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International Coal Group Inc. (NYSE:ICO)

Q1 2010 Earnings Call

April 29, 2010; 11:00am ET

Executives

Ben Hatfield - President & Chief Executive Officer

Brad Harris - Senior Vice President, Chief Financial Officer & Treasurer

Mike Hardesty - Senior Vice President, Sales & Marketing

Ira Gamm - Vice President of Investor & Public Relations

Roger Nicholson - Senior Vice President & Secretary & General Counsel of ICG

Analysts

Jeff Kramer - UBS

Brian Gamble - Simmons & Co

Garrett Nelson - Davenport & Co

Brett Libby - Jefferies & Co

Shneur Gershuni - UBS

John King - Wimco

Operator

Good day ladies and gentlemen and welcome to the Q1 2010, International Coal Group Incorporated earnings conference call. My name is Katlin and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today’s call, Mr. Roger Nicholson; please proceed.

Roger Nicholson

Thank you. Welcome to International Coal Group’s first quarter 2010 earnings conference call. I’m Roger Nicholson, Senior Vice President and Secretary and General Counsel of ICG. We released our earnings report yesterday after the market closed.

With me on the call today are Ben Hatfield, President and CEO of International Coal Group; Brad Harris, Senior Vice President, CFO and Treasurer; Mike Hardesty, Senior Vice President, Sales and Marketing; and Ira Gamm, Vice President, Investor and Public Relations.

Before we get started, please let me remind you that various remarks we may make on this call concerning future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

These statements are made on the basis of management’s views and assumption regarding feature events and business performance as of the time the statements were made. Because these forward-looking statements are subject to various risks and uncertainties, actual results may differ materially from those implied.

Factors that could cause actual results to differ materially are contained in our filings from time-to-time with the Securities and Exchange Commission, and are also contained in our press release, dated April 28, 2010.

Non-GAAP financial measures will also be discussed. You will find a reconciliation of the differences between the non-GAAP financial measures and the most directly comparable GAAP financial measures at the end of our press release. The copy of which has been posted to our website.

At this time I’d like to turn the call over to Ben Hatfield for his opening remarks.

Ben Hatfield

Thank you for joining us this morning. Yesterday, we were pleased to report strong operational performance as adjusted EBITDA increased to $46.9 million, compared to $44.5 million in the same period a year ago. Margin per ton sold increased by 31% compared to the first quarter of 2009. We achieve these results just by shipping 350,000 fewer tons.

Our 2010 first quarter results included a $22 million pretax loss on extinguishment of debt related to our successful capital-restructuring program. As a result we reported a net loss for the first quarter of $8.9 million or $0.05 per share on a diluted basis, compared to net income of $3.7 million or $0.02 per share in the same quarter last year. Excluding this loss, net income in the first quarter of 2010 would have been $6.2 million, which represents a 68% increase over the same period last year.

Our strategic capital restructuring efforts has significantly strengthened our liquidity, reduced future interest expense, and extended our debt maturity profile. In addition, we secured a new credit facility that provides increased borrowing capacity and greater flexibility. Brad Harris, our Chief Financial Officer will provide additional details on the restructuring later in the call.

Thermal coal markets began showing signs of improvement in the quarter; thanks to a combination of cold weather and cost over tonnage being pulled into the metallurgical market. Although utility coal inventories remain above the 10-year average, we expect them to approach more normalized levels by late summer.

Net coal demand continues to strengthen due to rising global demand. This tightening of supply is driving strong interest in both our low volatile and high volatile metallurgical products.

At this time I’d like to turn the call over to Brad Harris, our Chief Financial Officer.

Brad Harris

Thanks Ben. In the first quarter of 2010, we reported total revenues of $288.6 million, including $270.5 million attributable to coal sales of 4.3 million tons. First quarter 2009 revenues totaled $305 million, of which $273.8 million was attributable to coal sales of 4.7 million tons.

We reported adjusted EBITDA of $46.9 million for the first quarter of 2010, compared to adjusted EBITDA of $44.5 million for the same quarter of 2009. While the quarter-over-quarter increase is modest in absolute dollars, the increase is significant when considered that the results for the first quarter of 2009 included almost $8 million of EBITDA attributable to contract settlements. Exclusive of the settlements, adjusted EBITDA increased by $10.3 million or 28%.

Net loss for the first quarter was $8.9 million or $0.05 per share on a diluted basis, compared to net income of $3.7 million or $0.02 per share on a diluted basis for the first quarter of 2009. As Ben mentioned, our first quarter results included to $22 million pretax loss on extinguishment of debt related to our capital restructuring. Excluding this loss, net income would have been $6.2 million or $0.03 per share on a diluted basis.

Average coal sales revenue per ton for the first quarter was $62.57, compared to $58.51 per ton for the same period in 2009, while cost per ton was $50.90 in the first quarter versus $49.57 for the same period in 2009. Margin per ton increased 31% to $11.67 per ton in the quarter, compared to $8.94 per ton for the fist quarter of 2009; primarily due the higher realize prices and improved operational performance.

Depreciation, depletion and amortization expense totaled $26.4 million for the quarter, compared to $26.3 million for the same quarter last year. Corporate SG&A for the first quarter was $8.6 million, compared to $10.6 million for the same period in 2009. This reduction was primarily attributable to lower legal and professional fees.

During the first quarter, the company essentially completed its strategic capital restructuring program. The program consisted of three distinct initiatives. Starting in December 2009 and continued in the first quarter of 2010, we entered into a series of privately negotiated agreements to exchange $85.5 million aggregate principle amount of our 9% convertible notes due in 2012, for 24.9 million shares of ICG common stock.

Then in March, we simultaneously executed three security offerings that raised $422.9 million before underwriting fees, discounts and other costs. These offerings included the issuance of common stock, convertible notes, and senior secured notes. All three security offerings were significantly over subscribed.

Proceeds from these offerings were used to repurchase $169.1 million aggregate principle amount of our 10.25 senior notes in March, and $114.5 million aggregate principal amount of our remaining 9% convertible notes in April. The balance of the proceeds from these offerings will be used for general corporate purposes.

As announced in February, we also secured a new four-year $125 million senior asset based credit facility, to replace our previous revolving credit facility which was set to expire in June 2011. The new credit facility, which provides $25 million of additional borrowing capacity, and contains minimal financial covenants, matures in February 2014.

Consistent with our prior credit agreement, the new facility is expected to be used primarily for issuing letters of credit to collateralize our reclamation bonds. As of March 31, 2010 we had $301.7 million in cash, of which $136.4 million was dispersed on April 6, in conjunction with the repurchase of our 9% convertible notes. Currently we have $41.6 million in borrowing capacity available under our new credit agreement.

At quarter end, debt outstanding was $473.2 million, net of a $43.5 million discount, consisting primarily of $115 million aggregate principle amount of our newly issued 4% convertible senior notes, and $200 million aggregate principal amount of our newly issued 9.125% senior secured second priority notes.

Debt also included $135.5 million aggregate principle amount of our previously issued 9% convertible notes, and 5.9% aggregate principle amount of our previously issued 10.25% senior notes.

As I mentioned earlier, we retired over 80% of our remaining convertible notes in early April, so our debt now includes only $25 million aggregate principle amount of our original 9% convertible notes, and $5.9 million aggregate principle amount of our original 10.25% senior notes.

The company’s total assets were $1.6 billion as of March 31, 2010, compared to $1.4 billion as of the same quarter a year ago. Capital expenditures for the quarter totaled $16.6 million and are expected to aggregate $90 million to $100 million for the year.

At this time I’ll turn the call back over to Ben.

Ben Hatfield

Thank you, Brad. Now I’d like to provide an update on key developments in the first quarter. On March 10, the West Virginia Surface Mine Board upheld the approval of our surface mine from it, of the Tygart #1 deep mine complex in Taylor County, West Virginia.

Our current business plan anticipates that construction will resume on the Tygart #1 project in mid 2011. However, in light of elevated market demand, we are actively evaluating the option of accelerating the project startup. At full output, this complex is expected to produce 3.5 million tons of premium high volatile metallurgical coal, and high quality thermal coal.

Our Vindex subsidiary initiated development of its new Bismark deep mine and expansion of its Dobbins Ridge preparation plant in Grant County, West Virginia. Production and shipment of low-volatile metallurgical coal from the completed facilities is expected to commence in the third quarter of this year. We anticipate these projects will contribute 100,000 tons of metal coal sales in 2010, and achieve targeted output of 200,000 annual tons in 2011.

In February, ICG Beckley received the Greenlands Award from the West Virginia Department of Environmental Protection. This award is the state’s highest honor for environmental excellence in coal mining. The Beckley mining operation was honored for its many community and environmental projects in and around Eccles, West Virginia. Additionally, the department honored ICG Eastern’s Birch River surface mine, with an award for its innovative handling and disposal of coarse refuse.

Also in February, ICG Eastern’s Birch River Surface Mine and Birch River Preparation Plant, along with Wolf Run Mining’s Imperial Mine received the prestigious Mountaineer Guardian Award for outstanding safety performance in 2009. These awards were issued by the West Virginia Office of Miner’s Health, Safety, and Training and the West Virginia Coal Association.

On April 1, 2010, the Environmental Protection Agency announced new water quality standards, that if implemented as proposed would seriously limit all types of mining operations in the six states Appalachian Region, not just mountain top removal operations. The new standards are overly stringent, and would make it problematic for anybody to get a mining permit in the future. We certainly intend to make our voice heard during the public comment period.

Turning now to our current guidance; for 2010, coal production is expected to be 16 million to 16.4 million tons. The company expects to sale between 16.8 million and 17.2 million tons, including 2.6 million of metallurgical coal. The average selling process is expected to be $64 to $65 per ton, with an average cost of $51 to $52 per ton, excluding selling, general and administrative expenses.

Committed sales for 2010 are approximately 15.8 million tons or 93% of planned shipments, at an average price of $63.50 per ton, excluding freight and handling expenses. Uncommitted tonnage for 2010 includes approximately 700,000 tons that are expected to be marketed as metallurgical coal. Adjusted EBITDA for 2010 is expected to be in the range of $190 million to $210 million.

Focusing now on 2011, our coal production in sales are expected to be between 16.5 million and 17.5 million tons. The average selling price is projected to be $70 to $75 per ton. Metallurgical coal sales in 2011 are expected to total 2.9 million tons, of which approximately 2.4 million tons are un-priced. Committed and priced sales for 2011 are approximately 8.4 million tons or 49% of planned shipments, at an average price of $59.50 per ton, excluding freight and handling expenses.

In summary, we expect metallurgical coal pricing to continue to strengthen due to raising global demand, while the thermal coal market is showing signs of recovery, particularly over the past month. Substantial price improvement is expected to be suppressed by high utility inventories until late summer.

At this time I’ll open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Kramer of UBS. Please proceed.

Jeff Kramer – UBS

Hey, good morning and well done on a number of fronts in the quarter.

Ben Hatfield

Thanks Jeff. Good morning.

Jeff Kramer – UBS

Just on the comments around Tygart, I’m just curious how quickly you guys might be able to accelerate the project.

Ben Hatfield

We expect that construction could be accelerated by our full year if things go as expected, which would essentially move forward both development production, and full scale long haul production by around 12 months.

Jeff Kramer – UBS

Okay. So the whole thing shifts forward by a year, okay. In doing the math just on the committed and priced sales and the quarter-over-quarter change, it appears 300,000 tons were assigned in both 2010 and 2011 at about $167 a ton. Is that correct, and if so is that presumably for the Beckley tons?

Ben Hatfield

There is a mixture of deals in that transaction. It gets a little bit more complicated than that. Certainly the pricing on the Beckley turns is inline with what you’ve generally seen as the premium end of low haul pricing based on a widely double sized industry transaction. So Beckley is that premium mine and then there is a mixture of somewhat weaker quality products that give you the blended result.

Jeff Kramer – UBS

Got it. Okay. And on the net tons for the quarters, what’s the split or how many net tons were sold during the quarter?

Mike Hardesty

This is Mike Hardesty; about 475,000. We lost some shipments due to the weather that would have pushed as above 500,000.

Jeff Kramer – UBS

Okay. And of the 700,000 that are still open for 2010, what’s the split between low and high vol?

Ben Hatfield

It would be approximately 60% low vol, and 40% high vol.

Jeff Kramer – UBS

Got it. And then just elaborating on your comment about the inventories approaching normalized levels by late summer, is that basically keeping gas prices where they are now. Is that basically keeping gas prices where they are now in the $4 range, and kind of where the exports and the high vol switching is where you are seeing that right now. Is that kind of in that context as you see that?

Ben Hatfield

Well I think there are a couple of things going on. Certainly one is ramping up heat load, air-conditioning load if you will for the summer. That’s certainly going to have a tightening effect or reducing effect on the inventories.

At the same time, I think we are going to see industry wide substantials lack in strength, largely driven by the regulatory climate; a combination of the inability to get approved surface mining or even underground mining permits in a timely fashion, and the step-up in enforcement from even the Mine Safety and Health Administration that’s going to have a dampening effect on productivity in general terms.

So the combination of a tightening supply, and certainly summer load I think is going to bring things more so in the balance with the normal market environment by mid to late summer.

Jeff Kramer – UBS

Okay, thanks guys.

Operator

Your next question comes from the line of Brian Gamble of Simmons & Company please proceed

Brian Gamble - Simmons & Co

Good morning guys.

Ben Hatfield

Good morning Brian.

Brian Gamble - Simmons & Co

I was just looking at the guidance from a cost standpoint. It’s a slight tick up this quarter. I am assuming a little bit of that has to do with higher met realizations and the royalties paid there. Maybe you could confirm or talk about what the moving parts are there. Then thinking about ‘11 in that same regard, should we think about your typical kind of 3% or 4% cost inflation year-on-year as an appropriate place to start.

Ben Hatfield

You have several things going on. Focusing first on the first quarter cost, we did have some localized mine condition, transitional operating issues that gave us higher cost than we were targeting and expecting for our Kentucky region operations, but those are generally short term in nature.

In a broader sense, the factor’s pushing the cost up, certainly one of them is the ramp up in metallurgical production. Because generally speaking, as we ramp up production at Beckley and at Sentinel, and also at Vindex, that’s just going to have the effect of averaging or raising our average cost if you will.

In some cases we are taking low grade tons that would otherwise go to the thermal market in processing them to yield a metallurgical product that’s generally occurring at Vindex, but also raises the cost. So the combination of those initiatives to increase our output of metallurgical coal is generally going to raise the average cost, so that’s another factor.

Looking beyond first quarter, and what we expect in 2011, I think as you heard from several of the other industry peers, we are seeing strong regulatory response to some of the tragic accidents that have occurred recently, and that’s generally going to have a dampening effect on productivity as I noted earlier.

That’s going to drive up costs and certainly the effect of delayed permits is typically going to force producers as they try to maintain even status quo level of production, to sometimes push more marginal areas, because a new area maybe isn’t getting approved in a timely fashion as a permit action.

So those are the kinds of things that I think are generally going to push industry costs up going forward, and the order of magnitude that you suggested, is as good a guess I think if anyone could offer at this point.

Brian Gamble - Simmons & Co

Sorry for cramming those altogether; great job at extrapolating. On the met front, the 2011 bump up in met, it’s obviously nice to see. I mean when you think about Beckley, Sentinel, Vendex, additional opportunities, where is an upper end for where ‘11 could be? I mean could it be 3.5 once we get there, could it be higher than that?

Ben Hatfield

Well, I think we’ve been pretty conservative with what we’ve offered up and we prefer to keep it in that range targeting about 2.9 million tons in 2011. To be honest, we are pursuing some upside there, and we think we maybe able to deliver, so we want to stop short of telling the streets there until we’ve got everything nailed down. There are certainly some opportunities for working on it that could boost that number. On the order of magnitude of what you’re talking about, it’s too early to say that.

Brian Gamble - Simmons & Co

Great guys, thank you very much.

Operator

Your next question comes from the line of Garrett Nelson of Davenport & Company. Please proceed.

Garrett Nelson - Davenport & Co

Good morning everyone.

Ben Hatfield

Good morning

Garrett Nelson - Davenport & Co

On met pricing, we’ve heard varying price indications on the conference call so far, making it difficult to discern exactly where the market is for the various products. Have you seen a significant strengthening in pricing over the last month or so for your different met products, and if so, is the strength across the board more specific to particular products. Any color would be appreciated.

Ben Hatfield

The short answer is, definitely yes. We are seeing a strengthening of prices over the past month. The lower vol metallurgical prices, because it’s a scarce product, particularly the premium end of the spectrum like Beckley, prices are already very strong, and what we are seeing there is in line with what we generally heard the industry bantering about on the order of $235 to $240 metric in the shift range, so that’s consistent.

But what we’ve certainly seen happening over the last month is a very strong ramp up in pricing and demand for high vol metallurgical coal, I think in part because of general concerns across the industry about the availability, but certainly a key driver being the tragic accident at the Upper Big Branch Mine that I think is driving many steel companies and export buyers to look for coverage and security of supply. So that’s certainly raised the number quite a bit on the high vol metallurgical side, and there’s a wide range.

Part of the reason it gets a little confusing is, there’s a pretty wide range of depending on what is to market, depending on whether it’s the premium end of a high vol-A or the lower end of a high vol-B, the higher sulfur kind of products. So there is a wide range because there is a broad diversity of products, but there is no question that the market and the pricing moved pretty dramatically over the last 30 days or so.

Garrett Nelson - Davenport & Co

Thanks a lot. Great Q1 results.

Ben Hatfield

Thank you.

Operator

Your next question comes from the line of Brett Libby of Jefferies & Company. Please proceed.

Brett Libby - Jefferies & Co

Hey guys, strong quarter. Can you talk about the pro forma for everything; where cash is as of today, and then also with the acceleration of Tygart. Can you guys talk about kind of where you see CapEx, specifically for Tygart, and then for the overall company over the next three years?

Ben Hatfield

I will let Brain Harris address the cash question first and then we will talk a little bit about Tygart.

Brain Harris

Cash right now is about $160 million, reflecting the purchase of those remaining convertible notes that I referred to.

Ben Hatfield

On the Tygart project, again it would be premature to say exactly where the schedule and the numbers are going to come out, until we’ve made a full presentation to our Board of Directors, and confirmed everything time wise and processes wise with the shaft and slope contractors, and the site development contractors and all the people we are currently meeting with now.

But just kind of speculating a little bit on what maybe achievable, we believe it’s possible to accelerate that project by about 12 months, and the impact in terms of capital spend in 2010 could be on the order of $30 million to $40 million -- actually I misspoke; about $15 million to $20 million on 2010, and then a more substantial step up in 2011, perhaps on the order of $40 million, $50 million, but we’ll have more precise numbers on that once we’ve actually nailed down a schedule, and can say certainty when it’s going to happen.

Brett Libby - Jefferies & Co

And then the overall cost of the project is still little like $300 million or so?

Ben Hatfield

Yes, in round numbers it’s about a $300 million project, and we’ve spent thus far around $20 million.

Brett Libby - Jefferies & Co

All right, I got it. So the balance would be in 2012?

Ben Hatfield

Right, that’s where probably you are going to see peak spending, with a lot of the equipment load heading in that time frame, and of course the long vol coming later on.

Brett Libby - Jefferies & Co

And what would be the first production, if you were to accelerate from mid-2011 start, to mid-2010 start, what would the first production date be?

Ben Hatfield

Yes, I would say again it’s an order of magnitude from what we’ve told you earlier, about a 12 month acceleration, that we would see the initial development production right at the end of 2011 or early 2012, and then thereafter ramping up with continuous minor sections being added until you get the long vol coming online, probably in late 2013 or early 2014.

Brett Libby - Jefferies & Co

All right, thanks very much guys.

Ben Hatfield

Welcome

Operator

(Operator Instructions) Your next question comes from the line of Shneur Gershuni of UBS. Please proceed.

Shneur Gershuni - UBS

Hi, good morning everyone.

Ben Hatfield

Good morning.

Shneur Gershuni - UBS

Most of my questions have actually been answered, just I guess two industry wide questions. Ben you kind of talked about the permitting challenges and so forth, and the water content levels and what not.

I was wondering if the proposal that the EPA has out there, the levels that they are requesting or suggesting rather, I mean are they not only ridiculously low with respect to how it impacts the permitting situation, but how it would compare the water tables in local cities and so forth.

I mean these numbers are just far below that, and just done in such a way to basically not enable you to get permits or are these inline with water tables that you see in an average city and so forth, if the average person does drink?

Ben Hatfield

Shneur you’ve made a point that’s certainly a key issue, that frankly has the entire industry upset and questioning what the real goal is here, because the conductivity levels that the EPA is trying to suggest are mandatory. Number one, they are only applying in the six of the 50 states, which seems kind of absurd. Secondly it’s a level that first and foremost has never been established as a level that creates any damage or significant adverse effect.

They are speculating on an adverse effect, but one species of mayfly is moving out, and another specie is moving in, which is a rather bizarre kind of measure if you will or metric, for what constitutes an adverse environmental impact. But even more broadly speaking, if you take those same conductivity limits that the EPA is trying to inject into the Appalachian coal mining industry, you can’t satisfy those with many industries.

Frankly, you probably can’t satisfy it as a Wall-Mart parking lot. Anything that breaks ground, and breaks dirt creates dissolved solvents in the water, and the conductivity is essentially a proxy metric for dissolved solids. So we found it frankly just infragelous that the EPA would try to force the coal industry to meet a number if you will on conductivity, when there is first and foremost no adverse impact associated with the higher conductivity levels, and secondly a standard that other industries can’t meet and not being asked to meet.

So that causes us to believe that logic has to prevail at some point, either through negotiation or litigation, and we get a more rationale outcome; one that doesn’t destroy thousands of jobs in the Appalachian region for absolutely no purpose. So I will get off my soapbox now, but in short it’s just a crazy number, and we are hoping that common sense prevails and Appalachian mining jobs are protected.

Shneur Gershuni - UBS

Okay, one other question, kind of industry wide again. We have been hearing on several of the conference calls about increased scrutiny by MSHA and so forth, and the impact. I was wondering if you could sort of put into context of how you think it will impact both cost and volumes, and what is it due to the marginal producer that’s barely making a cash return at this point right now.

Ben Hatfield

By that you mean the EPA’s involvement in the process, what’s that doing?

Shneur Gershuni - UBS

No I was talking about more the MSHA scrutiny, given the [Inaudible].

Ben Hatfield

When we switch regulars…

Shneur Gershuni - UBS

Yes sorry, switching regulators.

Ben Hatfield

The MSHA impact is certainly going to have a dampening effect on productivity. I don’t think anyone in the industry would challenge the notation of demands being required to meet the laws and legally support it, and we all target.

That is clearly the behavior and the expectations that we impose on our own operations, but the manner in which its being approached, with the kind of assumption of guilt in advance of any evidence in the attempt to impose an apparent violation standard across the industry that’s clearly punitive and arguably even disruptive of constitutional due process. It’s just a little odd, and frankly I think again, I’m hoping that logic prevails and some rationality comes to the process.

You hear some people talking about slamming the appeals process and preventing operators from being able to appeal, and that just seems to defy any kind of constitutional logic I could come up with. So we hope that there is going to be more common sense reaction on the MSHA regulatory side as well, where we all kind of focus on the same goal, which at the end of the day is keeping our people safe, avoiding any kind of mine accidents, once a penalty is too much, 29 is something that none of us would have ever thought could have happened in this environment.

So the entire industry is focused on complying with the laws and meeting a stronger and more protective standard, and what we want to do is get there in a fashion that isn’t just unnecessarily and punitively disruptive of the business. So I think we will get there. We are going to work closely with regulators to raise the bar across that operations, and I think most of the other coal producers are going to do the same.

So I believe the industry is going to make a fallout effort to meet this higher standard of enforcement, but you can certainly expect that the transition could be difficult, and its going to result in some disruption of supply and tightening of production output, and that’s going to make things a little volatile on the cost side perhaps for some operations.

Shneur Gershuni - UBS

Great, thank you very much.

Operator

Your next question comes from the line of John King of Wimco. Please proceed.

John King - Wimco

Hi, can you guys hear me.

Ben Hatfield

Yes we can.

John King - Wimco

Good morning. Actually a follow up on last question that was asked on MSHA. If you could sort of speculate for me a little bit, given previous situations where there has been mine accidents, what typically does this result in?

Can you sort of quantify the impact in terms of an operating cost per ton? Is it a couple of dollars per ton; is it smaller or larger. I realize that it’s somewhat speculative at this point, but given the types of safety standards or operational changes you would have to put in place to sort of meet what you expect and are going to come out with, what they might come out with, can you just sort of put that in context for us?

Ben Hatfield

Realistically John I couldn’t offer any kind of measure that would be meaningful, because it depends so much on the circumstances and the findings. Certainly as the UBB investigation moves forward, if MSHA determines that there was an issue on ventilation side or something of that nature, that’s going to cause a broad industry review of all ventilation programs, and that’s going to happen even if MSHA didn’t ask for it, because there’s no one in the industry who wants to have another accident like that.

So you are going to see an outcome that’s certainly going to be a higher standard of enforcement, a higher level of scrutiny across the industry. I think everyone in the coal industry is already trying to do that internally, and we are going have further pressure to do so from MSHA.

We expect to meet that standard, but it’s really difficult to put a number on what the cost impact or the tonnage impact might be, just because we really don’t know what the circumstances of the accident are. So I’d be hesitant to put a number on it.

John King - Wimco

That’s fair, I can appreciate that. Historically when there’s been timings like that, is it kind of a couple of dollars per ton, is it larger than that or smaller than that. I mean just based on things you guys have seen in the past.

Ben Hatfield

Again it’s going to be very dramatic by the type of operation you have, and small mines versus large mines and even regional difference. So I would be hesitant to try to quantify.

John King - Wimco

Okay, that’s fair. Switching back to the EPA real quick, can you just refresh our memories in terms of what percentage of your production and reserves come from the type of mining, the mountain top removal; I guess with valley field or whatever it’s called. What percentages come from that methodology?

Ben Hatfield

Again, it depends on which characterization you use as to the top of mining that EPA is focused on. If you truly look at what’s commonly referred to and technically referred to as a mountain top removal mining, that would constitute probably significantly less than 20% of our production, but from what we have seen, the EPA focus is much larger. It’s essentially targeting all of surface mining, and indeed anything that uses the valley field.

So the surface mine numbers we have shared previously, that’s something that has a percentage of our production. It’s dropping pretty dramatically. Right now it’s probably in the 45% range and the current year is dropping towards probably 30% of our production by 2015.

But the more alarming aspect, is that so long as the EPA continues to essentially try to prohibit valley fields, they are having a far more damaging impact on the industry than just surface mining, because underground mines also need valley fields. They need them for refuse disposal at a preparation plant, they need them for site development at our mine portals, they need them for haul roads even to get coal in and out of these remote mine locations.

So a general probation or an attempt to prohibit valley fields has a far more damaging impact on the industry than just the mountain top removal that kind of gets the headline in all of the EPA pronouncements. So that’s the reason certainly that you see a broad industry push back on a regulatory initiative that we see as not only overly reaching, but certainly far more damaging than is generally being communicated to both clerical office holders and the public at large.

So I think once the instrument of the effect is better measured and better communicated, we are again hopeful that we’ll get a more rational outcome.

John King - Wimco

That’s fair. I appreciate that clarification. It sounds like it’s going to affect quite a few different types of mining. Is there a cost benefit or negative in terms of the less than 20% you mentioned in the words of that higher cost operation versus some of the other types of mining that you guys engage in.

I’m just trying to get a feel for, if it is applied across the board and it does have an impact on all your operation essentially, which ones will be impacted the most, either because there are higher costs of the margin or because the impact will be greater.

Ben Hatfield

Well, the near term impact is certainly going to be all surface mines, not just mountain top removal operations and there is a near term impact; we are even already seeing it.

As we get in the situation that we’ve been in for the last year or more no valley fields are getting approved, then that means surface mines whether they’re small or large have to hold the material longer distance; like the dirt and rock in a truck and have to haul it to another site, and that has a great impact on cost, that’s already visible I think across the industry. So we know where that mark is and it’s certainly adverse to the direction that we like our cost to be moving.

But longer term, the more settling aspect is, as no replacement tons get approved, if you have no replacement permits getting approved, and surface mines are literally going to run out of areas to work, and that begins to have an immediate and detrimental impact on jobs and on output.

So looking across the Central Appalachia’s spectrum where you have probably 40% surface mining, more or less you could see a pretty significant negative impact on output from Central Appalachia if this suspension of the permitting process continues to stay in place. So it could have some pretty broad impact from the standpoint of adverse cost and reduction is flat across Central Appalachia in particular.

John King - Wimco

Okay great, thank you very much. And just one real quick follow up, I apologize for taking up too much time here, but does met quality coal typically come from underground mining as opposed to surface. In other words we see the met impact to be less if the surface mining is impacted or is that not correct?

Brad Harris

You are correct. 90% plus of metallurgical coals is going to come from underground operations, and that pretty consistent across the industry. We do get a little bit from surface operations, but it’s a pretty small percentage of the overall output.

John King - Wimco

Great. Thank you for your time.

Operator

This concludes the question-and-answer section of the call. I would now like to turn the call back over to management for closing remarks.

Brad Harris

Thank you. International Coal Group looks forward to building on its first quarter performance. Please plan to join us again for our second quarter conference call in July. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: International Coal Group Inc. Q1 2010 Earnings Call Transcript
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