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Massey Energ (NYSE:MEE)

Q2 2010 Earnings Call

July 28, 2010 10:00 am ET

Executives

Baxter Phillips - President, Executive Director, Member of Finance Committee and Member of Safety, Environmental & Public Policy Committee

Don Blankenship - Chairman of the Board, Chief Executive Officer, Chairman of Executive Committee, Chairman of the Board of A T Massey, Chief Executive Officer of A T Massey and President of A T Massey

Mark Clemens - Senior Vice President of Group Operations

Eric Tolbert - Chief Financial Officer and Vice President

Roger Hendriksen - Director of Investor Relations

Analysts

Jeffrey Cramer

Brian Singer - Goldman Sachs Group Inc.

Kuni Chen - BofA Merrill Lynch

Jennifer Marcello

James Rollyson - Raymond James & Associates

Holly Stewart

Brian Gamble - Simmons and Company

Justine Fisher - Goldman Sachs

Michael Dudas - Jefferies & Company, Inc.

Shneur Gershuni - UBS Investment Bank

David Khani - FBR Capital Markets & Co.

David Gagliano - Crédit Suisse AG

Brian Yu - Citigroup Inc

Paul Forward - Stifel, Nicolaus & Co., Inc.

David Katz - CIBC World Markets

Question-and-Answer Session

Don Blankenship

Yes, so I think that we're consistent with what we've done in terms of new commitments particularly when you consider quality. We have sold some coal in '12 that accommodate what we consider sort of a backlog that fell from a couple of our surface mines that either are really high sulfur in certain seam splits or low quality that are in those numbers. But what we've sold in the last quarter for '12, which is a small volume, is consistent with what we suggest that we needed to get it to return on capital.

Operator

Thank you. I'd like to hand the floor back over to management for any closing comments.

Roger Hendriksen

All right. Thanks, Jackie. It looks like the queue has been depleted. We appreciate all the good questions. Thanks very much again for your participation and for your continuing interest in Massey Energy. This'll wrap up our call for today. Thanks again.

Operator

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

Operator

Greetings, and welcome to the Massey Energy Second Quarter 2010 Financial Results. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Roger Hendriksen, Director of Investor Relations. Thank you. Mr. Hendriksen, you may now begin.

Roger Hendriksen

Thanks, Jackie, and good morning, everybody. We appreciate you taking the time to participate in our call this morning. We know that your earnings season is busy and we appreciate your continued interest in Massey Energy. As you know we distributed our second quarter press release last evening, and if by chance you have not seen it, it is posted on our website and has been furnished to the SEC on Form 8-K.

The members of our management team who will be speaking with you today are our Chairman and Chief Executive Officer, Don Blankenship; our President, Baxter Phillips; and our Chief Financial Officer, Eric Tolbert.

Before we begin, I need to remind you that the statements made in this presentation which are not historical in nature are forward-looking statements, made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on current factual information and certain assumptions, which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control. Information concerning those factors is available on the company's 2009 annual report on Form 10-K and other periodic filings with the SEC.

In providing projections and other forward-looking statements, the company does not make and specifically disclaims any undertaking or obligation to update them.

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

Baxter Phillips

Good morning, and thank for joining us. This morning, I'll start with an overview of our operations for the quarter. Clearly, the recovery from the Upper Big Branch tragedy will take time both emotionally and operationally. Our miners and their families remain in our thoughts and prayers. Our operations have struggled as we work to recover from the tragedy of UBB.

As a result of several factors, our shipments for the quarter were nearly 1 million tons lower than our operating plan. Most significant was the impact of lower productivity in our deep mines that led to a production shortfall of approximately 500,000 tons. In addition, we ran approximately 400 fewer shifts in our underground mines than planned plant, which reduced production by approximately 200,000 tons as well. We attribute most of the decreased productivity and reduced number of shifts to the UBB-related distractions in the quarter, increased inspection and enforcement activity, higher turnover rates and a few geologic issues.

Our export sales productions were reduced by approximately three met shipments that we expected to leap forth before the end of June, which were delayed until early July. This reduced second quarter met sales by about 220,000 tons. In spite of the delayed export shipments, metallurgical coal made up 21% of our total shipments for the quarter. This was an increase from 19% in the second quarter of 2009 but down from the 29% of total shipments in the first quarter of this year. In terms of produced coal revenue, metallurgical coal accounted for approximately 30% in the second quarter.

We added two continuous miner sections in the Elk Run to help mitigate lost production at UBB. We expect to add another section this quarter. We also added Saturday production at existing met coal mines, and expect to continue Saturday production through at least the end of the year. However, most of the incremental production from working Saturdays and running additional sections in the second quarter was offset by personnel being diverted to support the efforts at UBB and by shifts lost due to increased regulatory enforcement. The incremental production from our mitigation efforts is expected to be more evident in coming quarters.

We remain pleased with our acquisition of the Cumberland Resources operations. Cumberland has continued to operate as we expected and is making a significant contribution to our results. This operation produced and sold 1.6 million tons during the two months and 12 days we owned during the second quarter. Most of the Cumberland tons were sold into the thermal market at premium prices. However, 85,000 tons were sold into the met market at an average price of $120 per ton.

We continue to work to optimize the product and sales mix of Cumberland through blending and an increased force on our global met coal opportunities. Currently, we expect to sell approximately 2.5 million tons of the Cumberland produced coal into the met market in 2011.

I'll now turn the call over to Eric for a discussion of financial details of the quarter.

Eric Tolbert

Thank you, Baxter. For the second quarter of 2010, we reported a net loss of $88.7 million or $0.88 per diluted share. The net results included pretax charges of $178.9 million related to the UBB tragedy. Excluding UBB charges, we reported a net loss of $1.6 million or $0.02 per share. This compared to net income of $20.2 million or $0.24 per diluted share in the second quarter of 2009.

Our produced tons sold totaled 9.8 million in the second quarter this year compared to 9.4 million in the second quarter of 2009. Our average produced coal sales realization of $70.45 per ton in the second quarter was $6.31 per ton higher than in the second quarter of 2009. This improvement was driven largely by higher average realized prices on the thermal coal ton and an increase in the proportional mix of higher-priced met and industrial coals sold during the quarter. The higher thermal coal prices were mainly attributable to the addition of higher price of thermal coal contracts assumed in the acquisition of Cumberland Resources.

