Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Walter Energy, Inc. (NYSE:WLT)

Q1 2010 Earnings Call Transcript

April 29, 2010 9:00 am ET

Executives

Mark Tubb – VP, IR and Strategic Planning

Joe Leonard – Interim CEO

Lisa Honnold – Interim CFO, SVP and Controller

George Richmond – President and COO, Walter Energy, Inc. & CEO of Jim Walter Resources, Inc.

Analysts

Shneur Gershuni – UBS

Curt Woodworth – Macquarie

Brian Gamble – Simmons

Meredith Bandy – BMO Capital Markets

Jeremy Sussman – Brean Murray, Carret & Co.

Bill Burns – Johnson Rice

Wayne Atwell – Casimir Capital

Dan Mannes – Avondale Partners

Wayne Cooperman – Cobalt Capital

David Khani – FBR Capital Markets

Jim Rollyson – Raymond James

Jen Marcello – Tuohy Brothers Investment Research

Mark Liinamaa – Morgan Stanley

Mark Caruso – Millennium Partners

Garrett Nelson – Davenport & Company

Alex Heidbreder – Millennium

David Lipschitz – CLSA

Operator

Welcome to the Walter Energy first quarter 2010 earnings call. All participants are in a listen-only mode. (Operator Instructions).

Now, I will turn the meeting over to Mr. Mark Tubb, Vice President of Investor Relations. Sir you may begin.

Mark Tubb

Thank you, Audra. Good morning and thank you for joining us for Walter Energy's first quarter 2010 earnings conference call. Today’s call is being webcast live over the Internet and a recording of the call will be archived on our website for up to 30 days.

Joining me today are Walter Energy’s Interim CEO, Joe Leonard; President and COO, George Richmond; Interim CFO, Lisa Honnold; and Senior Vice President and Treasurer, Miles Dearden. Today we will discuss earnings for the first quarter of 2010, the expansion initiatives also announced yesterday, our perspective on the market, and our business outlook. Following our prepared remarks, we will open the call to questions.

We may refer to forward-looking statements made in yesterday's press releases and may make those and other forward-looking statements on today’s call. For more information regarding risks associated with forward-looking statements, please refer to the company’s SEC filings.

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

Joe Leonard

Thank you, Mark and good morning to everyone. As you know, we reported earnings of $0.79 per share for the first quarter, driven primarily by our good execution in our coking coal business and a return to profitability in our coke business. We also announced that we settled approximately 1.7 million tons of coking coal contract at $235 per metric ton FOB at the Port for a six-month period of time starting April 1st. George will go into more detail on these settlements in just a few minutes. Last week, our Board increased our dividend by 25% based on our confidence that we can continue to generate strong cash flows in the future.

Further, we announced a series of initiatives and to growing our national resources and energy platform, including an agreement to acquire HighMount Exploration and Production, this will provide 8.5 billion cubic feet of annual coal bed methane gas production in Alabama where we have current and future mining plans; a non-binding Letter of Intent to lease 52 million tons of Blue Creek Coking Coal Reserves and to acquire the North River steam coal mine from Chevron Mining, Incorporated; a separate Letter of Intent to acquire additional 22 million tons of reserves, continuous to the Chevron reserves in another transaction; and finally, we announced that Walter Minerals will open its Reid School Coking Coal Surface Mine.

We will go into more detail on these transactions in a few minutes, but I also wanted to update you on the status of a couple of other items that we are working on. We are making excellent progress in our search for a permanent CEO. The interest in Walter Energy has been quite high. We've identified several excellent candidates and have started conducting interviews. We expect to narrow that field within the next few weeks and we will continue to work diligently to name someone in that position as soon as possible. We are also moving forward on selecting candidates for some other key executive positions as well.

We continue to make progress in establishing our headquarters at Birmingham and expect to have some of our first employees in the building by early summer.

Now, I'll turn the call over to Lisa to discuss the financial results of the quarter. Lisa?

Lisa Honnold

Thanks, Joe and good morning, everyone. Yesterday, we reported first quarter of 2010 results from continuing operations of $42.7 million or $0.79 per diluted share. First quarter operating income was $71.3 million on revenues of $312 million.

Revenue in the quarter improved primarily on higher metallurgical coke and coking coal sales volume, partially offset by lower realized selling prices for coking coal. Although revenues grew, our operating income for the quarter declined as a result of lower coking coal selling prices and higher production and royalty costs on a per-ton basis at Jim Walter Resources Mine No. 7.

As we mentioned in yesterday's press release, our results for the quarter include $0.06 per diluted share of a net tax charge, which included a $20.7 million charge associated with the elimination of the favorable tax treatment of Medicare Part D subsidies as a result of the passage of the Health Care Reform Act in March. The quarter also included a tax benefit of $17.4 million related to a special credit provided by the federal tax code relating to the sale of coke for the years 2006 through 2009. Neither of these items is expected recur.

Our results for the quarter also include $0.03 per diluted share or $2.5 million pretax of additional depreciation expense due to new accounting rules that affect coal med methane operations such as ours, beginning in 2010. This additional depreciation expense is expected to continue for the remainder of this year.

Our corporate overhead costs exceeded the first quarter of last year due to continued spending on our strategic initiatives including our move to Birmingham. In the second quarter of 2010, we expect corporate overhead costs to be higher than in the first quarter of 2010 by approximately $4 million due to costs for the transactions we announced yesterday.

Capital expenditures for 2010 are expected to total about $115 million. Current expectations include about $80 million of maintenance capital for all of the businesses. Also included in our capital forecast is $5 million required to begin production at Walter Minerals' Reid School Mine. The remainder includes various expenditures, primarily for the replacement shields at Jim Walter Resources and other wall repairs at Walter Coke. The capital expenditure forecast does not include any spending necessary for the transactions we announced yesterday.

