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Oxford Resource Partners, LP (NYSE:OXF)

Q4 2013 Earnings Conference Call

March 4, 2014 10:00 a.m. ET

Executives

Charles Ungurean - President, Chief Executive Officer and Director

Gregory Honish - Senior Vice President, Operations

Bradley Harris - Senior Vice President, Chief Financial Officer and Treasurer

Karen Van Horn - Investor Relations Representative

Analysts

Joe Mcmanaman – Raymond James

Sam Dubinsky – Wells Fargo

Adams Williams – Advisory Research

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Oxford Resource Partners, LP earnings conference call. My name is Patrick and I will be your moderator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the conference over Miss. Karen Van Horn, Investor Relations Representative. Please proceed.

Karen Van Horn

Thanks, Patrick. Good morning, and welcome everyone to our fourth quarter and full year 2013 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I’m Karen Van Horn, Investor Relations Representative with Oxford. Participating on the call today are Oxford's President and Chief Executive Officer, Chuck Ungurean; Oxford's Senior Vice President of Operations, Greg Honish; and Oxford's Senior Vice President and Chief Financial Officer, Brad Harris.

Oxford released its 2013 fourth quarter and full year results earlier this morning. On today's call, we will be discussing our operations and financial results. Following our prepared remarks, we will open the call up to questions.

Please be aware that some of our remarks may include statements that are not historical in nature and that may involve expectations, plans and objectives regarding future operations. These remarks are forward-looking statements and are subject to the cautionary language regarding forward-looking statements contained in our press release. Additionally, we will be discussing adjusted EBITDA and adjusted net loss, which are non-GAAP financial measures. The definitions of adjusted EBITDA and adjusted net loss and reconciliations thereof to net loss, a comparable GAAP financial measure, are included in tables presented near the end of our press release. Our press release has been posted on our website, oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that, I would like to turn the call over to Chuck for some opening remarks. Chuck?

Charles Ungurean

Thanks, Karen, and thanks everyone for joining us today. We had a positive fourth quarter. We saw an almost 15% increase in our cash margin per ton compared to the same quarter last year. But we also experienced an almost 7% reduction in tons sold attributable to the winding and idling of our Illinois basin operations. The net impact was a 2.4% in adjusted EBITDA for the quarter and on a full year basis, 2013 results met our revised expectations. Although adjusted EBITDA was down year-over-year, the full year results reflect the planned lower sales volume associated with our Illinois basin operations.

Our coal market conditions continue to be challenging. We are well positioned for 2014. We completed the wind down and idling of our Illinois basin operations during the fourth quarter and we’ve been proactive in rate sizing our cost structure to better align with our committed sales position by temporarily idling two Northern App mines. These actions are in addition to the productivity improvements already achieved in our Northern App operations.

We continue to focus on these core operations where we have strong committed sales position for 2014. As of today, our projected sales volume is 94% committed and priced. This underscores the strength of our long term customer relationships and our strategic importance in our core region. Utility stockpiles are down due to the extremely cold weather and as a result, we are seeing RFPs for coal spot orders that are open for only short periods of time. And the large drawn gas storage because of the low captures this winter has resulted in higher gas prices, generally in the range of $4 to $5 per MCF. This should increase coal consumption at many of our customers’ plants. Should there be an increase in demand resulting in additional sales for us, we have the ability to increase production with little incremental CapEx investment. Based on current market conditions, we expect a modest year over year increase in adjusted EBITDA for 2014.

Now I’ll turn the call over to Greg to provide an update on our mining operations. Greg?

Gregory Honish

I'm going to report on safety and operations, starting with safety. We completed 2013 with a reportable incident rate of 1.6%, which is 24% better than the average for Appalachian basin surface mines and facilities. We have performed better than the Appalachian basin average in each of the last four years, demonstrating our commitment to operating our mines safely.

Moving on to our operations. Productivity in our Northern mine operations improved 2.5% year-over-year, supported by the relocation of the Illinois basin equipment as well as the addition of a third highwall miner during the fourth quarter. The additional highwall miner enabled us to make up most of the production loss related to the entrapped highwall miner in the third quarter. As Chuck mentioned, we idled two of our Northern App mines at the end of the year to better align production with expected 2014 sales. This resulted in a net workforce reduction of approximately 50 employees.

Looking at our reserve position, we acquired 6.2 million tons of proven and probably coal reserves in Northern App. This exceeds the 6.1 million tons we produced in 2013 and is consistent with our strategy to add a minimum, replace the reserves that are depleted in each year. We also received nine permits in 2013 to mine a total of 6.8 million tons in Northern App.

And with that, I'll turn the call over to Brad. Brad?

Bradley Harris

Thanks, Greg. Good morning, everyone. Fourth quarter 2013 cash margin increased 14.6% to $6.61 per ton from $5.77 per ton in the fourth quarter of 2012. Coal sales revenue increased by 2.1% to $51.09 per ton, and cash cost to coal sales increased by 0.5% to $44.48 per ton. Tons sold decreased by 114,000 tons to 1.6 million tons, attributable to the wind down and idling of our Illinois basin operations.

For the fourth quarter, total revenues were $82.3 million, including $81 million from coal sales. Comparatively, fourth quarter 2012 revenues totaled $86.5 million, including $85.1 million in revenues from coal sales. Adjusted EBITDA was $8.2 million for the quarter compared to $8 million for the prior year quarter, an increase of 2.4%.

Depreciation, depletion and amortization expense was $10.3 million for the fourth quarter, compared to $12.2 million for the prior year period.

SG&A for the fourth quarter held steady at $4.2 million. Additionally, we incurred approximately $750,000 of impairment and restructuring charges in the fourth quarter related to the completion of the wind down and idling of our Illinois basin operations.

Interest expense was $3.9 million higher for the fourth quarter of 2013, primarily due to higher interest rates and amortization of cost associated with our new credit facilities.

And lastly, we recorded a non-cash gain of $2.7 million in the fourth quarter related to the change in fair value of the warrants associated with our second lien credit facility.

For the full year of 2013, adjusted EBITDA was $42.1 million compared to $47.9 million for 2012. The decline was primarily attributable to the plant lower sales volume from the Illinois basin operations and the 1.8% decline in cash margin from $6.93 per ton for 2013 or $7.06 per ton for 2012.

While cash coal sales revenue increased 2.7% to $50.92 per ton for 2013 as compared to 2012, this was offset by a 3.5% increase in cash cost of coal sales to $43.99 per ton for 2013 as compared to 2012.

CapEx, net of insurance proceeds reinvested, totaled $20.3 million for 2013, down from $24.5 million for 2012. Maintenance CapEx was down in part due to the benefits from the use of our Illinois Basin equipment relocated to our Northern App operations.

As of December 31, 2013, we had $3.1 million of cash and $5.1 million in available borrowing capacity on our revolving credit line. We continue to actively manage our liquidity and have taken a number of actions to improve our position, including idling our Illinois Basin operations, aligning our production with committed coal sales and reducing costs by temporarily idling two of our Northern App mines, reducing CapEx and acquiring a strategically located coal preparation plant next to a significant customer that will reduce coal transportation costs. We continue to pursue the sale of our remaining Illinois basin equipment consisting of a large capacity shovel and several small pieces of equipment and would consider offers for the remaining coal reserves and/or facilities related to our Illinois basin operations.

And now for our 2013 guidance. We expect to produce between 5.5 million and 5.9 million tons and we expect to sell between 5.6 million and 6 million tons. Our average selling price is expected to be in the range of $51.50 and $53.50 per ton, and our average cost is expected to be in the range of $42.30 to $44.30 per ton. Adjusted EBITDA for the year is expected to be in the range of $42 million to $48 million. And finally, we anticipate CapEx to be between $17 million and $21 million.

With that, I'll open the call up to questions. Patrick?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Joe Mcmanaman with Raymond James. Please proceed.

Joe Mcmanaman – Raymond James

I was just wondering if you can maybe quantify how much volume you could potentially put on without any incremental CapEx if the market improves?

Charles Ungurean

This is Chuck here. I believe we could get up to about 0.5 million tons.

Joe Mcmanaman – Raymond James

Okay. And then just in SG&A and DD&A, I was wondering, are you seeing any improvement in those costs going forward due to the idling of the mines or do you think Q4 is a good run rate for those?

Bradley Harris

Overall I think the Q4 run rate is pretty indicative of what to expect. I think the SG&A will hold flat. There could be a slight decrease in the DD&A line as we produce a few tons, but it will be a marginal decrease. So I wouldn’t expect to see any material change in that line either.

Joe Mcmanaman – Raymond James

Okay. And just my last question. With the two mines you idled in Northern App, do you see them coming back on at some point? Is there any situation where they would come back on sooner than later?

Gregory Honish

This is Greg. Based on our current sales forecast, we’ll probably see one of those mines come back on later this year and the second one would probably reopen in 2015.

Operator

Your next question comes from the line of Sam Dubinsky with Wells Fargo. Please proceed.

Sam Dubinsky – Wells Fargo

Great. Just a thought to the prior question, just some more color on idle mines. What coal price to do you need kind of the idle mines to come back online under your assumptions? Is there any CapEx boost to bring those mines back online and what’s the output again of those two mines? I may have missed that.

Gregory Honish

This is Greg. Let me start with the output on those two mines, was in the range of 40,000 tons per month total between the two. In terms of additional capital to bring them online, essentially none. We actually have equipment at the mines right now that we would fire back up again. And I’ll refer to Chuck on the coal pricing.

Charles Ungurean

On the coal pricing, we’d want to be in the high 40s to mid-50s. Again depending on the quality requirements.

Sam Dubinsky – Wells Fargo

Okay, great. And then just on your interest expense, I think it was about $7 million this quarter. Just a clarification, is that all cash interest or is there a non-cash component to that?

Bradley Harris

There’s a non-cash component of that.

Sam Dubinsky – Wells Fargo

What is the cash interest?

Bradley Harris

It’s about -- I’m going to speculate here. I think about two thirds cash interest, about one third non-cash interest.

Sam Dubinsky – Wells Fargo

Okay. And then how much liquidity do you think you need to run your operations through 2015? Do you think the current credit facility is adequate? Do you expect to grow a little bit of cash on the balance sheet or how do you see that panning out?

Bradley Harris

Short answer is our current liquidity is adequate. Obviously it’s a little tight, but we have operated comfortably at this level for a considerable period of time and believe we can continue to do so comfortably. As long as we execute our plan for 2014 as we anticipate and having a 94% committed sale position and we feel pretty good about the revenue, we should be fine at the current level.

Sam Dubinsky – Wells Fargo

Great. And then how much do you expect to raise in cash from asset sales? I think you gave a number in the past and I think that was just for equipment. But is there anything else up for sale? What do you think the min and max of after sales could equate to?

Bradley Harris

The asset sales of what we identified, the largest piece is the shovel down in Kentucky and there are some several smaller pieces, some older smaller dozers primarily there. I think we’re probably looking at cash proceeds in about the $3 million plus or minus range. But again the secondary markets are pretty saturated with used equipment right now. So while we continue to see interest, that hasn’t translated to an offer yet, but we are certainly hopeful.

Sam Dubinsky – Wells Fargo

Anything else up for grabs from the other idle mines? Is there any wildcard asset sales out there that people are looking at or is it just the equipment?

Bradley Harris

Really just the equipment primarily related to Kentucky. As Greg indicated, we had a little bit of idle equipment related to those two operations now, but that equipment can be put back into production. Some of it is going to come back online in the latter half of this year, 2014. So it’s really anything of substance is the Kentucky assets.

Operator

Your next question comes from the line of Adams Williams with Advisory Research. Please proceed.

Adams Williams – Advisory Research

A couple of questions. How much of your volumes are locked in for 2015 in terms of prices?

Bradley Harris

I think it’s about 50%.

Adams Williams – Advisory Research

Okay. How about -- do you have any number for 2016 just?

Bradley Harris

I want to say it’s in the 25% range. Those numbers will be disclosed in our 10-K that will be filed very shortly here. So we can give you the specifics on that.

Adams Williams – Advisory Research

Okay. And then can you comment on how much you’re paying for fuel and what’s the status of any hedges you’re using?

Bradley Harris

We have about 75% or so of our fuel position hedged for 2014 and those hedges locked in the fuel price at about $3.03 a gallon. The balance is obviously at the spot market prices and those have increased a bit, but they’re about $3.50. They’re fluctuating at a pretty decent pace right now given what’s going on in the world markets.

Adams Williams – Advisory Research

Okay. And the other question I wanted to ask is, how much did you all pay for the 6.2 million of probable and proved reserves you acquired during the year?

Gregory Honish

The process that we acquire most of our reserves -- this is Greg -- is through leases. So we will make an advance royalty payment which is a recoupable royalty payment and then once we start mining and that’s what shows up on our financials right now, we’ll pay the royalty out. So the amount of actual cash that we expended in 2013 for reserve acquisitions was probably in the range of $2 million to pick up that 6 million tons.

Adams Williams – Advisory Research

I guess I was just curious, are you just targeting to buy in reserves to offset the production? Why wouldn’t you be buying additional reserves? Is it just because there’s no demand for it, is that the issue?

Gregory Honish

When we find the right deal, we will buy the reserves up if that far exceeds our annual production, that’s fine. But at a minimum, we’re going to replace the reserves that we mine this year.

Operator

With there being no additional questions at this time, I would now like to turn the call back over to Mr. Chuck Ungurean for closing remarks.

Charles Ungurean

Thanks again, everyone, for your ongoing support of Oxford. We look forward to sharing our progress with you on our next earnings call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation in. You may now disconnect. Have a great day.

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