Average cash cost per ton for the second quarter of 2010 was $59.51 per ton, excluding the UBB cash charges. This compared to $51.53 per ton in the second quarter of 2009. These figures both exclude SG&A costs. Lower productivity attributable to increased regulatory enforcement actions, temporary shutdowns and unplanned transfers of crew and equipment, as well as higher surface mining ratios, were the key drivers of cost the increase. Labor rates and prices for supplies and repairs were generally flat to slightly lower on a year-over-year basis. At June 30, 2010, Massey had cash and cash equivalents totaling $496.2 million. This compared to $665.8 million at December 31, 2009.

In the second quarter, we completed the Cumberland acquisition for $645 million in cash including working capital adjustment and approximately 6.5 million shares of Massey common stock. We also repurchased approximately 861,000 shares of our common stock during the second quarter for $31.8 million, an average price of $36.92 per share. In addition to our cash and cash equivalents, we had $98.6 million available under our asset-based revolving credit facility for a total liquidity of $594.7 million at June 30, 2010. Total debt at the end of June was $1,306,000,000 compared to $1,319,000,000 at December 31, 2009. Massey's total debt-to-book capitalization ratio was 40.3% at the end of June compared to 51.2% at December 31, 2009.

Capital expenditures for the second quarter of 2010 totaled $108.8 million compared to $75.4 million in the second quarter of 2009. And depreciation, depletion and amortization was $148.9 million in the second quarter compared to $67.7 million in the second quarter of 2009. $62.2 million of the increase in DD&A was associated with impairment of assets at the UBB mine. The remainder of the increase was attributable to the assets acquired for Cumberland Resources.

Now let me turn the call over to Don.

Don Blankenship

Thank you, Eric. I'd like to start my comments with a brief update on UBB. We are working very hard to understand exactly what caused the explosion, and there are several investigative teams looking into the cause. Our goal is to understand what happened and to make every effort to prevent it from happening again. The families of the miners continue to be a focus. We remain in constant contact with them and for the most part, the compensation packages we have previously outlined, have been delivered.

We're also working hard to ensure that the investigation process is fair and complete. We have engaged numerous experts to help us analyze all the evidence and data, and we're sharing their findings and our findings with MSHA and the public. We have learned that an intense and overwhelming inundation of methane occurred at Upper Big Branch. This methane was released at a rate far in excess of the normal liberation rates for this mine. The investigation continues as to the source of the gas and the source of ignition.

We believe the mine will remain closed for an extended period of time and is not presently in our production plans going forward. However, we are studying a few possible alternatives that may allow us to access some of the coal reserves in the mine and the coal we're seeing. One option may be to seek permission to operate the continuous miner sections at Upper Big Branch that were completely unaffected by the explosion. Another option may be to start a new mine in the same coal reserve. Either way, consideration of these alternatives is ongoing.

As we look forward, we are beginning to see signs of improvement in the domestic thermal coal market. Recent data indicate that coal production is down and coal burn is up. Stockpiles at utilities served by Central Appalachia coal producers are approaching normal levels for the first time in 18 months. We believe thermal coal production in Central Appalachia will remain constrained for the foreseeable future due to increased regulatory impediments, ever-changing permit policies and reserve depletion.

At the same time, global demand for thermal coal was increasing by 200 million to 300 million tons annually. While China may be able to ultimately produce enough coal to provide for its domestic demand, India's economic growth will clearly be powered by a significant amount of imported coal.

The forward price curve appears to be taking. We expect this supply shortage into accounts with prices for high-quality thermal coal now in excess of $80 in 2012. Our outlook for met coal markets is also favorable. In the short term, we're seeing prices for high-vol met coal staying above $100 per ton at the mine. Higher quality coals could approach $150 at the mine.

In the longer term, we expect to see prices move significantly higher as we eventually emerge from the global recession and economic growth and development recovers. We continue to work to position Massey to take advantage of the anticipated opportunities in the global met markets. We acquired the Marmet river dock facility to help control a greater portion of our transportation needs, serving expanding met coal customer base.

In addition, we continue to develop high-quality reserves that will allow us to increase our total met coal production. During the second quarter, we were able to acquire a permit to build a new coal processing plant on our Marianna property. This reserve is contiguous to our Guyandotte operation. Thus, it provides a similar quality coal and offers many development and logistical advantage as over our planned Rowland development. We have chosen to develop Marianna before we move forward with Rowland. It will cost less to develop Marianna, produce about the same amount of coal, and we should be able to get it done on about the same schedule as Rowland.

Finally, we will be working very hard to improve our productivity and reduce cash cost as much as possible in the coming quarters. Combined with our improving product mix and higher contract to prices, we believe we have significant earnings potential in 2011 and beyond as indicated in the guidance ranges we have provided. This concludes our prepared comments, we'd be happy now to take your questions.

Roger Hendriksen

Jackie, are you ready for Q&A?

Operator

[Operator Instructions] Our first question is coming from Kuni Chen of Bank of America Merrill Lynch.

Kuni Chen - BofA Merrill Lynch

I guess, just first question on the met coal market, can you give us some color on what you have been seeing near term in that market? Others have commented that they've seen some recent slowing and perhaps some softness in some of the lower grades of met coal. Can you talk to some of those issues? And also, can you talk about your conversations with Asian buyers that's still ongoing or more on hold, kind of pending the Upper Big Branch investigation?

Don Blankenship

As far as the met market, the macro signals, you might call, seem to be mixed. I mean, we see some customers still anxious and some spot prices up. But I will say that we don't see as much excitement, say, toward China or other areas as we saw at the height of that activity a quarter or two ago. Essentially, those are big pictures, still the same. I mean, there's a lot of need for coal and a lot of growth, and there seems to be a lot of struggling in India and other places with meeting that growth. So I think we'll know more as we move into the fourth quarter, fourth calendar quarter, and see what type of activity there is out there. But I would say it's a little bit mixed, but I would agree with some that have said that perhaps it's softened a little bit.

Kuni Chen - BofA Merrill Lynch

And then just as a follow-up, I noticed that your commitment to price tons went up sharply for 2011. Is that an indication that you're now seeing utilities more aggressively come through the table? Can you just give us some detail on the pick up of commitments for next year?

Don Blankenship

I've not fully noted how much has changed since the last call. Do you have that, Eric? Eric will look that up. But basically, we've had some of carryover tons that obviously have resulted from the issues we've had, where we've had to switch steam to met. For example, at Cumberland, which was a good thing for us, but that moved some tons into '11 in the committee column. And we also sold some coal into '11 and '12 market, but I wouldn't think it's a substantial part in the last 90 days.

Eric Tolbert

We've increased our commitments from $34 to about $39. So about 4.6 million tons on the commitments and on the price and sold, it's up almost 9 million tons.

Don Blankenship

A lot of that would be carryover.

Baxter Phillips

And I think, as you said, some of that was pushing Cumberland tons, thermal tons. So it will get shipped on the met tons.

Don Blankenship

Yes, there's probably 2.5 million tons, I think, are here in that met category.

Operator

Our next question is coming from Shneur Gershuni of UBS Securities.

Shneur Gershuni - UBS Investment Bank

Just kind of as a follow up to Kuni's question. I was just wondering if you can give us any color of with respect to your met tonnage assumptions with respect to your guidance for 2011? And also, if you can sort of talk about the contracting opportunities with respect to the utilities? Inventories have clearly come down quite a bit. Do you wait until the end of summer to see where they end up before contracting or is the market improved enough to start considering a 2011 contract?

Don Blankenship

Shneur, we're responding to customer inquiries and watching it. I do think that the market may have some more strength yet to come into it, so I don't think that there's a rush for additional tons in '11, '12 or '13, a lot of times these are two and three-year bids. So I think the market will spend some on the back, primarily of the constraint production, whether or not there's a significant increased demand through the economy or the weather. The overall side on color on the market, again, there's not a lot of activity that actually takes place this time of the year in the export met market and of course, we watch the boards to see where they are. But I think the way we described it earlier, what you're seeing's a little softer. But it's mixed depending on whether you're looking at Eastern Europe or whether you're looking at Asia or whether you're looking at U.S. And I don't think that any color we would add to it right now would be too meaningful since it's so inactive.

Shneur Gershuni - UBS Investment Bank

Do you have an assumption or a range of kind of a met tonnage delivery in terms of tons for next year?

Don Blankenship

I thought that we -- did we provide anything specific on that in the guidance?

Eric Tolbert

No, in the guidance we provided to bid 3.4 million tons of met that's been priced. Couldn't provide the full amount of the...

Don Blankenship

So depending on what we're able to do at UBB and how much we're able to convert, we're going to be, I don't know, 10 million, 12 million met tons that could be yet to be priced.

Shneur Gershuni - UBS Investment Bank

Your cost assumptions for 2011, it sounds like you've had some operating challenges during the quarter and so forth. Is it fair to say that your effect of the deal in 2011 has no improvement at productivity at this point in time? And secondly, I was wondering if you can comment about the CapEx increase for 2011. Is it related to your description of potentially attacking the UBB reserves from a different portal?

Don Blankenship

As far as the cost and the assumptions that in the numbers, it depends on what you're benchmark is. I mean, obviously, since UBB, we've been running pretty weak. But our assumptions in 2011 are conservative compared to what we were doing prior to UBB. So we expect to return to productivity and regulatory and so forth, not too much different than before UBB or at least too much different than what we've experienced in terms of deep cuts and in terms of permitting and so forth. And we've been careful not to project mining off the permits that were hoping to get, but only mining off the permits that we pretty much have in hand. As far as the CapEx, we continue to put in a lot of CapEx to deal with UBB replacement, to deal with the Marianna plant, to deal with the inflation that's in the CapEx itself. And we also are having to deal with more and more regulatory capital spending as we go to other mines and put in more tracking devices and more rescue equipment and facilities. So there's a lot of that kind of CapEx in there, I don't know that I could articulate all of the particulars for you this morning, though.

Operator

Our next question is coming from Jim Rollyson of Raymond James.

James Rollyson - Raymond James & Associates

Don, in the guidance, your pricing assumption range went up quite a bit as well as the cost. I'm just trying to get to the bottom of kind of how much of that is maybe stuffed you've added since last quarter that's already locked in versus kind of what your assumptions are for the various types of coal you sell, it's kind of what's driving the increase?

Don Blankenship

I think that Eric may be able to give you better guidance on it, but I think it's somewhat of a mix. We're pretty optimistic now that we've gotten closure to Cumberland and so forth about that. And all of this gets confusing because of UBB and now Cumberland being in and which way it's moving. But we're optimistic about Cumberland, we're optimistic about the market even though our numbers are still modest compared to what some might believe they will be. And of course, utility market moved a little bit. And we've gone through great detail to come up with these numbers and feel comfortable that they are our best guess.

James Rollyson - Raymond James & Associates

Your best guess for the moment?

Don Blankenship

Yes. When you got that much met coal unsold, you can throw it around $3 or $4 or $5 pretty easy on the overall average. But I think it could be thrown in either direction, so I think the guidance is in the right place at the moment.

James Rollyson - Raymond James & Associates

And then just as a follow up, on the volume guidance, obviously you've got challenges going on this year which is why your numbers came down for 2010, but 2011 still pretty much basically unchanged. Just curious, you're still pretty, feel pretty comfortable you can get to those numbers? I mean, kind of with all this stuff going on, you kind of assuming that things start to normalize relative to the UBB situation as you get into next year? And just how do you get there?

Don Blankenship

These numbers are more detailed, determined than they are in some of the quarters that we've got mine by mine, foot by foot, shift by shift, ton per foot. So we've build them up from the ground up for this quarter because of all the changes that were entailed at Cumberland and at UBB and permit issues and shortcut issues. So we feel like we can achieve the numbers. And the assumptions on productivity is another area we're pretty conservative, so we should be able to do them. And in fact, we're looking at mines that we have that are not in play and are permitted that should we choose to, with the range of CapEx we have, we could reactivate. But we feel pretty good about the 2011 volume.

Operator

Our next question is coming from Michael Dudas of Jefferies & Company.

Michael Dudas - Jefferies & Company, Inc.

Don, maybe follow up on Jim's thoughts. The range, is it more driven by the mix of what you could produce and sell in some of that met market? And how much Cumberland crossover you could place and defer? Or is it the level of maybe, transportation or logistics or utility for some of the near-term capital programs to finish up and get your production capacity in order to meet those targets?

Don Blankenship

I think that the biggest part of our guidance range is just the assumptions on met prices. There's some impact from assumptions on steam prices and perhaps a little bit of mix assumption. But it's mostly what you think the met market will be.

Michael Dudas - Jefferies & Company, Inc.

Looking at what you've been dealing with relative to the last quarter and with the investigation. Do you anticipate your investigation kind of finishing up sooner or the timing relative to the other governmental body and agencies? You did highlight in the release that maybe not even before year end, one of the organization might release it. How should we see the milestones and sign posts on how that's going from a Massey and from a government standpoint over the next three to four months?

Don Blankenship

With a caveat or the foundation of answering this, it's entirely in the government's control. So we're basically kind of projecting when we discuss this, what their approach will be. But the governor of West Virginia, I think, said a couple of weeks ago, that he felt things could be clarified within a couple of months. So he would have more insight than we would. We continue to work everyday on the investigation. One problem we have that might cause some to delay a final completion if there's water upon one of the longwall development gates on the miner section that prevents access to that area. And we've had troubled getting it dewatered. So that one area of the mine not being accessed, it's probably going to cause experts to be hesitant on reaching the final completion until they do access it. But I believe that there's more and more focus on the longwall itself on the target area, the longwall and on the crack that's been discussed and on the gas indentation that I mentioned in my opening comments. So I think we're drawing closer to having a conclusion and probably will within a couple of months. But you may find that the final, final report wouldn't be too much later when the entire mine can be accessed.

Michael Dudas - Jefferies & Company, Inc.

Looking just back to 2011, how much was analyzed relative to your permitting situation, your ability to high wall a contour mine shifting permitted surface tons to underground tons given your Cumberland acquisition? Is that also an element of where the range and where the cost numbers could be, given those uncertainties?

Don Blankenship

That will leave like 12 highwall miners or something, so we have to make sure we've accommodated them in our contour mining and the permits given the situation, the direction the groups have given is, if you don't have a permit or at least it's not -- if it just depends on EPA, don't put it in the system. The same thing is true at Cumberland. So I think we've captured a situation where in '11, we feel like the environmental and safety regulations are accounted for in the numbers. But it does create a range of uncertainty, but the biggest cost factors are just how well we think we will run. It's not so much projection that we're going to do better because regs are going to be better or worse. It's just the normal range of how accurately you can predict your ongoing operations.

Operator

Our next question is coming from Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc.

On the cost guidance increase for 2011, would you be able to add some more color on the extent of that increase that would represent cost pressure that any Appalachia miner would face versus potentially a portion that might be secular but Massey specific following UBB?

Don Blankenship

Let me start off. Eric, how much is the cash cost gap, is it $5?

Eric Tolbert

I think that off the curve...

Don Blankenship

$4 up. That's probably about 20%, if you call it, $4 or $5, 20% of it is probably issues that are at Massey relative to UBB that will require ongoing spending at UBB that is not reserved. In other words, their accounting rules don't allow for everything to be reserved and there will be things there that will make up 20% or $0.80 to a $1 of that cost. The rest of it is basically just trying to reflect the environment we're operating in from a environmental and safety regulatory view. The surface mines are getting into that period of time that we had previously disclosed where they are being somewhat hampered and their mine plans are being hampered by the failure to get the next permit. So while we can get the volume, move the rock and run, we're beginning to see the impact of the late permitting. And of course, we expect and are experiencing the impact of the underground MSHA regulations.

Brian Singer - Goldman Sachs Group Inc.

Maybe similar color on the CapEx increase for 2011, and how much of that or what is driving that, and how much flexibility to move that up or down depending on the direction of commodity prices?

Don Blankenship

Most of that CapEx increases, of course, we've got plans to convert Cumberland to met. We've got Marianna going up probably quickly, and a lot of it probably in the first quarter. We've got CapEx to test, to displace equipment lost at UBB. It won't be the same type of equipment. So we've had just a fresh review and detail of what the CapEx requirements are going to be, given UBB, given the conversion from steam to met, given the rigs and so forth. So it's reflective of a lot of detailed work.

Brian Singer - Goldman Sachs Group Inc.

Is there any cost pressure that you're seeing there, or is it just more of the restructuring that you just mentioned in terms of cost inflation?

Don Blankenship

Well, there's a few million of it that's going to be reflective of step-ups like I said, and regulatories and so forth. There's probably an assumption of 5% to 8% equipment increase in there at least whether that occurs or not, that assumption is probably in there. And then again we've done some things, for example, on Bandmill, specifically, which would be mostly in '10 not '11, because we've had the event there, we have here in the quarter. We're going to a lot more fire suppression and trying to change the materials that are in the Bandmill plant and looking at materials in our other plants, which I think is an industry-wide issue but one that we've spent a great deal of time on due to the Bandmill fire.

Operator

Our next question is coming from David Katz of JPMorgan Chase.

David Katz - CIBC World Markets

On the CapEx guidance that you've provided, it looks like CapEx is dropping down a little bit for the second half of the year and then increasing in 2011. If that's correct, I was hoping you could go over what would be driving the increase in 2011?

Don Blankenship

It's sort of what we were just talking about, a lot of this regulatory, a lot of it is more focused on how we're going to mitigate UBB tons. A lot of it is conversion of steam to met at Cumberland. There's a whole host of things in there. A lot of it is just the detail of going through it in the last 90 days since the tragedy.

David Katz - CIBC World Markets

And then with regard to some of the press releases that you've put out, it seems that you've not gotten the access to the UBB that you would've liked. I was curious how you think that might impact the overall tenor and results of the investigation and what you guys would do if, for some reason, you disagreed with the conclusion of the investigation?

Don Blankenship

It's hard to anticipate what we might do. I mean we've been, as we've said publicly, very frustrated with the way the investigation is set up, the lack of quality pictures, the fact that our ability to being allowed to take pictures. The limits on how many people we can have in the mine versus how many people MSHA or the state has in the mine. If you will, puttering the evidence or disrupting the evidence, that we've been very bothered by the investigation. But I think that we will figure out what happened. We're very confident in the experts we've hired and very confident with our engineers, and we've got a lot of experience of mining in Central Appalachia. So we think we'll figure out what happened. We don't know what the government's conclusions will be. But I'm confident that the company will have a pretty good hand on what occurred at the end of the day.

Operator

Our next question is coming from Brian Gamble with Simmons & Company.

Brian Gamble - Simmons and Company

On the met shipments that shifted over into the third quarter, as well as your casual attempts to mitigate the lost UBB tonnage with the new continuous miner sections. Maybe you can just refresh of our memory on what you guys expect to ship for met in the back half of '10, and how that breaks out in Q3, in Q4?

Don Blankenship

I'll let these guys scramble to get the exact numbers. But I think we said somewhere, it would be around 2.5 million in Cumberland in '11, and we were at 250,000, is that right, Mark?

Mark Clemens

In '11, 2.5 million off of Cumberland. Year-to-date, we've done 4.5 million tons of met and in our projection for the full year, it's about 9.5 million.

Brian Gamble - Simmons and Company

And is it appropriate to weight those equally for the quarters, given the shifting of tons from Q2 into Q3, or should there be a decline and then an uptick in Q3 and then maybe, 45%, 48% of it in Q4?

Mark Clemens

Slight uptick in the third quarter compared to the second quarter.

Brian Gamble - Simmons and Company

And then, Don, you mentioned -- granted we'll keep the huge government caveat in place at UBB. But you mentioned a couple of alternatives for getting back in there and seeing production at some point in the future. I guess, given what you know now, if you were able to start the two continuous miner sections back up, what could timing or production look like from that? And if that was not an option, and you did have to go in with the new slope and the new entrance to the mine, what could timing look like on that? I guess, how delayed would it be if that were the option versus the continuous miner sections? And maybe if there's any idea to put a cost around that, maybe you can drill that up as well?

Don Blankenship

Let me frame it up a little bit. The south side of UBB was not affected by the explosion. And it's more a matter of what the government's timing is and what they're willing to do, I suspect, then physically being able to operate the mine. If we will run those sections in the south, we probably get 300,000 off of each one of them or about 600,000 tons whenever we're allowed to start them, and I'd be purely speculating on when we can start them. But certainly, I would like to see it be within six months, for sure it would be less than a year. But it's totally within the government's control. On the area where the longwall and the gates are, is the area that was most impacted by the explosion. And that area being reactivated is probably the least likely of the three sources of production. Although I don't know that we've given up on that idea but this will be difficult with the government and so forth. The slopes/face of it is actually not a slope. The mine on the Marfork Elk Run side of the mountain is above range, so it's a contour cut that allows you to go straight back in the hill. We have the permits from an environmental view point that are necessary to do that, and are going to activate that effort and absent the government stopping us for some unknown reason, which I don't know what that would be. Then I suspect that we will be able to access the reserve with that facility in the next five to six months, and mine at a pace of, say, 20,000 to 25,000 tons a month fairly quickly after that until we develop further back into the reserve and can begin to add sections. I apologize for that long answer but I hope that's the response.

Operator

Our next question is coming from Jeff Cramer of UBS.

Jeffrey Cramer

Just wondering if you could update us on the progress of shipping over to Europe, the sales efforts there. Has there any tons that have been placed since you guys have started, and kind of how would you characterize it down there right now both for the met side and also for steam?

Baxter Phillips

Basically, what happened is we've got our guy in place. He's like meeting with the existing customers and prospective customers. Don and I met with him in Europe last week, and we're pleased with the contacts he's made so far, the new introductions that he's made that we previously didn't have. Of course, we're not into negotiating season right now.

The met sales and the thermal market is not attractive for U.S. sales at the moment. And our instruction to him is to continue to make his progress and build relationships and be prepared for negotiating season. But I will say, is that he's adding value by making face-to-face contacts with existing customers, where we have ongoing discussions with the shipments that we're making and with our contracts and that he's clearly brought to us contacts. And frankly, mills or steel producers that we previously had no contact with. So we're expecting good things from him.

Jeffrey Cramer

And on the addition of the Marmet Dock facility a few weeks ago. I guess, from an infrastructure perspective, how many times at this point do you think you could ship overseas in a given year?

Don Blankenship

How many could we shipped overseas? Logistically , with the rail roads and the terminals and so forth?

Jeffrey Cramer

Yes, with the addition of the Marmet Dock?

Don Blankenship

Obviously, we've been talking about numbers in out years approaching 20 million tons, but we're trying to get to the point that we could do that. I would say that right now, that was counting domestic shipments, we probably need to get another 2 million or 3 million tons of capacity, so we could probably do 17 million tons counting our normal domestic tons or export tons and so forth. A big number of those probably 12 million to 14 million could be exported, meaning Atlantic or ocean export.

Jeffrey Cramer

12 million to 14 million is the Atlantic markets?

Don Blankenship

Yes.

Jeffrey Cramer

Just real quick on the share repurchase, can you give us a dollar amount in line for the balance of the year?

Don Blankenship

I don't think we have set any target on that. I mean we've of course been watching the stock prices closely and reflecting on it. But what we did in the second quarter is, we thought was the right thing to do and whether we'll make that decision each quarter rather than forecast it ahead of time.

Operator

Our next question is coming from David Khani of FBR Capital Markets.

David Khani - FBR Capital Markets & Co.

You've given us a liability estimate, I guess, of about $120 million in the second quarter. How comfortable, I guess, or on that level as overall impacts from UBB? And where, I guess, could we -- where is the risk, I guess, to the upside that the numbers could grow?

Don Blankenship

There's always risk in litigation but we are continuing to negotiate with the families. We've been through it several different ways and had lots of our people involved in it. So we think we've captured a realistic number. As far as all of it being accrued, as I mentioned earlier, there are certain accounting rules that some of the numbers are in the ongoing expense category of representatives, maybe as much as 20% of our cash cost increase is related to unreserved UBB issues. With that, I'll see if Eric wants to add anything to that because he's more close to the details on those numbers.

Eric Tolbert

I would reiterate what Don said. We try to capture in our accounting reserves everything that we think it's probable and estimable at this time. What we've incurred to date in terms of ongoing costs, of course, the benefits to the families, the asset write-offs. What Don was referring to in terms of the ongoing costs, we're trying to measure, of course, it's extremely difficult on site and so on, but just a very rough estimate on a quarter-to-quarter basis could be $7 million to $8 million a quarter of costs directly related or legal fees that's on, that did not in that initial reserve. And then on the upside, as Don mentioned, it really comes down to what happens with litigation going forward. But as of the time, we've put in our best probable and estimable and then of course, it's heavily dependent upon the insurance coverage.

David Khani - FBR Capital Markets & Co.

Is there any kind of mine entropy or charge that's also built into there? And then, of the amount of the families that you're dealing with, what percentage have you kind of settled versus unsettled on sort of with their claims right now?

Don Blankenship

Are you talking about specific UBB efforts or...

David Khani - FBR Capital Markets & Co.

The violations.

Don Blankenship

The violations would have been issued, have been accrued for and there's an estimate in the reserve number, which we wouldn't want disclose specifically for violations and the impact on outstanding violations. So all of that has been considered and enumerated, but we wouldn't want to disclose the exact details of that. But it's adequately considered, I believe.

David Khani - FBR Capital Markets & Co.

I'm just trying to figure out, if we wake up in the $129 million number, ends up being a much more bigger number or what sort of the upside risk to $50 million or $25 million or $200 million? Because I think a lot of the investors that we've spoken to, that's one of the number one fears here in owning your stock.

Don Blankenship

Litigation and insurance coverage are clearly the type of things that could drive that number higher. On the other hand, we've put in numbers that are at the upper range of anything we've ever experienced. And we believe the insurance coverage is solid. But I mean, that would be the only thing that would make huge differences, I believe, in what we've projected.

David Khani - FBR Capital Markets & Co.

On a more positive note, moving over to -- you mentioned India is being short coal and I think we all obviously agree with that. Could you give us some color on how much you've shipped to India second quarter versus kind of first quarter? Are you seeing it trending up, flat? And then what do you think if you look into either next year, the next couple of years, how much increase could you actually ship into India?

Don Blankenship

I think we don't want to be real specific as exactly how many tons we're shipping in India at the current time. But I would say that we view the India met market because they don't have a lot of internal production as being a strong market for us on an ongoing basis. And the Indian situation is of course, like other countries in Asia, that most of the development is along the coast and a lot of the reserves that they have to feed the developments is internal to the country. So it creates a situation where typically, they are not able to get their coal production up as much as they are to coal demand. And I think that's going to continue. It's hard to put a number on it. But clearly, that's the big challenge for India.

David Khani - FBR Capital Markets & Co.

And based on the numbers that you're shipping today, is it possible you could see a doubling or tripling of shipments from Massey to India over time?

Don Blankenship

I think that's entirely possible. There's a lot of the market in India that we've not penetrated. We've penetrated certain customers, and there's new facilities being built, and certainly, there's room to take market share at some point. So I think the answer would be, yes, we see India as a place where we can double volume under the right circumstances.

Operator

Our next question's coming from David Gagliano of Credit Suisse.

David Gagliano - Crédit Suisse AG

First, on the 2011 guidance range, of the 15 million tons that are left to price, I was wondering if you could break down the volumes by coal type, i.e., thermal, low-, mid-, high-volume met, whatever buckets that you need. What are the prices you're assuming for each of those buckets to get to the midpoint of your 2011 price expectations?

Don Blankenship

Since the shares [ph] (54:38), we shouldn't be too detailed and preclude negotiations and so forth, but I would say that a half percentage of our tons sold 2011 coal is met coal. I think the majority of it, I believe, is met coal. So that's where the average price and the guidance has most upside and, I guess, to some extent, some downside. So it's mostly centered around unsold met tons.

David Gagliano - Crédit Suisse AG

What types of met are we talking about?

Don Blankenship

Well, we're talking basically about the same blend of met that we have. I mean since there's such a high percent of it unsold but probably slightly lesser average quality than we have. Essentially, all of the tons and types of coal that we have would be included in that sale particularly with the development of Marianna.

David Gagliano - Crédit Suisse AG

I was hoping I could clarify the change in committed and priced ton during the quarter. If we just compare last quarter's press release to this quarter's press release, we include Cumberland in both cases, your committed and priced tons for 2011 increased 2.7 million tons, the implied price for that 2.7 [2.7 million tons] was $94 a ton. But earlier on the call, I thought somebody said that you're committed and priced tons went up 9 million tons, so I just want to clarify. Which one is correct? How much coal did you actually price for 2011 delivery during the second quarter?

Don Blankenship

I'm going to let Eric try to sort that out for you.

Eric Tolbert

Yes, actually, Dave, you are correct. I was looking at just the Massey alone. So if you take out the Cumberland fees, then really we've gone up about 2.5 million tons. I think primarily that was, as we've seen on the met side, it's about half met, half steam.

David Gagliano - Crédit Suisse AG

The actual met coal volume expectations for 2011, is it 10 million to 12 million tons in total or is it 13 million to 15 million tons in total? And I was wondering if you could give us just actually what's priced and unpriced. Just what are the buckets on the total net volumes between low vol, mid vol and high vol and whatever other met bucket we need to think about?

Don Blankenship

Well, I think the range is 13 million to 15 million. It's always difficult to say how much is low vol, mid vol and high vol when you do the blends that we do, but basically, we'll produce 600,000 to 1 million of low-volume coal, pre-Marianna. We'll produce probably 1.5 million tons of mid-vol, which means 2.1 million and we'll produce a very large number of what I would consider the highest quality, high vol, which is fairly high vol, just in the 31 vol range, which means it's among the highest quality high vol in the country. We'll probably do about 5 million tons, so that's put you up to, say, 7 million or 8 million. Our half of the total volume is extremely high quality, and then the rest of it is good quality high vol to lower quality high vol.

Operator

Our next question's coming from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs

The first question that I have is just a clarification on the thermal coal market. You guys have said in the beginning of the call that utilities aren't necessarily rushing to contract coal even though we've seen stockpiles come down, and then with respect to Europe, you said that your marketing team's starting build up there, but the Europeans, for obvious reasons, are not really rushing to contract U.S. coal. So at the same time, Don, at the beginning of the call, you said that you could see the U.S. thermal market strengthening, and I was just wondering what's going to drive that if gas prices remain reasonably low, economic conditions remain somewhat weak and maybe there's not as much a robust export market yet?

Don Blankenship

I think that gas prices being low allows gas plants to run harder, but that's been the case for some time. So the gas load, due to low gas prices, is probably there, and the constriction on supply, particularly in Central App, is such that the burn that's part of the baseload has burnt the inventories down and clearly, the supply has not being covering the burn for the last couple of months even with relatively low gas prices. So while there may be a macro generic decrease in the percent of electricity generated from coal, say, 47%, 48% due to gas and other reasons, that level of burn has feed into the inventories and will continue to do so, and therefore, the price should respond.

Justine Fisher - Goldman Sachs

And then the second question that I just had was back to the cost issue. I know that you said previously that about 20% of, let's say, the $4 higher-priced guidance is related to Massey-specific factors and UBB, et cetera, but then maybe the rest of it could afflict the rest of the industry. But my specific question was on labor turnover because you guys have said that, that was part of the reason why your costs were up for the quarter, and I guess though you do have to spread, are you seeing attrition because people may be are concerned about, for some reason, working at Massey? And is labor turnover included in the Massey-specific cost portion that you identified before?

Don Blankenship

Yes, I'll let Baxter address it.

Baxter Phillips

Essentially, Justine, the turnover frankly started before April. It started to pick up in January and February, and essentially, what I believe is half of where we previously had our long-term contracts, employment, individual contracts in place, they've started to expire. And frankly, I think what we're seeing is that they did benefit us when we had them, and now we are considering whether we should return to those again to stabilize the employment, but I would emphasize that the increased turnover took place or started after the beginning of the year, and what took place in February and March is pretty consistent with what took place in May and June.

Justine Fisher - Goldman Sachs

Is so it's kind of broader cost pressures, people just changed jobs industry wide rather than specific to UBB or anything like that?

Baxter Phillips

If you just look at the data that we have on the turnover, that's what it would suggest.

Operator

Our next question's coming from Paul Forward of Stifel, Nicolaus.

Paul Forward - Stifel, Nicolaus & Co., Inc.

On the share buyback question, it's encouraging to see it last quarter, and you'd already mentioned you really don't want to talk specifically about how much you do later on. I was just wondering if over the next couple of years, is there a cash level of that you're targeting that would assume significantly lower than the current cash-on-hand level that might allow significant share buybacks to take place over the next couple of years?

Baxter Phillips

Well, I guess I would say it's probably -- in terms of what we're actually planning on doing, it would be somewhere less than the cash-on-hand level at the moment, but I would go back and state that when we took the decision to do the share buyback, we were looking at what we had issued shares at certainly before, and of course the market has given additional opportunity. But presently, we are monitoring our cash requirements as a result of UBB and where we need to be before we make a decision on what cash we would actually allocate to continuing a share repurchase, but we have not decided to take a decision to discontinue the share repurchase program. It's just making sure that we're fully cognizant of what our needs will be going forward given UBB. You realize that, that doesn't give you a target answer, but we don't have one for you.

Paul Forward - Stifel, Nicolaus & Co., Inc.

On the increased CapEx expectations for 2011, I know much of that's going to be regulatory in nature. I was just curious about as you look over the next couple of years, are you tempted given the kind of uncertainty of rising cost and the uncertainty on the demand side for met coal in particular, are you tempted to respond to these cost pressures by potentially dialing back some of your planned growth and conserving cash or directing it toward future share buybacks potentially as a response to what is becoming a very difficult environment to grow coal production volumes in Central App?

Don Blankenship

I think it's always a consideration, but you're always looking to what your next coal mine is going to cost for your expansion. The cost pressures are, of course, production constraint pressures, they cause your divisor of tons to be lower, and that likely means a strengthening market. So it's hard to answer the question. What really drives whether we try to expand is as how much margin there is in the next ton given the assumptions at that time. So the fact that cost pressures could grow to $70, if the steam market was $120, it would probably be struggling to try to play in that market. So it's a hard question to answer, but to answer your question, it's every quarter, every year determination and assessing the labor market. One of the reasons we like the Cumberland opportunity was it gives us quite a bit of a different labor market. And as we get more and more pressure on the surface mining, if we have to go underground, that will exasperate the underground labor pool issue. And so it's really hard to say what we would decide to do given so many variables going.

Operator

Our next question's coming from Holly Stewart of Howard Weil.

Holly Stewart

Looks like you priced about 1.2 million tons of met during the quarter. Can you provide us the average price per ton for those volumes?

Don Blankenship

He's reflecting on whether we should do that because I think competitors might know who we closed with. We'd probably rather not be so specific in the number, but obviously, earlier, when Eric mentioned it, it was about 50% steam and 50% met and 90-something dollars. If you're looking at the markets, you can see -- if you looked at the steam markets, you can pretty well figure where those prices were. But we don't want to be too specific, I don't think.

Holly Stewart

And then last quarter, you gave a range of about $100 million to $130 million a ton for unpriced tonnage included in your guidance. Is that still a pretty good range for us to think about as what's being in your guidance?

Don Blankenship

The answer would be yes. That's pretty much the same as it is now.

Holly Stewart

The realized sales price premium at the industrial line item was down when you compare that to the utility sales line item. It was down pretty significantly compared to kind of the last five or six Qs. What's the difference there, and then how should we think about that premium going forward?

Don Blankenship

I'll let Eric answer that if he can or Mark?

Eric Tolbert

I don't. Do you have any specifics on that Mark though?

Mark Clemens

No, I think the tons were mixed.

Don Blankenship

Your question was at the utility average price...

Eric Tolbert

Industrial.

Don Blankenship

Industrial.

Eric Tolbert

We've got so many different customers. Yes, we're building...

Mark Clemens

So all we're going to imply [ph] (1:08:27) is to change customer mix...

Don Blankenship

Yes, industrial business, I guess what I would say is that volume is such that when you shift a different mix to customers and late seasons and non-late seasons, and there's so much different stuff that goes in there that two of the zero [ph] (1:08:39) that's going to some of the universities versus high-quality stuff going to some chemical plants and so forth that, that average might jump around on you from quarter-to-quarter just depending on the mix.

Holly Stewart

So maybe $10 premium?

Don Blankenship

Yes, the premium of investor over steam ought to be more than $10 on average, but a lot of that coal that's in an industrial thing is classified there because it's an industrial customer meaning the customer is not using it to market electricity, and sometimes, it's not any different than the steam coal. Other times it's two or three inch, 1 1/4 inch stoker of coal. So it's a very variable product in that mix and a small volume which makes it look artificial sometimes.

Operator

Our next question's coming from Brian Yu of Citigroup.

Brian Yu - Citigroup Inc

Don, Central App's -- and it's obviously seeing a sizable step up in cost, and when I look at the midpoint of 2011 guidance, production costs, $59 a ton, CapEx running at $8. So you need at least $67 per ton to break even at the operations overall. Can you comment on Massey's cost differentials between met and thermal, and what type of a thermal coal margin do you need to see to recover your cost of capital? Is the market there now, and if not, we could cut back on your investments given how hard it is to permit?

Don Blankenship

Yes, I'll try to do that. I think the numbers in the last quarter are not representative of hardly anything given the tragedy and all, but typically speaking, if we have, say, a $56 average cost, if we use that as a target, it's probably going to be like low-50s for steam coal and in the high-50s for met coal, not as big a difference as you might think, and part of that's driven by the fact that the EPA and the permit issues on the surface mines have caused the surface mines to move into the higher cost frame. And so you're going to have to see increased steam coal prices on an ongoing basis to maintain the met margin necessary to get a return on capital. I think that's the reason that we've been saying that the number has to be in the 70s, probably on a mid-quality Central App steam coal just to find new capital although commitments and capital investment already made. You have to continue to run for now. The met coal margins are real healthy, obviously, and we'll continue to focus investments in that area to the extent that the labor pool and the permitting and so forth would allow.

Brian Yu - Citigroup Inc

So for next year, it doesn't look like, without talking too much about your book, you can get these 70s price if the market's not there again or would you consider cutting back on your production just to preserve the value of tons?

Don Blankenship

I think primarily what we'll be focused on -- there'll be some sales in '10, but we'll be focused on '11 and '12 and be focused on mid-70s and higher to just justify what we believe is necessary to make a return on capital given the environmental and regulatory environment and the fact of the uncertainty that utilities based on getting supply. So it'll be more of what we're doing for our market strategy in '11 and '12 based on the situation that Central App production is in.

Brian Yu - Citigroup Inc

You mentioned 2011, the tonnage guidance includes permitted reserves and mines. As we look down to 2012, can you give us a sense of -- is there any change in that permitted capacity, and if there is, what the drop is as we sit here today?

Don Blankenship

What I would say is that 2012 certainly will be impacted. The exact amount, I don't know that we've gotten -- Eric, enough detail to figure how much that it can mitigate if you were to continue to have the permit involvement. But certainly, we would not be able to produce as many surface mine tons in 2012 if we don't begin to get permits as we are in 2011. But I suspect that, that would be a across the industry, and our drop would probably be less than average because of the large quantity of reserves that we have permitted. I don't know if I want to hazard a specific number for 2012 right now because what we would need to do is get into a lot more detail now that we are into that period in time where the inactivity's impacting us.

Operator

Our next question's coming from Jen Marcello of Tuohy Brothers Investment Group (sic) [Tuohy Brothers Investment Research, Inc.]

Jennifer Marcello

Just on the acquisition of the term mill in the quarter, can you give us a sense of potential or transport cost savings you could realize, maybe dollars per ton, barge versus rail, something like that?

Don Blankenship

It's a big number, I would guess, and let me say before I give you this number that it's not as simple as you might think because you get down to New Orleans, you can have different vessel rates and the different sizes of vessels moving across the Atlantic to different parts of the world, and you've got to take into effect what it does to your ocean vessel rates as well as your cost of getting it to the vessel, but I would say that it's $6 to $7 on 3 million to 5 million tons.

Operator

Our last question's coming from David Gagliano of Credit Suisse.

David Gagliano - Crédit Suisse AG

I just had a follow-up on one of the earlier questions on the break-even price for thermal. Once again, if we compared Q1 to Q2 press releases, I think it implies you sold about 5 million tons of thermal coal for 2012 delivery at an average price of about $65 per ton? Is that right or is there some mixed shift going on there?

Don Blankenship

There's a couple of things going on there in order to do the things we're doing at Cumberland with met coal and then blending coal in from steam to met and asking for deferrals. It's hard to say that we sold the coal as much as we deferred and moved the coal in some circumstances.

Baxter Phillips

That's correct.

David Gagliano - Crédit Suisse AG

Did you make any forward commitments for 2012 delivery, new ones, and if so, at what price, for coal?

Don Blankenship

We probably have made some, but exactly how many, Eric's looking to see. It looks like the majority of the commitments we've made, and we don't want to get too specific, have been to utilities that have lower quality, and they're in the range of $65 to $70.

Eric Tolbert

Or higher than that actually, even in the mid-70s.

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Source: Massey Energ Q2 2010 Earnings Call Transcript

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