Excluding the impact of non-recurring items, our normalized first quarter effective tax rate was 31%. Our full year projected 2010 effective tax rate is also 31%.We ended the quarter with very favorable cash and liquidity. Cash at March 31st was $214.4 million compared to $165.3 million at December of 2009. Available liquidity was $452.6 million at the end of March compared to $401.6 million at the end of 2009. This strong liquidity position along with internally generated cash will support our current growth initiatives and we currently have approximately $235 million of cash on hand.

I'll now turn the call over to George to discuss our operational results for the first quarter, the market outlook, and our strategic initiatives.

George Richmond

Thanks, Lisa and good morning, everyone. I'd like to talk about safety before turning to our operating results. Nothing is more important to us than the safety of our employees. We continue our strong emphasis on safety with the ultimate level of zero accidents.

Jim Walter Resources' first quarter 2010 results showed significant improvements in lost time accidents with a 23% reduction from the first quarter 2009. JWR's lost-time accident rate for the first quarter of 2010 was 2.47 compared to latest published national average of 4.15. One accident is too many and all of our employees must and will continue to strive to reach our goal of zero accidents.

At Walter Minerals, Taft Coal has gone almost three years without a loss-time accident. Walter Coke also showed continuing improvement by completing the first quarter of 2010 with no-lost time accidents, demonstrating that the goal of zero accidents is attainable.

Now, turning to our operational results, coking coal sales in the first quarter totaled 1.8 million tons, in line with our prior expectations. Coking coal production totaled 1.7 million tons, which was on the lower end of our expectations range. Compared to the prior year, however, production was down approximately 300,000 tons, mainly as a result of the extended longwall move at Mine No. 7 we talked about last quarter. Development over the next panel in 7 North is progressing nicely and we are in fact at the start of the longwall in mid-May. No. 7 East expansion longwall is also running well with (inaudible) in line with planned levels.

We announced in the release yesterday, we said 1.7 million metric tons of coking coal contracts at approximately $235 per metric ton for a six-month period starts in April 1st. the six-month contract period differs from our traditional annual contract cycle and is longer than the quarterly contracts announced for Australian coal last month. However, we believe the six-month contract is in our best interest at this time as it protects us in the near term by contracting at higher prices today, while leaving volumes available to be priced later as the market continues to strengthen.

We have the majority of our internal produced tons committed for the remainder of the year, but much of it remains still to be priced. We are also seeing opportunities to purchase third-party coal and blend it with our high-quality Blue Creek coking coal.

Turning to our Walter Coke operations, we returned to full production capacity in April and we are optimistic that coke operations will be very profitable in 2010 on strong demand throughout the year. Our service mining operations produced 345,000 tons of steam and industrial coal and sold 375,000 tons in the first quarter. Average selling price has improved by more than $8 per ton versus the first quarter of 2009.

Looking forward to our expectations for the second quarter, coking coal sales are estimated at 1.7 million to 1.8 million tons with margins ranging between $85 and $90 per ton. Second quarter coking coal production is expected to be – to total 1.7 million to 1.8 million tons with cost averaging $55 to $65 per ton.

Transportation and handling costs are expected to be approximately $15 to $16 per ton for the remainder of the year. Royalties on coking coal are expected to be between 7% and 8% of the realized price short term at the mine.

Before I turn the call back over to Joe, I'd like to offer some color on the Alabama expansion initiatives we announced last night. As many of you know, there are significant Blue Creek coking coal reserves to the rest of our existing operations, in which we have added interest for quite some time.

With the transaction announced yesterday, we have now more than half of the approximate 140 million tons that could be accumulated and leased in this area. This would allow us to develop a large metallurgical coal mine where we expand production, extend the life of our mining activities, and gain additional synergies in conjunction with our existing mine operations in the area.

The announcements we made yesterday is a major step towards developing these coking coal reserves, which are the last significant minable reserves in the Blue Creek coal seam, a making of the only plausible producer capable of mining the remainder of these reserves in the area.

The Chevron property consists of 52 million tons recoverable tons of Blue Creek coal, as well as the North River steam coal mine, which has approximately 11 million tons of reserves remaining with an expected annual production of 2.5 million to 3 million tons, all of which is under contract. The mine has an excellent workforce and has been a consistent performer over the years. As the mine phases out, our plan will be to redeploy the workforce to develop a new mine in the reserves west of our existing operations.

The 140 million tons of reserves are high-vol coal. However, they are in the Blue Creek seam and have excellent coking characteristics. As such, our plan will be to blend this product with our low-vol No. 7 mine coal, which will result in an excellent coal, essentially identical to our No. 4 mine coal. Our No. 4 mine coal is a premium product as well and although it's a mid-vol product, it commands the same premium pricing as our No. 7 coal.

Separately, we view the HighMount coal bed methane operation as a crucial component of our future mining plans. We developed our coal bed methane degasification business more than 20 years ago and its successful operation has been one of, if not the major improvement in mining efficiency, production, and safety in our metallurgical operations.

Conventional gas wells need to be in place for at least five years before they start producing in-seam methane. Our ability to control the extraction of methane position the well – position where the wells are drilled and manage the sealing of wells before we mine through them has contributed to our successful mining of the Blue Creek seam over the years. That position will allow us to use existing infrastructure to place gas wells where needed to maximize coal production, minimize mining costs, and improve mine safety. Importantly, these wells were less expensive to acquire than it would have been for us to put them in ourselves.

I will now turn the call back over to Joe.

Joe Leonard

Thank you, George. And that concludes our prepared remarks. So at this point, we'll turn the meeting over for any questions that anyone may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Shneur Gershuni with UBS.

Shneur Gershuni – UBS

Hi, good morning, everyone.

George Richmond

Good morning.

Joe Leonard

Good morning.

Shneur Gershuni – UBS

I guess my first question is just with respect to the series of announcements that you made last night. I guess a hypothetical question, assuming you execute the LOI with Chevron and so forth, can you kind of walk us through the timeline of how long you think it would take to implement your strategy of developing new mine property? And also, if you can talk in context of your ability to be able to continue repurchasing shares as you did in Q1?

Joe Leonard

Well, I'll take the first one. The Chevron property and the other leases, there is still more leases to answer that to put the 440 million [ph] ton mining. So obviously, we are still working on those properties. From a timescale point of view, the – it's about a – to get the longwall operate is probably about a six to seven-year period to get the mine up to full production.

And putting in perspective, that's about – is about the same as we did on our No. 7 expansion with the addition of about two years of – for permitting, which we didn’t have to permit at No. 7. So that's the type of timescale we'll need to get the mine – we'll obviously be mining coal before that date, but we'll really consider a mine or an expansion to come online when the longwall starts producing.

Joe, you want to tackle the repurchase?

Joe Leonard

Yes, I think in regard to share repurchasing, we still have about $15.9 million that the Board has approved us to spend. We are not a bank and we are not going to sit on our cash. We are going to invest it in where we can get better return and if we found our situation – and we don't have other opportunities that are as good as repurchasing shares, we will do that. But we have some other projects in mind that maybe better uses of our cash. And we'll just – we'll have to play that by year as we move forward.

Shneur Gershuni – UBS

Okay. And then a follow-up question with respect to pricing. We've seen the Chinese have attempted to put the brakes on their economy and so forth. Have you seen any impact in recent weeks in terms of how the spot has moved in terms of contracting or is pricing will kind of remain at the elevated levels that we saw in the second quarter – I'm sorry, in the first quarter?

George Richmond

We believe pricing has strengthened since our $235 settlement and we believe that all along otherwise we would do an annual at $235. We always felt that was upside and we are actually seeing that in the market. Obviously, China has an effect, but if you – the positives or the met coal business – the steel mills have returned to profitability. U.S. steel production is up to 73% right now. Hot-rolled coil broke through the $700 barrier.

So all over, we are seeing strengthening in the steel business. And I think the latest information with – obviously the Australian floods had a severe impact on the availability of coking coal and I think hence we've seen some fairly significant increases in the price of coke and we believe quite a bit of that is because of the shortage of coking coal.

Shneur Gershuni – UBS

Okay, great. Thank you very much.

Joe Leonard

Thank you.

Operator

Our next question is from Curt Woodworth with Macquarie.

Curt Woodworth – Macquarie

Yes, hi. Good morning.

George Richmond

Good morning.

Joe Leonard

Good morning, Curt.

Curt Woodworth – Macquarie

I was wondering if you guys could elaborate a little bit more on the tons left to price. I think it's about 2.7 million based on the guidance, what's the timing with respect to when you expect to price that and is the majority of that left-to-price primarily to South American customers?

George Richmond

Yes. We've got approximately 2.5 million still to price for the year, plus a couple of hundred thousand. We talked about doing some purchase coal, so we'll have a couple of hundred thousand of that to price. I expect that we will have some more smaller deals completed in – over the next couple of weeks to the customers that run from April 1st to March 31st, so that will be – we will – that will be similar to the – pricing may change, but similar to the six-month deal.

Regarding the South American – obviously, their contract year doesn't start till July the 1st and so we really don't have a benchmark out there where to start those discussions at. So I think we will be a little patient on that and see where the Australians come with their second quarter benchmark before we start talking pricing on that volume.

Curt Woodworth – Macquarie

Okay. And then just a follow-up question. On the natural gas acquisition, in the short run, you mentioned in the press release that it's accretive. Can you give us a sense for how accretive the transaction is and also longer term, in terms of the ability to take control of the property and degasify it for the safety standards, can you just talk about why that is strategic to you and why the decision was made to buy it today versus later in time? Thank you.

Joe Leonard

Yes, I think as far as the accretion, we are estimating about $0.06 in 2010 and about $0.16 in 2011. On this property, we've been looking at it for quite a long time and it came on the market and we were in a position to move fast and work with them to get where we are. So this is something we wanted to do for a long time and opportunity presented itself now.

George Richmond

And just after that regarding the drilling of the gas wells, we will look at this – the drilling of this gasfield different to our gas company would. They will obviously drill the gas wells on certain – maybe 88% is what – they will traditionally drilling way is relatively easy access, where they can get to and where the higher gas areas are. We will look at it totally different. We will superimpose the wells – existing wells on top of a mining plan and look to prioritize the wells where we are going to be mining the first. So when we get down to mining the coal, we've already got the gas out to the coal seam.

So that will be the first thing we do is prioritize where the wells are going to be. And then as we look at the future years, I mean, the real profitability that comes out of this business in increased met coal production in the future years.

Curt Woodworth – Macquarie

Great.

Joe Leonard

Thank you, Curt.

George Richmond

Thank you.

Operator

Our next question is from Brian Gamble with Simmons.

Brian Gamble – Simmons

Good morning, guys.

George Richmond

Good morning.

Brian Gamble – Simmons

A couple of quick ones. George, could you just confirm – the South American volumes that you are referencing, that's roughly 1.5 million tons a year, is that about right?

