James River Coal Company Q2 2010 Earnings Call Transcript

| About: JAMES RIVER (JRCCQ)

James River Coal Company (JRCC) Q2 2010 Earnings Call Transcript August 6, 2010 11:00 AM ET

Executives

Beth Cook – Director, IR

Peter Socha – Chairman, President and CEO

CK Lane – SVP and COO

Analysts

Brett Levy – Jefferies & Company

Jim Rollyson – Raymond James

Jeremy Sussman – Brean Murray

Michael Dudas – Jefferies & Company

Justine Fisher – Goldman Sachs

Brian Gamble – Simmons & Company

Jeff Kramer – UBS

Shneur Gershuni – Union Bank of Switzerland

J.D. Kritser – Steelhead Partners

Brian Finkelstein – Catapult

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Company second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Beth Cook, Director of Investor Relations. Please go ahead.

Beth Cook

Thank you. And good morning. Welcome to James River Coal Company’s second quarter earnings call. We released our earnings this morning and our current release is posted on our website and furnished to the SEC on a Form 8-K. With me on the call today are Peter Socha, Chairman and Chief Executive Officer; CK Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; and Jim Ketron, Vice President and General Counsel.

Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These forward-looking statements should be considered along with the risk factors that we note at the end of our press release as well as in our annual report on Form 10-K and other SEC filings.

I will now turn the call over to Peter Socha.

Peter Socha

Good morning, everyone. Thank you, Beth. And welcome to our call. We are going to have very, very short comments this morning, which is one reason why we didn’t do slides and we’ve already gotten lot of emails and calls about that. We are going to try to do the opening comments in about five minutes or so. Just a couple of things from me. Three points really.

Liquidity, two years ago, we had no liquidity. A year ago, we had $36 million of liquidity. And right now, we have over $200 million of liquidity. That is something that we are very happy about. We are very pleased with. It has given us an opportunity to strengthen the balance sheet and strengthen the company.

The second point in my opening comments would be profit margin. We did have a profit margin in Central App of almost $31 this quarter. That is from steam coal and stoker coal only. For those of you not familiar with James River Coal, until recently we really haven’t had any met coal at all. We will have met coal going forward. But our margins of $31 were for steam and stoker only. And we did sell a little bit of coal for next year. I guess the most important point there is we are about two-thirds sold in Central App for next year at a price of 101.28. And of what’s left, of the third that’s left, about half of that would be stoker, the other half would be steam coal.

With the market tightening as it is, people sometimes – they look at me with funny eyes when I say next year could be better than this year, and in fact, I think it will be. And I think 12 million probably better than 11 million. So that’s something I’m sure we will get into during the Q&A. The mines had a good quarter. Sales had a good quarter. So overall, I think we had a very good quarter. We are pleased with where we are and we’re pleased with where we are going.

And with that, I will turn it to CK.

CK Lane

Okay. Thanks, Peter. Welcome, everyone. For safety, we had another strong quarter in our safety performance. Our NFDL rate continues to track below the national average. All of this, though, was overshadowed by the fatal accident that we had at mine 68. Bobby Smith, a well regarded continuous miner operator was killed on June 24. He had been with our company approximately six years. He (inaudible) by his wife Amanda and three children. This was the first fatal accident at the mine since it opened in 1989 and then the tragic out for everyone there and his family. So this one on – we've been thinking about that a lot.

For the operations, in cap, production was at our expected level. We completed mining at one underground mine and moved the man and equipment to our new mine, which is called Old House [ph] branch. We also completed mining at one of our surface mines and moved to a new surface mine called Harmons Branch. We had a couple mines that had some pretest geological issues in the quarter, but we were able to work through those and didn’t impact production or cost a whole lot.

As in our press release, we did start the two new mines in the second quarter. They are operated with contract miners. There wasn’t any real significant startup issues. We had begun construction on the third met mine that will begin later this year, and we were able to start our preparation plant and get that up and running that will process the met coal.

In the Illinois Basin, production was below our expected levels. Our underground mine went to a thin cold area to access additional reserves. Our recovery dropped dramatically going through that. We are coming out of that now. On our surface mines, we had several projects that we had to complete with the new core of engineers permitting process that slowed us down some. And we also moved our Augusta surface mine. We had mined out of that current premier to a new premier location. So we had a lot of steps going on in the Illinois.

We also had one of our industrial customers, the access to slow down shipments to match their demand. And in Illinois, we basically lowered our production and adjusted our work schedule to match the shipments that we had and really didn’t build up any inventory since that coal is a little bit higher sulfur coal. Overall, it was a good quarter. We are sad about the totality, but pleased with the progress of the operations that we had. And with that, I’ll turn it back to Peter.

Peter Socha

Thanks, CK. Just a couple of market comments, and that is the – the thermal market in the US is definitely coming back. The most notable, I guess, event there is we are seeing prompt demand. We are seeing people that are looking for coal for 2010, for Q3 and Q4, and that is something that we could not have said during our call in February or during the call in May. So I think we are starting to see the market gradually direct.

In the European market, I was emailing back and forth with a friend in Germany yesterday, and it appears that particularly in Germany, power demand is definitely back. It’s basically first half of ’10 is equal to first half of ’08. So they are very pleased with that. Hard coal burn is up dramatically over the last year, not gas demand is up dramatically over the last year. So Germany apparently is leading Northern Europe anyway out of their recession.

The met market in the US appears to be taking a pause, but that’s all it is. We don’t see it as any type of a secular softening. It’s more of a pause. And we will be pricing into that market sometime in the fall. Certainly the conversations will be – the pricing conversations will be coming up later this month – will be starting later this month.

As far as our schedule, we are – next week, next Wednesday, we are up in New York with Jefferies with Mike Dudas. September 15th, we are at the Southern Coals Conference in Cincinnati and the Cincinnati Coal Exchange. I’ll be doing the Jefferies. I’ll be doing Southern Coals Conference, actually at that when we’re speaking about the election. So that one may be interesting.

September 30th, Sam is going to be up in New York with Davenport. That’s data week [ph]. So I’ll be down in Birmingham. And then earnings will be Thursday, November 4th. And in November, we’ve got Rolly and we’ve got Dahlman Rose and Kurt [ph] and engineer in November and early December.

We did put out the guidance. You could see we raised quite a bit – quite a number of the numbers. And we think that reflects our current expectations as of right now. We have already gotten questions on the met coal, whether it’s in there, whether it’s not. The tonnage is in there. For margins, we’ve assumed margins that are consistent with our steam coal margins. So we haven’t made any off-the-wall assumptions about pricing with that.

And shelf, I mentioned the shelf last time. That I believe will be filed this afternoon. It would be $150 million shelf. The old shelf registration statement that we had had $21 million left on it. That will be withdrawn. So that one no longer be in existence. As of right now, we have no use for the shelf. I have no plans for it. There is nothing I’m looking at. It is just something to have in place, as I mentioned on the last call, but we didn’t want to surprise the market with it. So that would be in place.

And I think that’s about it. Sam and Beth will be making calls this afternoon. So if you have questions on anything on the earnings or on the guidance or anything else, they will be available till around 2 o’clock. And I think Sam and his wife are headed out of town.

And Melina, we will be happy to take questions now.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Brett Levy with Jefferies & Company.

Brett Levy – Jefferies & Company

Hey, Peter. Hey, CK. Let’s see. First off, you probably see that there is, in the market right now, a new Illinois Basin somewhat project financing. Are you worried about oversupply in the Illinois Basin if all of these projects sort of come on as scheduled?

Peter Socha

No, not really. The Illinois Basin has a whole bunch of sub-basins to it. I mean, it’s gathered under the umbrella named Illinois Basin. But for instance, the market we serve in Indiana, there is really not any coal that I’m aware of. CK disagrees. He has no problem telling me that. But we really don’t see much coal from Illinois coming into Indiana. A lot of their coal, they are – they are forward selling. I mean, they are doing it under long-term contracts. I believe they have several long-term contracts in Europe. I haven’t seen the process. I don’t know what they say in there. But I think it’s pricing this morning.

Brett Levy – Jefferies & Company

And then in terms of the European, hang in there for a while there, it just didn’t make sense. Is there anything over there? Have the lines crossed or the point you are going to start shifting some shipments over to (inaudible)?

Peter Socha

When we were in New York in June, I made the comment, it wouldn’t surprise me if we don’t end up shipping a Panamax to Europe in late this year. And I think that that may still be the case. If it’s not late this year, it will be early next year. The numbers, if you look at the net back numbers, European prices, US prices, they have really moved out of whack a little bit in a negative territory. But primarily that’s because US prices are coming up, which is a good thing. So I think next year we will ship a meaningful amount of coal to Europe. That wouldn’t surprise me at all just based on phone traffic and based on conversations. But right now, those things are not lined up. As I’m sitting here, I’m looking at a trend going export right now.

Brett Levy – Jefferies & Company

Last question, you guys are clearly looking at spending some of this money on reserves and incremental addition to your production. Any sense as to sort of geography that is more favored? Do you favor undeveloped reserves or are you looking for something that’s more up and running? Is there any sort of favorite flavor here?

Peter Socha

No, no. The short answer is no. We are looking – at any given time, we are looking at several things, and that’s true today. If anything, the activity may has picked up just a notch, just where it is noticeable where I get two calls a week and CK on things rather than one. But I don’t have – I don’t think we have a preference between Illinois Basin and Central Appalachia.

Brett Levy – Jefferies & Company

Thanks very much, guys. Good quarter.

Peter Socha

Thank you, Brett.

Operator

Thank you. Our next question comes from Jim Rollyson with Raymond James.

Peter Socha

Good morning, Rolly.

Jim Rollyson – Raymond James

Going back to your last comments in the prepared remarks on met, you said volumes are in there, but you are only assuming kind of margins consistent with steam. Can we talk a little bit about maybe how the cost structure looks at those lines relative to your overall Central App mix?

Peter Socha

Yes. It’s a little higher. I mean, as we talked about on the last call, I think depending on what you do with the prep plant, we have six because we own the prep plant. We’ve owned it for years. We have fixed cost attached to it that we have been carrying all along. So if you assign all of those fixed costs to the met coal, then you’ve got costs that are in the 90. If you back those out and say, well, gee, we’re paying those anyway, then you’ve got costs that are a little bit lower than that.

Jim Rollyson – Raymond James

And for the quality –

Peter Socha

It doesn’t really move the needle as far as the overall company and the overall cash cost. It doesn’t move the needle that much.

Jim Rollyson – Raymond James

Right. And for the – if you’ve already sort of embedded it, everything marginally is incremental anyway.

Peter Socha

Yes, yes.

Jim Rollyson – Raymond James

For the qualities of product that will come out of the three mines, in the market we are in today, what kind of price range would that fetch?

Peter Socha

We are not – I mean, talk to Mike who handled the sales on that yesterday. We’re going to start some new conversations later this month, which is a little bit later than we thought they would be, but I mean, in the grand scheme of things, it’s not a whole lot. We’re talking about several weeks. I’m going to (inaudible).

Jim Rollyson – Raymond James

Fine. And then your philosophy now on pricing, the other third of coal, you kind of hit the waiting mode –

Peter Socha

I told the guys, go play golf. Yes, until the fall, go play golf. We’re two-thirds priced right now. For CK, to run the mines in Central App, we really need to be 6.0 to 6.5 – below 6.0, as I’ve said before. He puckers [ph]. And so we have another couple of million tons to put the bed. A half of that – a little bit less than half of that would be stoker and the other half would be thermal. And in a couple of months, we will focus on first half of ’11. And the market is tightening. Clearly, by any metric you look out, the market is tightening.

And so again, as we talked about before, we’ll let the market come to us. But I think by September-October, Mike and Mark and I will be sitting down and we will be talking about first quarter of ’11, then first half of ’11, and then third quarter. We’re just going to take – we're going to shorten things up. We’ve gotten a good base in there, 4 million tons at a $101. I think it’s pretty clear we’re going to have an average sales price next year that’s well into $90. And if you look at where we are so far this year, we are at $95.20 or $95.12 or something like that for the year. So next year’s average sales price should be comparable to this year.

Jim Rollyson – Raymond James

And then how are you thinking about cost going from year to year?

Peter Socha

I think there are so many uncertainties right now, both going through Congress and going through the state and federal regulators that up on that one as well. I mean, let’s just wait and see. I think that – I believe it was Kevin, it might have been Kurt [ph], that said we’re not seeing – and I think it was accurate – we are not seeing a lot more inspector activity, we’re just seeing an increased intensity of the inspectors when they are there. CK, would you agree with that?

CK Lane

Yes, absolutely. I mean, you’re starting to see more downtime on the shift than you did before. And with the new law going through Congress, and till that comes out, it’s just anybody’s guess what that impact would be.

Jim Rollyson – Raymond James

And then lastly, just kind of an accounting question. It’s interesting that the new guidance now with the met included, which I think we all –

Peter Socha

Are you asking me an – are you really asking me an accounting question? Are you really doing that, Rolly?

Jim Rollyson – Raymond James

Yes, I’m going to take a shot. Your EBITDA guidance seems to be right over top of where consensus is. But your EPS guidance seems to be a little bit off from consensus. Is it the non-cash amortization related expense stuff that’s probably the big difference there?

Peter Socha

Let’s say, I believe you’re on Sam call list after the call today.

Jim Rollyson – Raymond James

Yes. Awesome. Thanks, Peter.

Peter Socha

You’re welcome. Okay, thanks.

Operator

Thank you. Our next question comes from Jeremy Sussman with Brean Murray.

Peter Socha

Good morning, Jeremy.

Jeremy Sussman – Brean Murray

With the thermal market clearly coming back, any thoughts about dialing up production a bit?

Peter Socha

Not yet. Don’t need to. I mean, any – if we were to dial it up right now, we’d be selling it at something less than where I think it will be in a year. It’s kind of – we had a Board meeting, I guess it was early this year, I think it was April or May, and I was talking about it, meaning the coal in the ground is like wine. It’s appreciating now. For a horse, like a racing horse, Jeremy.

Jeremy Sussman – Brean Murray

I don’t know about appreciate, but –

Peter Socha

No. I mean, we’re already generating a lot of income. We’re generating a lot of free cash. I don’t need to go out and crank up production, to go out and sell the coal at $80. I think in a year, it’s going to be more than that.

Jeremy Sussman – Brean Murray

Right. No, definitely. Just to clarify, for 2011, I think you said half of your stoker and half of your thermal was – half of both was open –

Peter Socha

Half of both open. Yes, about that. Yes, about that. It may be 55/45, maybe 52/48, but roughly half.

Jeremy Sussman – Brean Murray

Would you lump that met into stoker?

Peter Socha

No, I hope that’s all.

Jeremy Sussman – Brean Murray

Okay, okay. So half is stoker –

Peter Socha

For the met, there is nothing – there is nothing committed on the met at all next year. And so whatever margin we get there will be incremental margin.

Jeremy Sussman – Brean Murray

Okay. And then just last question –

Peter Socha

But again, it’s 6.5. I mean, that’s to run our existing thermal mine. The 6.0 to 6.5 that I was referring to is to run our thermal mines. And that mine is different.

Jeremy Sussman – Brean Murray

I see. Okay. And then just last question, with cost – your cost guidance, your new cost guidance in Central App, certainly it seems like you’ve been able to do a better job than your Central App peers over the last couple of quarters. But without bringing on the met coal mines, has that basically what accounted for the dollar or so increase?

Peter Socha

No, no. CK, why don’t you cover that?

CK Lane

Met coal mines probably aren’t going be 300,000 tons plus 25,000 to 30,000 tons a month once they are up and running. So we won’t have that much production in the second half of the year. Really, the cost increase is just what we are seeing from a regulatory environment just with the changes that we’ve seen coming out of Congress and with the changes that we’ve seen in the field with the inspectors, both on a state and federal apple [ph]. It’s affecting that more than anything.

Jeremy Sussman – Brean Murray

Appreciate it. And great job this quarter, Peter.

Peter Socha

Thanks, Jeremy. Appreciate it.

Operator

Thank you. Our next question comes from Michael Dudas with Jefferies & Company.

Michael Dudas – Jefferies & Company

Good morning, gentlemen and Beth.

Peter Socha

You know, Mike, I was sitting in the barber chair this morning and I was thinking of all the questions that I was not going to let you ask. