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International Coal Group, Inc (NYSE:ICO)

Q2 2010 Earnings Call

July 29, 2010 11:00 a.m. ET

Executives

Roger Nicholson - SVP, Secretary & General Counsel

Ben Hatfield - President & CEO

Brad Harris - CFO

Mike Hardesty - SVP, Sales & Marketing

Analysts

Brett Levy - Jefferies & Company

Brian Gamble - Simmons & Company

Dave Katz - JPMorgan

Michael Dudas - Jefferies

Shneur Gershuni - UBS

Jeff Cramer - UBS

Evan Van der Veer - Aegis Financial

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 International Coal Group Incorporated Earnings Conference Call. My name is [Cara] and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And I would now like to turn the conference over to your host for today, Mr. Roger Nicholson. Please proceed sir.

Roger Nicholson

Thank you. Welcome to International Coal Group's second quarter 2010 earnings conference call. I'm Roger Nicholson, Senior Vice President, 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; Gene Kitts, Senior Vice President, Mining Services 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 assumptions 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 July 28th, 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, a 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. We enjoyed solid operating performance in the second quarter. Our focus on increasing sales of metallurgical coal and on effective cost control helped drive margin improvement with margins increasing 26% compared to the second quarter of 2009.

Our second quarter results also benefitted from the first overseas delivery of a new ADDCAR highwell mining system. Adjusted EBITDA for the second quarter of 2010 was $44.8 million. Although results for the quarter were adversely affected by a $10 million charge for a negotiated early termination of a thermal coal sales agreement, we view the transaction as a very positive development.

It enables us to sell 400,000 tones of previously committed thermal coal as a premium high volatile metallurgical coal at significantly higher prices in 2010 and 2011. Approximately 80% of thus tones have already been committed.

Net income for the quarter was $4.5 million or $0.02 per share on a diluted basis. In addition to the contract termination charge, these results reflect a $6.1 million loss on extinguishment of debt related to our capital restructuring.

Thermal coal processing steadily improved in the second quarter as utility coal inventories continued falling from their record high's in November 2009 and approached more normalized levels. This summer's warm temperatures are expected to further reduce stockpiles and support higher prices. Although the demand for metallurgical coal slowed in the second half of the quarter, we believe this is a brief plateau and not indicative of an extended change in the market outlook.

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

Brad Harris

Thanks Ben. In the second quarter of 2010 we reported total revenues of $300.4 million including $270.7 million attributable to coal sales of 4.1 million tones. Second quarter 2009 revenues totaled $277.8 million of which $254.7 million was attributable to coal sales of 4.2 million tones.

Adjusted EBITDA for the second quarter of 2010 was $44.8 million, net of the previously mentioned $10 million contract termination charge. Adjusted EBIDTA in the second quarter of 2009 was $52.2 million, including a $7.7 million gain related to a contract termination. Exclusive of these items adjusted EBITDA would have been $54.8 million in 2010 and $44.5 million in 2009, a 23% increase.

Net income for the second quarter of 2010 was $4.5 million or $0.02 per share on a diluted basis, compared to net income of $10.4 million or $0.07 per share for the same quarter a year ago. In addition to the contract termination charge, net income for the second quarter of 2010 also included a $6.1 million pre-tax loss on extinguishment of debt related to the company's capital restructuring.

Excluding the $10 million contract termination charge and the $6.1 million pre-tax loss on debt extinguishment, pro-forma net income in the second quarter of 2010 would have $13.5 million or $0.07 per share on a diluted basis. Excluding the $7.7 million gain related to the contract termination, pro-forma net income for the second quarter of 2009 would have $5.6 million or $0.04 per share on a diluted basis.

On a pro-forma basis our second quarter results reflect $142% increase in earnings per share over the same period last year. Average coal sales revenue per ton for the second quarter was $65.79, compared to $60.92 per ton for the same period in 2009 while cost per ton sold was $51.51 in the second quarter, versus $49.60 for the same period in 2009.

Margin per ton increased 26% to $14.28 in the quarter compared to $11.32 per ton in the second quarter of 2009, primarily due to higher realized prices for metallurgical coal and greater participation in that market.

Depreciation, depletion, amortization expense totaled $26.1 million for the second quarter compared to $26 million for the same quarter last year. Corporate SG&A for the second quarter was $8.3 million, compared to $8.7 million for the same period of 2009.

In March and April of 2010, in connection with tender offers and consent solicitations, we repurchased approximately $169.1 million aggregate principal amount, about 10.25% senior notes due in 2014 and $114.5 million aggregate principal amount of our 9% convertible notes due in 2012 as part of the capital restructuring.

We incurred a $6.1 million loss related to those transactions in the second quarter of 2010. In July 2010 we redeemed the remaining $5.9 of the 10.25% senior notes at a reduction price of 105.125% of principal amount plus accrued and unpaid interest. We used cash on hand to fund the redemption. As of June 30th, 2010 we have $205.3 million in cash and 33.3 million in borrowing capacity available under our credit facility.

At quarter end debt outstanding was 365.3 million, net of a $36.3 million discount, consisting primarily of $115 million aggregate principal amount of our newly issued 4% convertible senior notes and $200 million aggregate principal amount of our newly 9.125% Senior Secured Second-Priority Notes.

The company's total assets were $1.5 billion at June 30th, 2010, compared to $1.3 billion at the end of the same quarter a year ago. Capital expenditures for the second quarter totaled $21.8 million and are expected to aggregate to 150 to $115 million for the year. As

As everyone is aware, Congress passed a healthcare legislation in March of this year. Included in that legislation was a provision to remove lifetime caps on medical plans. Our retiree medical plan has such a cap. So as a result we re-measured our post retirement benefit obligation resulting an additional liability of $6.3 million.

The prior service cost associated with the legislatively mandated change is then amortized over the average remaining working life of the miners. We incurred an additional $422,000 in expense related to this revaluation in the quarter.

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

Ben Hatfield

Thank you Brad. Now I would like to provide an update on key developments in the second quarter. In June we resumed construction at our Tygart No. 1 deep mine complex in Taylor County, West Virginia. Initial production of premium high-volatile metallurgical and high-quality thermal coal is expected in late 2011 with the longwall startup scheduled to begin in early 2014. At full output, the Tygart No. 1 mine is expected to produce 3.5 million tons per year. ICG ADDCAR Systems completed the sale of a highwall mining system to a customer in India. This is the first ICG ADDCAR System to be delivered outside of North America.

In May our Wolf Run, ICG Eastern and Vindex Energy operations were honored with prestigious awards for outstanding safety performance in 2009 from the West Virginia state counsel of the Joseph A. Holmes Association and District 3 of the Mine Safety and Health Administration. Additionally ICG ADDCAR's Bridger highwall mining operation was recognized by the State of Wyoming for working without a lost-time accident for all of 2009.

The company was successful in substantially repositioning our Sentinel Mine into the high volatile metallurgical coal market during the quarter. Several new domestic and export deals were concluded, including a 500,000 ton contract with a domestic customer that runs through 2011. As long as current market conditions continue we expect about 80% of Sentinel's output to be sold as metallurgical coal.

Turning now to our current guidance, for 2010 coal production is expected to between 15.8 million and 16 million tones, a combination of EPA driven permit delays even on deep mine permits and intensified MSHA regulatory efforts have driven the lower production outlook.

The company expects to sell between 16.6 million and 16.8 million tones including 2.7 million to 2.8 million tones of metallurgical coal. The average selling price is projected to be between 66.25 and 67.25 per ton with an average cost ranging from $51.75 to $52.75 per ton excluding selling, general and administrative expenses.

Committed sales for 2010 are approximately 16.2 million tones or 97% of planned shipments at an average price of $65.25 per ton. Uncommitted tonnage for 2010 includes approximately 400,000 tones that are expected to be marketed as metallurgical coal. Adjusted EBITDA for 2010 is expected to be in a range of $200 million to $220 million.

Moving now to guidance for 2011, coal production and sales are expected to be in a range of 16.5 million to 17.5 million tones. The average selling price is projected to be between $72 and $77 per ton. Metallurgical coal sales in 2011 are expected to range between 3.1 million and 3.2 million tones, of which approximately 2.3 million are un-priced. Committed and priced sales for 2011 are approximately 8.8 million tones or 52.3% of planned shipments at an average price of $61.37 per ton.

In summary despite the uncertain near term economic outlook we believe coal market fundamentals are solid. Thermal coal pricing is steadily improving due to declining utility inventories and increasing electricity consumption. Metallurgical coal pricing is expected to strengthen going forward as the outlook for world steel demand continues to improve.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Brett Levy with Jefferies & Company. Please proceed.

Brett Levy - Jefferies & Company

Hey guys. As you're looking at the Tygart Project, talk about the spacing again. Again you put these numbers up in the past but can you talk about the spacing of the cost and the total cost between now and the longhaul startup in 2014?

Ben Hatfield

You're referring the timing of the capital?

Brett Levy - Jefferies & Company

Yeah, the capital commitments by year?

Ben Hatfield

Again we cant get too specific on that but I think as we have noted earlier, the bulk of this spending is going to generally hit in the middle of that timeframe, about 2012. In fact around 50% of the capital project load is going to hit in 2012 and 2011 and 2013 will each see about 15 to 25% of the capital spending. So that's kind of the spread if you will. All that certainly is subject to progress updates as we move along but thus far we're very encouraged by the pace of the site development. We have a lot of equipment on site. Things are moving along as expected and we're pretty exited to that get that project moving forward.

Brett Levy - Jefferies & Company

And is it still around 300?

Ben Hatfield

The total project capital as I believe we disclosed in our June release is about $325 million. Of that I think we've spent about $18 million prior to 2010.

Brett Levy - Jefferies & Company

And then, is there anyone out there asking for you guys to start making commitments for 2012, either on the steam or the met coal market and are those discussions north of the forward curve?

Ben Hatfield

I'll let Mike Hardesty, our Head of Sales speak to the specifics but I can verify that we are getting very strong interest particularly in the Tygart coal being committed going forward and we are already getting some early inquiries on 2011, 2012. Mike you want to speak to that?

Mike Hardesty

Yes. Specifically with Tygart we are in the initial stages of discussion on metallurgical contract possibilities with a couple of domestic camps. We're really exited about the interest that we're getting on the project but not commitments thus far.

Brett Levy - Jefferies & Company

And then, last question and I'll get back in the queue. You guys raised CapEx estimates by about $15 million for 2010. What is the bulk of the delta from the previous number to the current number?

Ben Hatfield

We tried to clarify that with our June 2nd second release. That was specifically the increased spending related to Tygart. So the difference between the first quarter 2010, the guidance for capital and the current one is entirely Tygart's spending that's expected in the current year.

Brett Levy - Jefferies & Company

Sounds good. All right, thanks so much, guys.

Ben Hatfield

Sure

Operator

And your next question comes from the line of Brian Gamble with Simmons & Company. Please proceed.

Brian Gamble - Simmons & Company

Good morning guys.

Ben Hatfield

Good morning.

Brian Gamble - Simmons & Company

Refreshing to see some cost guidance that didn't move up exponentially for the quarter, a.k.a. some of the other releases this quarter. Maybe you could go over some of the differences in what you see as the increases over the back half of the year versus some of the other estimates that we've seen, recently, everybody obviously dealing with MSHA in different ways and clearly, you guys have managed to run your operations little smoother than some, but maybe you could just go over some of those differences and what gives you confidence that cost wont out pick up meaningfully in the back half?

Ben Hatfield

I can't say too much about some of the peer group guidance because obviously their situations are unique to their operations. But I can speak generally about what we see in our corner versus the rest of the industry. Across the entire peer group of the coal industry you can certainly expect continued cost pressure driven by the regulatory issues.

On the environment certainly delayed valley fields means your mining higher cost surface mine coal. You are hauling the material further to try to find a storage site. All that drives your costs up. On the MSHA side, the step up in regulator enforcement, particularly post UBB has been pretty dramatic and I think we're all feeling some effects of that and indeed those are drivers on our cost guidance but I think its also fair to say that older mines that are much more mature in the cycle are going to be disproportionally impacted in a negative manner by the step up in enforcement.

Its much tougher to take a 20 year old mine and essentially keep your nose clean from an enforcement compliance perspective than it is a newer mine and we are blessed in several respects in that the operations that are big drivers in our cost mix are essentially newer operations like Beckley and Sentinel and so generally speaking I think we are somewhat advantaged by operating newer deep mines source that some may have operations that are 10 or 15 years old or more those that are much tougher no matter who you are.

Going forward I think it's also a function of other relationship with regulators. We try hard to do the right thing and I try to meet the new standard it's clear that the standard has been raised that there is no confusion on that point and we are trying to get ahead of the curve as soon as we saw some of the early focal points on the UBB investigation and some of the other expense we immediately targeted step up and our rock testing programs in our compliance monitoring efforts, in belt line maintenance, all the kinds of things that can get you into more violation troubles.

So, we have added people, we have added equipment trying to stay ahead of the curve if you will on the compliance step up I think that's paid off in several respects.

Brian Gamble - Simmons & Company

Thanks for that. And then secondly, the implications for buying off the contract of $400,000 for $10 million bucks implies $25 increase in the realization for that tonnage, how far above that $25 were you expecting, and obviously you've already found some of it, you've been able to recognize some realization on those tons?

Mike Hardesty

It's Mike I will take that one; we are going to be at least $50 above the 25 on average.

Ben Hatfield

It's a very attractive opportunity for us. We were pleased to come to agreement with a very good utility customer that kind of change their mix and redirected the coal and led us resell the Sentinel coal as met, and it was pretty much a win-win from our perspective and we are pleased with the outcome.

Brian Gamble - Simmons & Company

So, the implication there is there is $75 or more above the realization that you would have got shipping it as thermal?

Ben Hatfield

That's a far statement.

Brian Gamble - Simmons & Company

That's excellent. Way to go guys.

Ben Hatfield

Thank you.

Operator

And your next question comes from the line of Dave Katz with JPMorgan. Please proceed.

Dave Katz - JPMorgan

Hi, I was curious about your ADDCAR, kind of the success that you've had in India, where else do you expect to be able to ship that you haven't shipped before and what were the revenues from selling ADDCAR systems in 2009?

Ben Hatfield

Well again for competitive reasons we prefer not to get into much that dissecting on the cost and the margin as it has been less already in the earnings release but I do want to say that we see the first sale into India is not the end of the story but certainly the beginning of the story. We have active discussions and active relationships there that we hope to build on. We think that could be followed by about several more sales of ADDCAR systems. We think they are going to really be attracted our productivity of that system as opposed to the capabilities of some of the competing systems. So, we believe they are going to lack the product, lack the result and we think it's a continuing growth opportunity that could result in several more sales.

We are looking at in another areas; we have had increase about systems possibly going into South America, other locations. All of those are ongoing discussions that we are certainly pleased and excited about the opportunity in India.

Dave Katz - JPMorgan

Okay. And then, with regard to the metallurgical coal market, you guys just said, that you think it's a temporary plateau. I understand where you're coming from on a longer term basis, more in the mid-term, what gives you reason to think that we should see signs of strength come back?

Mike Hardesty

This is Mike again; on the domestic side we know that at the pace that several of our customers are taking our committed contract coal. If they are going to run out of contract before they run out of years. So, we are counting on a pretty strong lifting in the fourth quarter and new business on the domestic side.

We also think that we will see recovery in every stock on the international front but finally get to the fourth quarter.

Dave Katz - JPMorgan

Okay. Thank you very much.

Operator

And your next question comes from the line of Michael Dudas with Jefferies. Please proceed.

Michael Dudas - Jefferies

Good morning gentlemen.

Ben Hatfield

Good morning.

Michael Dudas - Jefferies

Maybe this question for Mike Hardesty, maybe a bit more insight into what your thermal customers are thinking about given the visible trends that we're all kind of been pointing towards over the last six to eight weeks. And has that -- those thoughts changed from maybe your discussions say in February, March this year with them?

Mike Hardesty

They have certainly changed from our perspective because last quarter we were not going enter into any term transactions that indicated pricing that was available. Now that we have seen prices for 2011 move up, 15% or so they are starting to get into a range where I think we would look at clearing some commitments, and I think the utilities are certainly vary of what's going on with the fall in inventories, they are falling a lot faster than I think a lot of utilities expected. So, that is sort of my view on that issue.

Michael Dudas - Jefferies

So, you think maybe after this summer burn and sometime in September, October will be a little more substantial with discussions?

Mike Hardesty

I think so; we have got several new solicitations that we will be responding to over the next week. Those are going to be good indicators the utility side to see how well they match up to the in an OTC prices that are available today.

Michael Dudas - Jefferies

What are your thoughts about the removal of mountaintop mining coal from the coal shipments to certain utilities in the Mid-Atlantic or Southeast?

Ben Hatfield

This is Ben, I will speak to that one, clearly that's going to be a significant tightening of supply that's really carried out in that fashion because as most of the follow the industry recognized. It isn't really a problem with just mountaintop removal. The same tools that are chasing mountaintop removal with will indeed apply to all surplus mining in Central Appalachia and as you know that 40 – 45% of the production. So, we are talking about a very significant tightening of supply if utilities aren't buying those coals and indeed they essentially get shut in. I don't see that happening in the near term certainly because it would have a very dramatic impact on their costs.

There maybe some select utilities that are looking at that direction for whatever reason they may have but in a broader sense of it I think the utility community recognizes the dramatic and negative impact on their fuel cost and the dramatically negative impact that going to have on consumers of electricity across Middle-America. So, I think generally speaking from the utility community we are going to see a more major improvement approach and they will respond more or less to the regulations that are issued.

We are hoping things turn out better than some or some on the environmental activists side are hoping because I believe there is a very real effect there that some are underestimate.

Michael Dudas - Jefferies

Well said. And my final question maybe for you is as from your perspective of getting through very difficult times on past few years, and what you are seeing maybe in the labor market or in the rumor-mill, lot of discussion about Central Appalachian production declines and the less low capitalized producers having difficulties. You highlighted that in your answer on a question about the older mines. Are you seeing any physical or any visible aspects to that and what -- given your experience, what you gut feel in the next couple of years how that plays out balancing against what could be a continued robust net market?

Ben Hatfield

I think the short answer is a continued tightening of supply. We are already seeing signals from some several competitors that they are close older operations, that are challenged on the environmental or on the regulatory complaint side particularly MSHA challenged in terms of being able to meet the new enforcement standard. Though I think that's not the first of the process it's going to continue and some of those older mines are going to shut in and that's going to tighten supply and I think that will continue to keep crossing for Appalachian thermal coals strong and even more so for meteorological coals because it's the scarcity of the premium quality high wall and low products. So, I think it bodes well for companies that have strong reserves that have an attractive permitted position and are pretty well entrenched with new deep mining operations.

I think while the overall trend of production in Central Appalachian is likely to continue declining. Certainly bodes for some attractive margins for those of us that I believe are well positioned.

Michael Dudas - Jefferies

You're aware of a company that's well positioned, Ben?

Ben Hatfield

ICO is well positioned, I could mention that.

Michael Dudas - Jefferies

Thank you very much. I appreciate it gentlemen.

Operator

And your next question comes from the line of Shneur Gershuni with UBS. Please proceed.

Shneur Gershuni - UBS

Hi, good morning guys.

Ben Hatfield

Good morning.

Shneur Gershuni - UBS

Just wanted to follow-up on one of Brian's questions, you had mentioned about older mines having some challenges with respect to MSHA. When you look at kind of the portfolio of underground mines and so forth, do you think that the long wall mines or the -- versus room-and-pillar mines might have more challenges and/or do you think the gassier mines like nickel mines might have more scrutiny rather than some of the steam coal mines?

Ben Hatfield

I would say is, they are all going to have challenges at some level because indeed the standard that we have lived by for a long time has been raised dramatically and we all have to adjust to it. But it's much more tough, much tougher if you will for older mines to react. So, it's not as much long wall mines versus room-and-pillar mines being challenged. Its older mines with a lot of outside works, a lot of 4 and 5 mile long mainline tunnel. Those are the operations that is going to have the greatest difficulty in keeping their operations in compliance and minimizing their violations. So, I think it could impact the long wall operations room-and-pillar operations.

Generally speaking I think you are going to see the entire industry try to focus on sealing all of old areas rather than maintaining them, trying to position themselves essential maintain a smaller area to the higher standard, it's going to be easier for some to do than others but it's clear that the direction of things is generally going to be older mines that are challenged, difficult complaint complying, those are going to shut in and the best positioned operations is going to be new mining operations that don't have nearly as much out by burden.

Shneur Gershuni - UBS

Okay. And then, I was wondering if I can just sort of shift to your met coal profile, clearly the change in this contract moves you up. Should we be thinking the run rate now is about 3.2 million tons and then when Hillman, I mean, rather Tygart comes on that takes you up to about roughly 6.7 million tons is kind of your run rate. So, you are going to be running about a third of your operation on that. Are there any others areas say next where you could be able to move some of those tons into the metallurgical coal market?

Mike Hardesty

This is Mike Shneur, I will take that. We are not quite yet at a 3.2 million run rate because we are just now ramping up the Bakerstown mine at Vindex. So, I think by the time we get to the end of next year, somewhere in that 3 to 3.2 run rate is where we will be.

With regard to Tygart, you can assume it somewhere between 1.6 and 2 million tons to our met profile. So, that would put you more in that 4.5 to 5 million range and then I think it's not in our outlook as we do have additional upside at Vindex probably in the neighborhood of 400,000 tons on top of that but that would require more capital development and two new mines.

Shneur Gershuni - UBS

Okay and then, actually just focusing on the mix for a minute. If I remember correctly you have a legacy contract there. Has there been any luck in negotiating your way out of that one or putting in a real load out there sort of reduce the transport cost?

Mike Hardesty

Actually things have changed, somewhat favorably with regard to that legacy contract. Couple of things have gone in the right direction, number one we invested some capital and improving equipment and we have got much improved cost performance at the operations that service that contract and secondly because it is an index price, we have been fortunate that the index ahs continued to push the base price up over the last year and half and two years. So, we are not really much underway with that contract now as we were before. Matter of fact I would say near breakeven or within a few dollars of it. But it's not nearly as much a concern now as it has been. It's still a long-term commitment but we are much better position to service it without significant financial burden and overall the Vindex operation has stepped up pretty dramatically as a contributor as they become more and more a substantially piece of our metallurgical portfolio going forward.

Ben Hatfield

And I would add that, as we grow our met business that contract will be more valuable to us because we will produce low quality (inaudible) and this will give us a steady outlet for that.

Shneur Gershuni - UBS

Great, thank you very much.

Operator

And your next question comes from the line of Jeff Cramer with UBS. Please proceed.

Jeff Cramer - UBS

Hi, good morning guys.

Ben Hatfield

Good morning.

Jeff Cramer - UBS

Just on higher volumes, what you guys are getting the long wall in place and sort of kind of ramp up to that, how do you see production, basically I guess the continuous miners during '12 and '13?

Ben Hatfield

I am sorry could you repeat the question I didn't fully understand it.

Jeff Cramer - UBS

Just at Tygart, what do you feel like 2012 and 2013 production?

Ben Hatfield

Well again it's going to be continually ramping up; we are going to see very early development kind of production levels towards the end of 2011, very modest tonnage, 2012 we will begin to sequence in the mainline development sections with the continuous miners. It's really a little early at this point to roll out specific tonnage forecast but you are going to expect that there will measurable production in 2012 that we expect to move in to the high level metallurgical market at attractive prices and that's more substantial output in 2013 even in advance of the long wall started.

Jeff Cramer - UBS

Okay. And I guess just from how you guys seem to be handling things well on the cost side. Give us a sense I guess specifically for your met line setting exactly where costs are for those?

Ben Hatfield

Actually we can't share cost that complex because we need to stick with general segments that we have shared in our earnings release. But I have shared in previous calls the recognition that the Sentinel operation particularly is one of our lower cost operations and it's somewhat of a contrast because most metallurgical operations because they tend to be deeper lying sands and have higher qualities of methane liberation, they tend to be higher cost operation and the Sentinel operation is one that's somewhat well positioned in that respect because they are lower cost even than sale of our thermal coal mines. So, we are pretty pleased with the direction things and operationally we continue to see improvement both at Sentinel and Beckley that we believe will keep them in, what I would say is the lower quartile of the cost performers for that kind of product.

Jeff Cramer - UBS

Got it, okay. And as far as the contracting goes for '11, I think where do you guys see and you are starting to get some solicitations now. Where do you see yourselves contracted by the end of the year?

Ben Hatfield

We normally target being in the 85% to 90% contracted position by the end of the year that's being the pattern thus far and I still expect to be in that range by the end of 2010. The only unique aspect of 2010 is I believe the thermal contract layering as it's been demonstrated thus far. It's going to occur later in the year for I think all the right reasons as we simply did not want to participate in some of the utility solicitations in the second quarter when the process they weren't that attractive.

So, I think we will still over the course of layering in contracts during third and fourth quarter get to something close to that 85 to 90% contracted position by year end.

Jeff Cramer - UBS

Great, thank you.

Operator

(Operator Instructions). And your next question comes from the line of Evan Van der Veer with Aegis Financial. Please proceed.

Evan Van der Veer - Aegis Financial

Good morning gentlemen. I was just wondering if you could just give us an idea of your ability to pull back on the Tygart CapEx if you cross a point of no return if for some reason met coal prices were sort of to come down here in the short to medium term. Could you give us a sense of when that might be and your ability to sort of change direction there?

Ben Hatfield

Well again it's a construction project. I can't envision the circumstance that would likely lead us to that conclusion but if we felt the need to, if you had a dramatic kind of global market change kind of events such as we saw in maybe 2009. We certainly have the ability, at any point over the next 12 to 18 months and simply shut it down and stop. It's an excavation project now within the next quarter or two it will be a shaft and slope excavation project and there are contract protections if you will or if we have material change and circumstances we could certainly suspend work and put the project into ideal mode.

But again one of the unique features of that project is we think it's remarkably competitive even if you saw weaker metallurgical demand just as a high quality thermal product going into the normal utility sectors, it's actually quite profitable. So, I think it's unlikely absent a huge change of event that we would see the need to suspend but we certainly have that ability in my view over the next 12 to 18 months.

Evan Van der Veer - Aegis Financial

Okay. And in regard to your sort of cost competitive position across the industry, I guess it's pretty dynamic at this point. But, I was wondering if you could just give us some type of points without mentioning any specific mines in regard to where you see yourself on the scale of competitiveness across the industry?

Ben Hatfield

Well it's a test mix because you have to recognize that all costs are going up among coal producer generally speaking because of the reasons that we have described earlier but I do believe we are better positioned than many particularly with respect to our surplus mining operations being in close proximity to areas that have been previously for sometime and we have quite a bit of what's called if you will haul back, areas that don't necessarily require valley field and will let us to continue producing for several years.

So, we're well positioned with respect to kind of continuing doing what we are doing. The thing that pushes together direction on cost is we are continuing to ramp up metallurgical production and particularly as we bring on extra tons of Beckley low wall met or Vindex low wall met those tend to be higher cost tons that will push up the average somewhat put in Central Appalachia and Northern Appalachia. But on an apples-apples basis I think we are fairing a pretty well in terms of a peer comparison and I think well positioned to withstand the lot of the increase regulatory scrutiny that is being pretty broadly distributed across the sector. So, I feel good about our position. It's tough to get more specific than that other than saying that you have to kind of pay more attention to margin than cost. Costs bar graphs are great in terms of assuming that people are selling a equal quality product from equal circumstances but really matters at the end of the day is what margin are generating regardless of whether the cost is trending up or not and as you can see our margins recently are trending favorably and we expect to continue that initiative.

Evan Van der Veer - Aegis Financial

Great. Thank you very much.

Operator

And there are no further questions in queue. I would now like to turn the call back to Ben Hatfield for closing remarks.

Ben Hatfield

Thank you very much. International Coal Group looks forward to building on its second quarter performance. Please plan to join us again for our third quarter conference call in October. 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. Good day.

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Source: International Coal Group, Inc Q2 2010 Earnings Call Transcript
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