George Richmond

No, it's more than that. It's going to be more than that. South America, we've got Brazil and we've got Argentina and a little bit in Chile. So I think you – we are about 60-40 now, so after the 8 million tons, over the full contract year, it’s going to be over 3 million. Yes, about 3 million.

Brian Gamble – Simmons

Okay, great. And then the only portion of any of the development work and purchases that you are making that will impact your 2011 volumes would be the Reid School Mine, is that right? I mean, there is not any production coming from any of the new reserves in '11 that you are talking about longer term in development work, there is not anything incremental we should be learning into '11, is that right?

Joe Leonard

That's correct. Yes, that's correct.

Brian Gamble – Simmons

And then lastly, on the gas purchase, the HighMount purchase, are you planning on to 2010, is that – it's going to come out straight out of cash on hand plus free cash flow from the second quarter?

George Richmond

Yes.

Joe Leonard

Yes, it is.

Brian Gamble – Simmons

Okay. That's perfect, I appreciate again.

Joe Leonard

Anybody else? Is there any other question?

Operator

Thank you. Meredith Bandy with BMO Capital Markets.

Joe Leonard

Okay.

Meredith Bandy – BMO Capital Markets

Hi, everyone.

George Richmond

Good morning.

Joe Leonard

Good morning.

Meredith Bandy – BMO Capital Markets

Good morning. So I just – just to follow up very quickly on the last question, when you say there is nothing else to layer in for next year, we would layer in sort of the seam coal that's running – in theory, if you close the Chevron acquisition.

George Richmond

Yes, I think that was focusing on the met coal, which I thought was the – yes, yes –

Meredith Bandy – BMO Capital Markets

I'm sure, yes. I'm sure that –

George Richmond

There could be some – the North River steam coal as well, yes.

Meredith Bandy – BMO Capital Markets

Okay. I know this is far out in the future and you are still working on acquiring all these leases, but if you could give us some guidance on – if you acquire the 140 million tons, what in your view would be sort of a right-sized mine to put on that reserve? And also, I'm not sure – would you consider this to be – with the Chevron assets that are already there, would you consider this to be more of a Brownfield or a Greenfield project and any guidance on current sort of CapEx, maybe relative to what you did with the No. 4 – 7 East expansion?

George Richmond

Okay.

Meredith Bandy – BMO Capital Markets

Just a few things.

George Richmond

Yes.

Meredith Bandy – BMO Capital Markets

Yes.

George Richmond

The CapEx, it's been a – we are going through a lot more detail today, obviously, than we did in the past. So the CapEx we would estimate is probably in the $500 million to $600 million range for a mine of approximately 4 million tons. So as a parameter – it would be a Greenfield project and from a parameter, that's $150 million or a little less, $130 million to $150 million per million tons, which actually is quite a good project in the world today. Did I get them all or did I miss any, Meredith?

Meredith Bandy – BMO Capital Markets

No, I think that pretty much hit it.

George Richmond

Okay.

Meredith Bandy – BMO Capital Markets

Thank you very much.

George Richmond

Thank you.

Joe Leonard

Thank you.

Operator

Jeremy Sussman with Brean Murray, Carret & Co.

Jeremy Sussman – Brean Murray, Carret & Co.

Hi, good morning.

George Richmond

Good morning.

Joe Leonard

Good morning.

Jeremy Sussman – Brean Murray, Carret & Co.

You also mentioned that you were seeing some purchase coal opportunities on the met coal side in your opening remarks. Can you elaborate on this a little bit, please?

George Richmond

Yes. Over the first two periods, we've moved some coal which is, in effect, a blended product. Think of it as a coal with metallurgical characteristics, but it's a filler coal if you want. So we've been able to purchase some of the products we've purchased over the last few years and blend it with some of the TRI and Taft Coal and at times, some of the Blue Creek coal and move that into the market.

The prices to start with weren’t great, but we're seeing there is more and more shortage of metallurgical coal, we see more and more interest for that type of product. Although I will say over the last couple of weeks and last month, we've been very, very heavily focused on selling or marketing the primary product. But we think that market is going strengthen towards the end of April, over the second half of the year.

Jeremy Sussman – Brean Murray, Carret & Co.

Okay, great. And then – appreciate that. And just lastly, in terms of the $235 per ton number for six-months, you were able to achieve this in light of sort of a $200 quarterly number that BHP signed for basically half the length of this contract. So to me, this would imply a $255 or so number for Q3. I mean, would you sort of agree with those lines of thinking there?

George Richmond

Well, I'm not going to throw a number out, but I will say this. If we thought there wasn't upside from $235, we would sign an annual contract.

Jeremy Sussman – Brean Murray, Carret & Co.

Very good, I appreciate it. Thanks, guys.

Operator

Bill Burns with Johnson Rice, you may ask your question.

Bill Burns – Johnson Rice

Hey, George. I was just curious, have you seen the same level of increased mine inspections that appear to be going on in Central Appalachia?

George Richmond

Well, we had – a couple of weeks ago, we did have extra inspectors at our No. 7 mine. But I think I really need to try and put it in perspective. We had – for a couple days, we had seven inspectors on one day and eight on the other at No. 7. We are trying to put our mines in perspective. No. 7 mine is probably the most inspected mine in the country anyway. We have three resident inspectors that turn up for work every day.

In 2009, No. 7 had 638 entrance inspection shifts and in the first quarter, 153. So you can see that's about the rate in the first quarter, but the deep mine, they come as the gassing mines that produce over a million tons, the large mines, a lot of employees. So we do get a lot of inspection shifts. No. 4 mine had 520 inspection shifts last year. So we did have a couple of days of extra inspectors, but we normally have a lot of inspectors anyway.

Bill Burns – Johnson Rice

Okay, I appreciate the color, George.

Operator

Wayne Atwell with Casimir Capital.

Wayne Atwell – Casimir Capital

Hey, good morning.

George Richmond

Good morning.

Wayne Atwell – Casimir Capital

And congratulations on all of your growth initiatives. Are you looking overseas at all? Do you have any thoughts about going overseas for growth?

Joe Leonard

I think right now our primary objective is to tie up as much as we can that's adjacent to our met coal operations in Birmingham. However, as we move forward, we've got a number of initiatives that we are looking at and we – I would say we wouldn't rule anything out at this point. But right now, we'll be working to close up these Letters of Intent and that will be our first priority and we have some near-term projects that we are working on as well. But we don't – we wouldn't rule anything out at this point.

Wayne Atwell – Casimir Capital

Okay. And as tight as the met coal market is and is likely to be over a next number of years, one wonders about acquisitions, i.e., the fact that you might be a target yourself. Do you have a poison pill or any kind of defense to keep yourself from being acquired at what might be considered an unattractive price?

George Richmond

I mean, we have – yes and no. I mean, obviously our Board is a very, very experienced Board and – I mean, obviously they will try and be defensive on unattractive price. But on a very attractive price, they would have to take it into consideration. After all, it's the shareholders that own the company.

Joe Leonard

We feel the strongest defense is to have a very good stock price, which we have today.

Wayne Atwell – Casimir Capital

Right. And lastly, you have a fairly large unfunded pension and employee benefit. Is there plans to fund that?

George Richmond

Well, the UMWA (inaudible) liability.

Wayne Atwell – Casimir Capital

Right.

Joe Leonard

Pension.

George Richmond

Oh, the pension?

Lisa Honnold

Yes, we continue to fund that on an aggressive basis. We are putting more in than we are required to and that combined with asset growth, we continue to move closer to a funded status.

Joe Leonard

We will fund that about $9 million this year, we funded it at $16 million last year.

Wayne Atwell – Casimir Capital

Okay, thank you.

Operator

Dan Mannes with Avondale Partners, you may ask your question.

Dan Mannes – Avondale Partners

Hey, good morning, guys.

George Richmond

Good morning.

Dan Mannes – Avondale Partners

Couple of quick follow-ups. First, on the coal sale guidance, the 8 million tons, you are mentioning things like the purchase coal, you've mentioned Reid School, I think you still have even another surface coal mine that's currently idled in Flat Top. Any opportunity to move that a little bit higher, maybe in the next year or two outside of what you already talked about for '11?

George Richmond

Well, we – yes, we haven't included the volumes from the Reid School in the numbers and the reason is it will be running after a year, which is approximately 100,000 tons (inaudible). But yes, there is a potential to increase the volumes as we get further into the project. It is a very, very, very high-quality, high-vol coal. It has the reputation of being one of the best coals in the state and not only they are high-vol, the ash is like about 4%, so it is a very, very attractive product. So after we running, we'll see if we can – it won't be the millions of tons, but it's – maybe we can squeeze some more tonnage out of that project.

Dan Mannes – Avondale Partners

That's Reid School you are referring to?

George Richmond

That's Reid School.

Dan Mannes – Avondale Partners

Okay.

George Richmond

Regarding the Flat Top, the Flat Top is a steam market – a steam product. We – it's ready to go, it's permitted. We have equipment available, but right now, we are still watching the steam market before we – we need some changes in pricing on the steam market before we go aggressive on that project.

Dan Mannes – Avondale Partners

I wasn't sure if there would be opportunity to produce steam there and maybe take some of the TRI coal that has the met quality and sell that into the met market.

George Richmond

Yes, we – what we've done over the last couple of years, we are using some TRI into this secondary blend and we are also using some TRI and some Taft substitute coal into our own coking plant. So we've been taking – buying less Appalachian coal and using more of our internal coal.

Dan Mannes – Avondale Partners

Got it. So may be some flexibility there.

George Richmond

Yes.

Dan Mannes – Avondale Partners

Briefly – and maybe I missed this, in terms of the extended longwall move, is that now complete or is that still ongoing?

George Richmond

No, the startup date is still in line with what we said. We expect it to start up around the middle of May, around May 15.

Dan Mannes – Avondale Partners

Got it. And then lastly on the coking business, I know historically you've done annual contracts for – on – for I'll call it swaps, but I know it's now Walter Coke. Can you give us update, what's going on there, is that all being sold on sort of a market basis?

George Richmond

That's on a quarterly basis.

Dan Mannes – Avondale Partners

Okay.

George Richmond

We went into the year, settled the first quarter pricing and now we've settled the second quarter pricing, third and fourth quarter is still open in what we consider a strengthening market.

Dan Mannes – Avondale Partners

Got it. And then last thing and I know again, this is preliminary since you haven't even assembled all the leases you need, when you look forward to sort of a broader Greenfield expansion project and given the capital you are talking about laying out in the time frame, what sort of – how do you think about the returns relative to met coal prices? I'm going to assume you are putting a number well below current prices to make the numbers work.

George Richmond

Yes. I mean, it will probably be – again, we've got a lot of work – let me –

Dan Mannes – Avondale Partners

Lot of work –

George Richmond

Yes. Let me say this. The mining conditions are very attractive in the mine. The seam profile, the middle mining, the rock in the in-seam is very, very attractive. So it will be a relatively high-productive mine from a tons per man day, et cetera, et cetera. And with the – we've drilled and cored this property, we've run tests with our No. 7 and – as a blended product, we can get the – we can get the CSR of the blended product into the mid-60s, which makes it a very, very attractive product.

From a pricing point of view, we will – from a pricing point of view, we expect to get the similar pricing to our primary products of today. Mine cost-wise, I guess if we – the cash cost shouldn’t be a lot different to our existing operations. However, mining costs because of the extra depreciation could be quite a bit high. But yes, we don't need anywhere near the same type of pricing that's out in the markets today to make a lot of money out of it.

Dan Mannes – Avondale Partners

Okay, great. Thanks for the color.

George Richmond

Okay.

Operator

Wayne Cooperman with Cobalt Capital, you may ask your question.

Wayne Cooperman – Cobalt Capital

Hey, guys, how are you?

Joe Leonard

Good morning.

George Richmond

Good morning.

Wayne Cooperman – Cobalt Capital

Two questions. First just, I guess you said you are signing $235 short term, because you think longer term or at least in the near term that's going to go higher. Anymore comment and I wonder how long do you think this could last for.

And then what – have you got any more details on this deal with Chevron? I mean, you didn’t – you put out in the release, but then it's not a finished deal and it's kind of a little hard to gauge what this could mean for the company? If you could give us anymore sense of the timing, when you will get production, how much per year, what the cost structure might be, anything that would be more helpful to us.

George Richmond

Yes. Let me just say this first of all. We normally tend – we try to be pretty conservative on some of these announcements. However, the circumstances led us to announcing it pretty early. Chevron felt the need to talk to their employees at the mine and because they were doing that, they did that – so we felt we needed to get it out.

So we are still negotiating, we are obviously doing due diligence, although I will say this. I have personally known the mine for 30 years and we know a lot about the operations obviously, but I don't think we want to expand on that and as soon as we can, we will.

Wayne Cooperman – Cobalt Capital

Okay. First question just about kind of the met coal shorter-term, longer-term outlook.

George Richmond

Yes, I mean, we obviously beloved in this product for a lot of years. Hence, we switched out the long-term steam contracts and markets. As we try and annualize the year-over-year pricing and the bubbles and the slumps and ignoring – I guess trying to take out of the picture the Australian floods, we came up with a number on a – like a normalized basis, a little over a couple of hundred dollars this year. So that was without the China effect.

So we are still seeing – obviously, we can't control China on what the impact may have long term, but there is a significant shortage of this type of product to make steel and there is no other options long term. So I guess what I'm saying is that we may get some bumps year to year, but the continuing strengthening of both the $200 level, we think will continue for quite a long time.

Wayne Cooperman – Cobalt Capital

All right. Thanks.

Operator

Our next question is from David Khani with FBR Capital Markets.

David Khani – FBR Capital Markets

Yes, hi, guys. Can you hear me?

George Richmond

Yes.

Joe Leonard

Yes, David.

David Khani – FBR Capital Markets

So a lot of my questions have been answered. But on the Greenfield expansion, when do you think you would get the permitting done?

George Richmond

We are estimating permits in about two years.

David Khani – FBR Capital Markets

Okay. Two years from today?

George Richmond

Yes.

David Khani – FBR Capital Markets

Okay, great. And can you – I know this is not a big number here, but what is the CapEx you think you are going to need for the gas business?

George Richmond

In the range of about $15 million to – $16 million to $18 million per year.

David Khani – FBR Capital Markets

Okay. Okay. And will that enable you to keep production sort of flat or grow it?

George Richmond

Yes, I think it will keep it relatively flat, but what – obviously, they could – when we start longwalling, all these wells are over – either the properties we've already leased or we are going to mine. When we start longwalling, we will gradually build up the well gulf [ph] gas production. So there will be a change after the longwalls start mining, an increase.

David Khani – FBR Capital Markets

Okay. So it will be flat and then once you get the gulf gas, then you – then you will step up it a little bit?

George Richmond

Yes.

David Khani – FBR Capital Markets

Okay. Okay. And then – I know you don't want to give out too much information, but did you have to put any upfront money at all for some of the coal leases or reserves that you leased up?

George Richmond

We are obviously not going to give you exact numbers. But there is – the leases normally work by some upfront money and then minimum royalties which we then recover – recuperate against future production. But to answer your question, the dollars we have to put down on these leases, I don't think anybody in the call would consider material.

David Khani – FBR Capital Markets

Okay, good. That's great. Good. And then the last question is how much inventory do you have on hand now?

George Richmond

380,000, somewhere around that.

David Khani – FBR Capital Markets

And what do you think that number will be by the end of the year?

George Richmond

Well, I will – we are planning about the similar level, but we really – things get really tight when we get below 200,000 just from a blending point of view. We've been down to those levels before. We'll just have to monitor the market, but normally around the similar levels to where we are now.

David Khani – FBR Capital Markets

Okay, great. Thanks, guys.

George Richmond

Thanks.

Operator

Jim Rollyson with Raymond James, you may ask your question.

Jim Rollyson – Raymond James

Good morning, everyone.

George Richmond

Good morning.

Joe Leonard

Good morning, Jim.

Jim Rollyson – Raymond James

Believe it or not, there is actually still a question or two to ask. Port capacity growth, George, you guys did a pretty good job of timing No. 7 East with McDuffie's expansions, so they were ready to receive the extra volumes. When you think about the new leases and this being six or seven or so years out, kind of have you talked to the Port guys and how do you see that playing out?

George Richmond

Without getting down to specifics, Jim, obviously adding another 4 million tons is obviously an issue we have to address and we are trying to address those issues today and I don't want to get into any more details than that. But we know that's our potential bottleneck and we are going to manage our way through that.

Jim Rollyson – Raymond James

So you are on top of it? That's good.

George Richmond

I sure hope so.

Jim Rollyson – Raymond James

Transportation costs, you mentioned you were kind of backing into the numbers of $15 to $16 now, getting you down to the port. That used to be $14 to $15, it actually used to lower. Just kind of curious the trend in transportation costs and how you see that going forward in the next couple of years.

George Richmond

Yes, we have renewed or extended some of the costs, I don't want to break them down specific, but obviously you know the pieces of it, there is the Port, there is the power maintenance, and there is the rail. And our contract ran out at the end of the first quarter and we have renewed – added another year to one of the contracts and longer to the other, and they have new rates which should go into the – at least to the first – the end of the first quarter next year.

Jim Rollyson – Raymond James

Okay.

George Richmond

But we're reasonably pleased with the size of the increase.

Jim Rollyson – Raymond James

Got you. And then lastly, I think in the prepared comments on the press release you mentioned Walter Coke getting back up to full capacity. But your shipment guidance for 2Q is obviously down quite a bit from 1Q. Just kind of curious what's going on there, what the thoughts are.

George Richmond

Yes, if you remember, Walter Coke is – produces a little over 400,000 tons annually, that's their capacity, which is 100,000 tons a quarter, which is what we are projecting close to it anywhere to the second quarter. So the drop from the first quarter, we just sold a lot out of inventory, which we built last year in the first quarter.

Jim Rollyson – Raymond James

Makes perfect sense. Great quarter, guys. Thanks.

George Richmond

Appreciate it.

Operator

Jen Marcello with Tuohy Brothers Investment Research.

Jen Marcello – Tuohy Brothers Investment Research

Good morning, guys.

George Richmond

Good morning.

Joe Leonard

Good morning.

Jen Marcello – Tuohy Brothers Investment Research

Obviously, most of my questions have been answered, but I remember you sent a few shipments to Japan in the fourth quarter. Just wondering what you sent to Asia in the first quarter and then if you foresee any increasing opportunity there, I guess in the balance of the year.

George Richmond

I really don't think we are going to see anything into Asia. I think if every – if all our customers want the top end of their range volumes, they have a floating range which we negotiate, we are going to be quite short of coal anyway. So I much prefer to move into what we call our strategic markets versus anything into Asia.

Jen Marcello – Tuohy Brothers Investment Research

Do you have any idea what stockpiles look like with your customers in the Atlantic Basin?

George Richmond

I'll try and answer that question the same. We obviously read the customers, but we don't know what their stockpiles are like. So the way we read it is when somebody asks us the lay days for a certain date and to move those lay days forward or hold the boats if the lay days are the 15th to the 30th and then we've got the nomination and it's right on the 14th every time or we want to delay a boat for a few days and they get a little aggravated with this and we assume they're relatively tied to coal and that's the situation we are in right now.

Jen Marcello – Tuohy Brothers Investment Research

Okay. Thanks, guys for the commentary.

Joe Leonard

Thank you.

Operator

Mark Liinamaa with Morgan Stanley, you may ask your question.

Mark Liinamaa – Morgan Stanley

Hi, guys.

Joe Leonard

Hey, Mark.

George Richmond

Hi.

Mark Liinamaa – Morgan Stanley

Have you commented – who – the additional leases that you want to acquire related to your venture, can you give any indication – now?

George Richmond

I'm – I didn’t hear the last part of that question.

Mark Liinamaa – Morgan Stanley

Who has the rights to the leases that you want to acquire at this point?

George Richmond

I'm not going to break them down one by one, but there is quite a big chunk of the property about equivalent to the – well, around about 20 million odd tons we've already done that is in a trust and it's people that we are sending relatively nice checks to today. And we've been mining on their property for many, many years.

Mark Liinamaa – Morgan Stanley

Okay. So that – nothing held by major miners at –

George Richmond

There's none of it held by miners apart from the Chevron piece.

Mark Liinamaa – Morgan Stanley

Okay. Thanks, guys.

Joe Leonard

And the way we piece this together with a few deals that we've announced, it makes it very, very difficult for anybody else to mine in that area.

Mark Liinamaa – Morgan Stanley

Very good. Thank you.

George Richmond

Thank you.

Operator

Mark Caruso with Millennium Partners.

Mark Caruso – Millennium Partners

Hi, good morning, guys. Just circling back on the met market, I know earlier – was that sort of how you think about the met market, but I guess one thing, George, in terms of – can you just give us a little bit more granularity in terms of why you did a six-months deals rather just quarterly and how we should think about that going forward since you just have fourth quarter open?

George Richmond

Yes. I mean, I guess we were faced with a couple of book ends. One, the Australian benchmark for the first quarter is $200 and a lot of the customers expected that. We didn’t like the $200, we thought it was under market and then some other U.S. producers settled some low-vol at about $230, $231. We didn’t like that either, because we felt it was locking in tonnage up for the year with a strengthening market. So we felt we were leaving coal and sales and potential live prices on the table if we did that.

So we also felt that if we'd have tried to get annual pricing that would have, I guess, protected us from leaving coal – leaving dollars on the table. It would have been unacceptable to our customers and they wouldn't have been able to sign to it. So we pushed for this compromise where – I mean, you could look at the $235 in several ways and you could look at it as average of $235, you can look at it as $200 and $270 or $220 and a $250 or a $235 and $235. But we felt that was the absolute best way that we could lock in prices higher than the $200, but still leaving enough volume open to capitalize on a strengthening market.

Mark Caruso – Millennium Partners

Great, thank you.

George Richmond

That – and Mark, let me just make a comment, Mark.

Mark Caruso – Millennium Partners

Sure.

George Richmond

Just pointed out that I misspoke earlier on when I talked about looking for expectations, coking coal sale. I think I said 1.7 million to 1.8 million for the year – for the quarter. It's actually 1.7 million to 1.9 million. I just wanted to correct that.

Mark Caruso – Millennium Partners

Thank you.

Operator

Garrett Nelson with Davenport & Company.

Garrett Nelson – Davenport & Company

Good morning, everyone.

George Richmond

Good morning.

Garrett Nelson – Davenport & Company

Most of my questions have been answered as well. But there is a longwall move at Mine 7 North currently underway. I was wondering if you could provide an update on any scheduled longwall moves for the balance of the year at those mines.

George Richmond

Yes, that longwall, the North – 7 North will start production mid-May. No. 4 moved in March and we expect it to move in June, the longwall at No. 4, which will be a normal like 10-to-13 day move. It has another longwall move in December. However, we will have preinstalled equipment on that. So it will only be a one-day move, so in effect, there is no production lost from No. 4's longwall in December.

And then the other move we've got is on the East expansion longwall and that's the one that will start in December and lose – I mean, it will be down for a considerable time, which we talked about in the last quarter as we are trying to catch-up on the delay in developing the second panel. Once we get through that into 2011, that's where we get the volumes up significantly because today we are not projecting anything like these type of longwall delays next year.

Garrett Nelson – Davenport & Company

Okay, thanks a lot for – thanks a lot for that detail.

Operator

Our next question is from Alex Heidbreder with Millennium.

Alex Heidbreder – Millennium

Yes, hi. Can you talk a little more on first, if there are any environmental or permitting issues on the three transactions that you guys announced? And then, just in general, I know you talked a little earlier about the increased 18 [ph] session, just in general, do you guys – do you have any impact from what's going on in other coal jurisdictions on your own and any other kind of future permitting issues? Thanks.

George Richmond

Well, first of all, these are deep coal mines, so the permitted issues are significantly different to the issues that we face in Appalachia with mountain top removal or surface mining. The major issue there is surrounding the permitting of the mine – well, the – just the regular permitting plus (inaudible) because we wash this coal, there will be slurry disposal and rock disposal and they are really the major issues we face in our underground coal mine.

Our surface operations, we are replacing those mines we have a couple of permits in place. But they – like everywhere in the country, they are taking longer and longer to get permitted. Right now, we seem okay, but if it continues to drag out, we (inaudible) latter years on those operations.

Regarding – obviously, the – something clearly went wrong in the accident of North and as an industry, I'm sure not just as a company and as an industry, we all need to find out what went wrong and what we can do to prevent anything in future. Only thing I would hope is we actually – as an industry, everybody, all interested parties, we don't jump to too many conclusions. We'll actually fix the problem. I want to say that that is what always happens. So we are clearly going to see some increased inspections, some probably early recommendations and/or legislations. So we – clearly, it's going to have an impact and we'll just have to monitor and see how it goes through the system.

Alex Heidbreder – Millennium

And legacy environmental or liability issues at the three transactions?

Joe Leonard

None that we are aware of.

Alex Heidbreder – Millennium

Thank you.

George Richmond

Thank you.

Operator

Meredith Bandy with BMO Capital Markets.

Meredith Bandy – BMO Capital Markets

Hey, guys, I took my answer – my follow-up question has been answered. Thank you.

Joe Leonard

Thank you.

Operator

Our next question is from David Lipschitz with CLSA.

David Lipschitz – CLSA

Good morning, everyone.

George Richmond

Good morning, David.

Joe Leonard

Good morning.

David Lipschitz – CLSA

A question for you on the South American – I don't know if you started talking to them or maybe I missed it. Have you talked to them about sort of length of time or are you looking to do six months with them or a year or it depends on what you want and what they want?

Joe Leonard

Yes.

George Richmond

Well, I mean there are some South American companies getting more comfortable with the quarterly. But – I mean, we – because we did a six-month in Europe, that doesn't mean we are going to do that in South America or we are going to do annually or quarterly. I think the point is from a timing point of view, we had a base to work from in the European business, because we started April 1st.

Right now, we try to be a little patient because we don't have the Australian second quarter numbers. We obviously have our internal numbers, but we'd really like to – they've got a few more months of the contract, so we'd really like to see how that second quarter of the Australian benchmark settles out before we decide what's in our best interests. I mean, we are willing to do any of the above, provided it maximizes the shareholder value.

David Lipschitz – CLSA

They – so you're saying they're signaling to you that they potentially would do quarterly, they are more comfortable with it?

George Richmond

I don't think anybody is real comfortable with the quarterly mix making coke, extremely difficult where coal – the base coal may or not be available in the next quarter. So I think everybody would prefer – I would still produce – so we prefer annual, however, I think we have a new reality and I think we are getting a little bit more comfortable with it.

David Lipschitz – CLSA

Okay, thank you.

Joe Leonard

And there doesn't seem to be any additional questions. And it's coming close to – time to close the call. I'd just like to summarize as we – we had a very good quarter in the first quarter. As we move into the second and prepare for the third quarter, we see a very favorable pricing environment. The No. 4 longwall would be up and running mid-May. Our coke business is back up to full production and pricing seems good there as well.

In the near term, we will work very diligently to close out these LOIs and get those locked up and move on. And as I said earlier, we have some other strategic projects we are taking a look at and we will work those if they make sense and if they don't, we'll pass on. But – so we have a full plate and we are looking very favorably toward a very strong 2010.

So thank you very much for participating with us this morning. We very appreciate it. Good-bye.

Operator

Thank you for your participation. Today's call has concluded, please disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Walter Energy, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts