quarter. I will now turn the call over to George.

George Richmond

Thanks, Lisa and good morning. We produced and sold approximately 6 million tons of coking coal in 2009, compared to 5.8 million in 2008. Despite the historic blows in global steel capacity utilization during the past year. Coking coal sales in the fourth quarter totaled 1.4 million tons, which was 200,000 tons less than we expected.

The short fall was primarily caused by transportation delays, heavy rains and flooding in November, December, impacted barge and rail traffic, as well as loading capacity at the port. The resulting impact was poor congestion at the end of the quarter which delayed planned shipments from the fourth quarter into January.

Fourth quarter coking coal production totaled 1.4 million tons, which was 100,000 tons less than we expected. The Number 4 mine had a Longwall move during the quarter and production did not return to planned levels for about a month after the move.

The issue was revolved by modifying the rules support control system and should not recur. Fourth quarter coking coal prices averaged $126.48 for short ton FOB port. And included about 105,000 tons of our 2008, 2009 carry-over volumes at approximately $315 per metric ton FOB port.

As we mentioned in the press release, we have settled the remainder of our 2008, 2009 carry-over tons and expect to deliver about 1.3 million short tons in 2010 and the first quarter of 2011.

The entire balance is priced at original contract levels of $315 per metric ton and higher. Turning now to our metallurgical coal corporation, Walter coke returned to profitability this period on a normalized basis driven by improvements in cost dividend demand from the domestic steel industry.

Production has increased to about 100 ovens per day and a return to full production is expected by the beginning of April. We have settled all of our 2010 volumes of furnace coke. However, pricing beyond the first quarter is subject to negotiation. Our surface mining operations produced 310,000 tons of steam and industrial coal and sold 326,000 tons in the fourth quarter.

Average selling price has improved by $12 per ton versus the fourth quarter 2008, driven by favorable contract pricing on a three-year contract which became effective in early 2009.

Financial results in our natural gas business were essentially break-even in the fourth quarter and were lower than the prior year, on lower volumes and pricing, about $4 per MCF.

We currently have 1.5 billion cubic feet of 2010 production edged at $6.20 per thousand cubic feet. For the first quarter 2010, coking coal sales are estimated at 1.7 to 1.9 million tons with margins ranging from $32 to $40 per ton. With our Mine Number 7 in the East Expansion Longwall in full production, our overall hard coking coal production is expected to total 1.7 to 1.8 million tons in the first quarter.

With costs averaging $55 to $60 per ton. To Longwall moves in the first quarter will result in a slightly lower production volumes and a slower higher cost per ton compared to our full-year projection of $50 to $55 per ton.

Due to a slower than planned development rate on the replacement North Lognwall panel at Number 7 mine started with the next panel will be delayed until May about 45 additional days. We expect total hard coking coal production for the second quarter to be 1.8 to 1.9 million tons at a cost of $50 to $55 a ton.

This longwall design as a production volume impacted approximately 250,000 tons in the first hour. And therefore, we have not increased our sales guidance by the 200,000 tons that shifted from December.

The 8 million tons planned also have built into a significant long haul delay in the seven east expansion section which is a major cause of managements attention. We have also started to conclude some business to purchase coal, although not significant volumes as yet, we expect these volumes to grow over the year.

Between production, inventory and the potential for purchased coal during the year, we feel very comfortable in our ability to sell out at least 8 million tons this year. Transportation and handling costs are expected to remain in the $14 to $15 per ton range in the first quarter and royalty costs are expected to be between 7% and 8% of the real life price short ton of the mine.

Capital expenditures for 2010 are expected to total about $110 million. Coke expectations include about $80 million of maintenance capital for all of the businesses and an additional $10 million is projected for the initial development of the $35 million tons of reserves acquired of the number four mine in 2008.

The remainder equals various expenditures such as planning for replacement shields, at Jim Walter Resources a number of wall repairs at Walter Coke. I will now turn the call back over to Vic.

Vic Patrick

Thanks, George. Our 2009 performance demonstrates how well our business performed through a difficult cycle. We're looking forward to an outstanding 2010. And expect significant organic revenue and income growth and corresponding increases in cash. We plan to use our expected strong 2010 financial performance as a platform for continued growth.

We're encouraged by the number and quality of projects in our strategy pipeline. In addition, we have been consistently repurchasing our shares. With almost 1.5 million shares repurchased in 2009, at an average price of $23.26 per share, including about 100,000 shares in the fourth quarter at an average price of $63.41 and another 62,000 shares so far this year at an average price of $67.27.

Regarding 2010, our planned 8 million short ton sales volume equates to 7.2 million metric tons of which 3 million metric tons are already contracted at an average price of $189. The remainder 4.2 million metric tons are open to pricing, in an extremely strong market.

Looking beyond 2010, we expect continued growth in metallurgical coal demand globally. With imports possible reaching 275 million tons or more over the next three years. This longer term outlook includes a compound annual growth rate of almost 10% in demand in both our current core business areas of South America and Europe.

This strong market environment emphasized Walter Energy's investment considerations and growth prospects. With our 7 east expansion complete and operating we have already grown our metallurgical coal franchise and expect coking coal production capacity to reach up to 9.5 million tons in 2012.

Our hard coking coal product is among the highest quality coals in the world. Our low and mid-Vol coals possess the chemical and physical characteristics including high coke strength and good fluidity that steel producers prefer.

Our strategic market areas of Europe and South America where we have meaningful transportation advantages remain important. But we will continue to explore opportunities outside of our traditional distribution footprint. And we believe that the demand for premium hard coking coals will continue to grow and that these products will continue to increase in scarcity, particularly these highest grade coals such as ours.

And now we have completed our prepared remarks, we will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Jim Rollyson from Raymond James, you may ask your question.

Jim Rollyson - Raymond James

George, you talked about the $10 million or so of CapEx related to some of the development of the 35 million tons at Number 4. Is that going to be some sort of an expansion or is that more of an extension in the life of the mine?

George Richmond

Jim, we are examining both those possibilities. But what we're doing for now, it takes about two years to drive to the where we put the portals for that operation. We are looking at both plans of whether to just add it on as an extension to the life of the mine or whether we could have some marginal tons to the operation, increase the volumes out in the Number 4. But right now, we're still in the planning stages, so I really can't say which way we're going to go.

Vic Patrick

And Jim, in terms of expansion, given our lift capacity, at Number 4 and George, you just said, I want to make sure you caught it, we wouldn't be looking at the same kind of expansion we saw in Number 7. It would be maybe a million tons or something if it was an expansion and still as your question suggests its sorting out whether it is expansion or extension.

Jim Rollyson - Raymond James

Understood, you guys kind of talked about costs for the underground mining for met, which sounds like it is going to start up high and kind of work its way down throughout the year as the volumes pick up. Can you talk about surface mining? It seems like cost picked up quite a bit sequentially this quarter. Maybe what you're thinking going forward there?

George Richmond

We're estimating this years cost around $62 a ton. Remember, we actually put some volumes out, we were trying to match the markets so we took longer vacations and that done last week and run less weekends during the fourth quarter, so that was a little bit of a reason for the increase.

Jim Rollyson - Raymond James

Another one, a number of your competitors, in recent calls, have been talking about spot prices for met at the 200 plus range. I think it exceeded that by about 10% in conversation here in the last couple of days. What are you guys seeing? And just maybe what you're thinking about the timing of settlements this year, early, late, that kind of stuff?

Vic Patrick

Let me start and I will let George finish. What we have heard is consistent with what we have seen. What you have heard is consistent with what we have seen. And as evidence of the strength of the market the Australian weather, as you've noticed in the last few days, continues to contribute to a sense of anxiety on the purchasing side of the market. So we're continuing to see these positive pressures in the spot market.

George Richmond

And you know, the story, we can look at the bumps from the flood and steel capacity dropping in the previous years, but certainly, you know, on a normalized basis, it is clearly a shortage of this product and we don't see any reason for the settlements to be significantly different from the spot pricing.

Jim Rollyson - Raymond James

And timing?

George Richmond

Well, I guess we consider maybe later better, but probably March.

Operator

Shneur Gershuni from UBS you may ask your question.

Shneur Gershuni - UBS

Good morning. I was wondering if we can just sort of go over the production schedule that you kind of laid out you said that you have based essentially released 250,000 tons in the first half. I was wondering if you could sort of give us your thoughts with respect where you see your quarterly run rate running when you’re not having longwalls moving?

George Richmond

The difference between looking out a little further, the difference between 2010 and 2011 is basically the longwall delays, we had a long longwall delay built into the plan. Hence we see the big jumps in production in 2011 to 9 plus million tons. So on a normalized basis, probably two and a quarter million tons plus a little bit without longwall delays, this year close to 2 million tons on an average basis.

Shneur Gershuni - UBS

I was wondering if you can sort of give us some color on where your inventory stands right now and your opportunity to be able to sell that out into the open market as well as part of it?

George Richmond

Right now, we're right around 470,000 tons. And as you know, 400,000 is comfortable but we've been down to 200,000 tons before. We can actually live with 200,000 tons for short periods, so long as it is in the right places. Have it docks versus the mines.

Shneur Gershuni - UBS

And then with respect to contracting, there has been a lot of chatter with respect to quarterly pricing. Is that something that is of interest to you guys, if you can sort of opine on it a little bit?

Vic Patrick

We think that quarterly pricing may be an interesting opportunity for us. Our customers very much like to have an annual contract because of the way, our coal being a base coal for most of our customers, they build their blends around it and they don't really want to have to replace our coal on a quarterly basis if they can't get it, so we think that if VHP does get to a quarterly pricing scenario, that there will likely be a premium for the certainty of annual pricing and that may be an advantage for us.

Shneur Gershuni - UBS

Okay. And one last question. I missed your comments with respect to the share buyback. I was wondering if you could sort of talk about your options with respect to cash flow generated this year, kind of where you're looking and where you go and how material you expect buybacks to be if you have some opportunities to expect heavily.

Vic Patrick

Well, in terms of buybacks, I think you can expect to see our behavior be consistent with what I described in the text is something that we look at we really have an ongoing program and we look at the market every day. And so it is not something we're going to be backing away from.

On the other hand, it is in terms of strategic development of the enterprise, it is kind of a last resort. We have opportunities as George mentioned to do internal organic kind of development, the mine floor expansion.

We've got reserve opportunities we've got acquisition opportunities in adjacent areas and further field. We're also looking at infrastructure opportunities. All of which have the effect of improving the business both in the short term and over the longer term. So we're categorizing and prioritizing all of those opportunities and taking a longer term most productive ones first.

We like share buyback. As I mentioned we were active this quarter. So it is not like we feel that is not that is an opportunity that we continue to see value for the shareholders.

Operator

Brian Gamble from Simmons you may ask your question.

Brian Gamble - Simmons

Just to actually follow up on that question real quickly when you talk about buybacks you mentioned it as a last resort. But with the cash flow coming in this year, are you going to need to do something sooner rather than later with decisions what else you want to do with it? You mentioned a lot of different options there but is that something we should be expecting in the next quarter or so?

Vic Patrick

I'm not sure what you're asking should you be expecting to see share buyback in the quarter? You have already seen it.

Brian Gamble - Simmons

No I am expecting to see something other than share buyback relatively soon.

Vic Patrick

Look I am not going to give a sense of the specifics on either timing or projects on a strategic side, but we do feel like we've got a lot of good opportunities, both in terms of organic and inorganic.

We're looking at both business and infrastructure and we hope to bring those things to you over the course of the year. But I'm not going to talk about any specific timing at this point.

Brian Gamble - Simmons

That’s fine just asking. And then the purchased coal that you mentioned growing over the course of the year, should we expect it to get back to the levels we've seen in previous years? Obviously not anything of note in the Q4, but what sort of levels should we be thinking about for the full year?

George Richmond

We are obviously still working on it. But I guess I think of a conservative number for the year, maybe around 400,000 and we will see how it develops. And that is fairly consistent with where we were at the top of the market in 2008.

Operator

Meredith Bandy from BMO capital markets. You may ask your question.

Meredith Bandy - BMO Capital Markets

I was just wondering if you could touch base, you talked a little bit in the release about the coke getting back to the full production this year and do you know when you might expect to see full production in the thermal side? And what would you consider to be your full production in thermal?

George Richmond

Well there are a lot of variables to assume. Right now, it is around about 1.5 million tons. And we will be really close to that rate. We won't be, we do have some inventory and we would like to work that down a little bit before we increase it. But then as you know, on full production, we have a couple of surface mines that are basically ready to go and we put them on all of them. That's got the potential of another half million tons. 500,000 to 600,000 tons but we are not planning on those starting those operations yet.

Meredith Bandy - BMO Capital Markets

Okay. So that would be going to the sort of indefinitely deferred I guess.

Vic Patrick

I would like to think of it as opportunistically available. I think we're using the same thing with different language.

Meredith Bandy - BMO Capital Markets

Can you give us any update on the hedging for your net GAAP?

George Richmond

It has not changed since the last quarter. We have 1.5 I think, 1.5 BCF 620.

Operator

Alex Rackwitz from Nevsky you may ask your question.

Alex Rackwitz - Nevsky

Hi, guys. I have a question on where you're sending your coal to. Whether 8 million tons you mentioned in sales that you are confident of getting is owed to your traditional markets or whether you're sending any to China.

George Richmond

It is basically all to our existing customers but we have shipped a couple of bowls to Japan.

Alex Rackwitz - Nevsky

Okay. And when you send them, when you shipped something to the far East, is it because the customers are so desperate and willing to pay the freight differential or do you make up the freight differential yourself?

George Richmond

We will not sell it to make up the freight differential. We expect the same price as we could get in our traditional markets. We can move all of our volume into our traditional marks, so we will not sacrifice freight rates.

Alex Rackwitz - Nevsky

And the other question I had, is when you talk about 8 million tons of production, 9.5 million tons by 2012, does that include purchase volume or is that pure mine production?

George Richmond

No, that is pure in house volume production.

Vic Patrick

And in terms of the Chinese question, we do get inquiries all the time, so it is not like we're not selling to China because we can't. It is just that we have better opportunities elsewhere.

Operator

Dan Mannes from Avondale. You may ask your question.

Dan Mannes - Avondale

A couple of quick follow-ups. First, maybe I missed this, could you go into a little more depth about the issue you're running into on 7 East that was going to slow production a little bit in the first half of the year?

George Richmond

No, that was not 7 East that was the north side of the mine. The 7 East, longwall panel, is doing fine.

Vic Patrick

There was the delay in the second half on the 7 east longwall panel then. But we talked about it in the script was the seven north panel.

Dan Mannes - Avondale

And could you just describe that in a little more detail what the issue was.

George Richmond

Yeah with attempting not to get into too much detail but the further North we had mined in the number seven mine, the coal gets thinner and as usual, the rock gets harder. But also, the middle band of rock we mined is getting thinner. So we are really switched on this panel to try and mine it like we do the number four mine and take both seams. So what had improved over the last three or four weeks but certainly it was not easy to start to make that transition.

But we think long term that's what we're going to do and it should go easier with a go forward. So we are putting a quite a bit of rock in this. And we certainly have not been up to traditional planned rates. But we think it is what we've got to do long term for that half of the mine.

Dan Mannes - Avondale

Got it. And briefly on the purchased coal, the run rate you were talking about, as you get later in the year, is that constrained at all based on demand given the quality differential? Or is that constrained based on the availability of the product?

George Richmond

When I say conservatively, we have not put the 400,000 tons to bed yet but that's the type of request we've got so far. Now we could make more available.

Dan Mannes - Avondale

Got it. And then lastly, the costs. I mean obviously a pretty significant takedown from this quarter to the next. How much of that is attributable to the fact that you're running one less call it excess yen, and I guess I'm trying to, if you could give us bit of a walk there.

George Richmond

I mean on the year-over-year for the quarter, it is basically volume of having 8 million tons versus the 6 million tons.

Vic Patrick

And let me just take you back to the blending point because it really is a key point about opportunity and the leverage to the upside on the business. Our coal is of such quality that our opportunity to blend it and still have a good with much lower quality coal and still have a very high quality product is fairly unique. And so what we've seen is a real opportunity on the pricing side to have margins that approach our traditional margins on that product, in a really hot market. I'm not saying that it is the same, but it is there are very good margins on this product, so the constraint really had a lot more to do with the demand than it does for the supply.

We can find these products that mix with the coal because the quality of our coal is so high.

Dan Mannes - Avondale

And we saw that to some degree in the second and third quarter of 08.

Vic Patrick

If you remember 2008 that is exactly what some of the rockets fueled in those quarters came out of that process.

Dan Mannes - Avondale

Got it. Thanks for the trip down memory lane.

Vic Patrick

We like to think about the good old days here.

Operator

Jeremy Sussman from Brean Murray and Carrot and Company. You may ask your question.

Jeremy Sussman - Brean Murray

Hi, guys. This is actually Lucas calling on behalf of Jeremy. I have a question again regarding the longwall in number seven. Do you think it is going to be resolved in the second half of this year?

Vic Patrick

In other words, do we think with that will be a continuing issue or a one-time issue?

Jeremy Sussman - Brean Murray

Yeah.

Vic Patrick

I mean it is really two issues do we think we can get the 45 days down? We're doing our best. That will be what we try to do all year. But that's where it is right now and that's what we're planning around in terms of business results. Do we think it will recur next time we move the panel? No.

Jeremy Sussman - Brean Murray

Okay. Great. Thank you. And you also mentioned those transportation delays in November and October, and could you give us a bit more color on what happened there and is that likely to recur in the future?

George Richmond

We hope not, but let's go frequently, several things came together, and start up with the barge in. They usually do maintenance on the river and on the locks in the November time frame because it is a low period for rainfall. So there was a 30-day planned shutdown. Well, it rained very, very heavily, and it caused a lot of complications, and that ended up being a 60 day delay.

So the river was down 60 days, which was always a problem. And on top of that, the rain created some delays with the rail, and we had an embargo where we lost one week with tracks washed out with flooding. We also had delays at the state dock, about 2 1/2 weeks of major repairs doing to the railroad. So the effect of this, we have some competitors who supplied or transport 100% of their product by river, so when the materials started moving again, everything got back to the end of the December period. So I mean yes, we will see the 30 days delays going forward but this is fairly unusual for all of these to occur at the same time.

Jeremy Sussman - Brean Murray

Yeah that there is certainly came a lot of things together. That was very unfortunate. But thank you very much on the color on that.

Operator

Mark Parr from KeyBanc Capital Market. You may ask your question.

Mark Parr - KeyBanc Capital Market

I wanted to get some I had one question about the market dynamic and then I had one clarification I wanted to get on your pricing and contract volumes. But first, if you look at the amount of material that’s going into Brazil and going into Western Europe, I've got '08 numbers but I don't really had I know there was a pull-back in '09. If you could comment a little bit about what you see as far as total volume going into Brazil, and Europe, from a net coal perspective. And then how much volume do you see being pulled away from Asian sourcing? I would just like to get some more color on the volume. We recognize that the Atlantic basin is becoming shorter, but just kind of like how much?

George Richmond

Well, I haven't got the exact numbers in front of me, but what I seem to remember into Brazil, prior to last year, it was running about well run about 12 million tons of coking coal. And I think it was down nearly 50% last year. So just getting back to the same run rate will take another 6 million tons. And as you probably know, Brazil has all sorts of expansion plans scheduled which some have been delayed and some seem to be coming on, some of them now. So on a normalized basis, we will go way above those 12 million tons.

Mark Parr - KeyBanc Capital Market

So you if you look historically, I think Australia might have accounted for about 5 or 6 million of that 12. And do you have a sense of where that might be going to, in 2010 or 2011?

Vic Patrick

Well, as I mentioned in the script, on a qualitative basis, we have an answer to that question, which is the Australian coals an the Canadian coals seem to be more and more pulled into where they have a natural transportation advantage, which is Japan and China. And in the Australian coal down in Brazil, they're fairly competitive with us, but the in transportation, but just the growth in those markets, as strong as the recovery is that we're seeing in South America, and what we expect, given buildup to the World Cup and Olympics and so on.

Even though it is strong on a percentage basis in South America, on a total volume basis given the percentage increases you're seeing on a much larger base in the Pacific, the Australian and Canadian production increases seem to not get you there in terms of meeting specific demand, let alone being able to come down and meet the Brazil. Coking coal into Brazil in 2008 was about 12.5 million tons. And at the recent coal trends, there was presentation suggested that number just on coking coal by leaving out BPI is going to about 17 million by 2012. So you're talking about a very significant, more than 50% increase over the period, which will be well positioned to provide.

George Richmond

And just can I get some more numbers just to add one thing to that, although we have not started negotiating pricing as yet for next year, the first thing we usually start talking about is volumes, and I think across the board, we have a request for a fairly significant increases to virtually all our customers, both in Europe and south America.

Mark Parr - KeyBanc Capital Market

Okay. That's really helpful. And then if I could just, on the clarification, you had given some numbers about how much material you had contracted for in 2010, thus far, and I believe the price you used was $189.

Vic Patrick

That's the weighted average of the 129 carry-over and the agreed 315 but in the existing year, 129, and the 315 carry-over from '08-'09.

Mark Parr - KeyBanc Capital Market

Okay. And then what percentage of the what was the tonnage number that you used for that?

Vic Patrick

The same that we have in the press release an the table on the.

Mark Parr - KeyBanc Capital Market

All right. I apologize. Okay, thank you very much. And congratulations on being in the right place at the right time with a great product.

Operator

Garrett Nelson from Davenport and Company. You may ask your question.

Garrett Nelson - Davenport and Company

Beyond the two longwall moves in Q1, are there any scheduled longwall moves for the balance of this year?

George Richmond

Yes. Well let me go through number four as a long wall move. Moved in October of last year. They will be moving March and June of this year, we're on some fairly short panels, both about 13 day delay. And then they will move again in November. However, we are going to put some shields on that face price of the move, so that will only be a three-day delay. So in effect it is a longwall move with no impact on production. The number seven mine will be moving this quarter then restarted in May. And then that longwall does not have another move until 2011. The east expansion longwall will be starting to move in September. And that's their only move as well this year.

Garrett Nelson - Davenport and Company

Great thanks for the detail. And then a follow-up on coke. Your Q1 sales guidance of 125 to 135,000 tons, implies an annualized run rate above the full year sales guidance. Is just because Q1 sales are expected to be higher given shipments from inventory?

Vic Patrick

Yes.

Operator

(Operator Instruction). Curt Woodworth from Macquarie, you may ask your question.

Curt Woodworth - Macquarie

Follow-up questions on the blending opportunities, I mean it would seem that there is a fair amount of acreage that I believe has a lot of high ball reserves, not too far away from you, so is there any longer-term thinking of trying to acquire or lease some of those reserves and try to blend some of that high ball or low ball product? And with that require significant incremental investment for you guys to do that?

Vic Patrick

Yes and no. Would you like me to expand? The blue creek seam does extend to the west of us. As it extends to the west, volatile matter increases. And so the opportunity, if you have a very high quality low ball product like our number seven to blend with that, it would create a product that would be an enviable product in anybody's inventory. So that is the yes part of my answer. The no part of my answer is would it require a substantial capital investment to do that? When I say no, look, it would not require -- that is only a partial answer. It would not require significant capital investment to acquire leases. Typically a lease acquisition turn, as you saw with our acquisition of the capacity property back in 2008 is not a huge initial outlay.

It is an ongoing annual royalty arrangement. And so the outlay to acquire the reserve would likely not be huge. Although it would be complicated because the reserve is in many different hands. So its not something you can just kind of go out and in three days put that all together. Part of it is held by the federal government. Go figure. In terms of timing on that it takes a while to get through the process.

But having acquired the reserve, you would then be facing a multi-year and significant capital project to put the mine in to get the coal out. I would think you would probably have two years of mine permitting and work. And before you really put much in the ground by way of spade work. Then you would probably have additional, at least five years, to have it to longwall production and that total cost would likely be in the $600 million range. That would be a very nice project for someone like us and really in terms of the blue creek theme, we do feel like we're the people to go get a project like that done.

Curt Woodworth - Macquarie

Is that on the drawing board at all?

Vic Patrick

No, I haven't thought anything about it.

Curt Woodworth - Macquarie

Given the capital costs would be relatively low in the short run, and it takes a lot of time to get that in place, why would you not pursue that sooner than later given kind of the global dynamics that

Vic Patrick

Let me turn the question around on you, Kirk. Why would we not be pursuing that with urgency?

Curt Woodworth - Macquarie

Exactly.

Vic Patrick

Yes. And as I said before, I’m not going to get into specifics about what we’re looking at or what we are not looking at but that project that you mentioned seems like one we already pursuing with urgency.

Operator

David Lipschitz from CLSA you may ask your question.

David Lipschitz - CLSA

Questions for you in terms of let's go back to memory lane. In terms of your customer demand, how would you compare it to the first part of 2008?

George Richmond

I think it is very, very similar.

Vic Patrick

It is similar to the pre-flood. Post-flood was panic. Pre-flood was nervous, anxiety. Where are we going to get tons.

David Lipschitz - CLSA

Where would you say is the inventory levels that your customers are right now?

George Richmond

We think they're relatively low. Look, I hate to broad-brush this, because it varies from place to place, but we believe they're relatively low. A lot of them projected for it to take a lot longer for the demand to increase, and therefore on the, and is that increase, they found it difficult to find additional volumes, and we can usually judge that by the requests for boats to be shipped. Sometimes only a few day, and a lot of pressure being put on us for week here or a week there which would suggest that very low inventory levels in general.

David Lipschitz - CLSA

Just a quick other question, separate topic, in terms of the acquisition, would you look at acquisitions mostly in your area to sort of built on, or would you look at something in, central Appalachia or something like that if you saw an opportunity there?

Vic Patrick

We would obviously have the most strategic interests and potential synergy with operations in our own backyard. That said, we would look farther a field. Although central Appalachia would not really be the place I put top on my list for the various regulatory and other issues that you've seen troubling some of our competitors.

David Lipschitz - CLSA

So what would be on your list?

Vic Patrick

The rest of the world and I'm not going to go into too much detail on that.

Operator

(Operator Instruction). Wes Sconce from Morgan Stanley. You may ask your question.

Wes Sconce - Morgan Stanley

Can you talk about your outlook for the coke market and whether you're considering growing this business?

George Richmond

No, right now, we are not considering growing this business. We like the business. We think long term, the demand is or the supply is going to be relatively weak, compared particularly in the foundry market. We, from a furnace point of view we're extremely well located to local steel mills. And apart from last year, we think we're going to continue to sell out on that business, and sell everything we can produce.

Vic Patrick

The business has a very nice competitive position. On the furnace side, the U.S. industry is it does not have adequate coking capacity, in a high capacity utilization environment, to fulfill their needs so they have to buy from third party or import. On the foundry side, as just mentioned it is an even stronger competitive position because foundries don't have their own coking capacity. They have to buy from third parties. Either domestic or foreign. And the domestic industry is seen some fairly high profile closures and problems in the recent past. So we think we have a nice position really on both products.

Wes Sconce - Morgan Stanley

Thanks. And just a follow-up housekeeping question, how much was (inaudible) in 2010? Can you give us what 4Q was.

George Richmond

The fourth quarter was below a million dollars. $800,000. And for the year, it was $5.4 million.

Wes Sconce - Morgan Stanley

And your projections for 2010?

George Richmond

Well, we are hoping that we are managing quite well but obviously, a lot of that well, let's broaden that. A lot of that is based on shipping rates, and the cost per ton for a boat, and that goes up, as coal and grains flow around the world. That piece, we cannot do a lot about, apart from the previous year, 2008, we built in a lot of caps into our new contracts. So we are capped out. January, if you remember, was higher, I'm not to going to go into the details, but it was higher, obviously, we have some boats that weighted going into January, which did cost us some money. But overall, we believe we will get decent through-put. There have been expansions of the state dock based individual foreign investors so hopefully we can manage it down.

Wes Sconce - Morgan Stanley

Thanks for the detail. Good luck to you guys.

Operator

There are no further questions at this time.

Vic Patrick

Well, thank you we see no further questions, that concludes our call. We look forward to seeing you in Birmingham for our 2010 annual meeting. Thanks for your interest in Walter Energy.

Operator

This concludes your conference call. You may now disconnect. Thank you.

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Source: Walter Energy, Inc. Q4 2009 Earnings Call Transcript

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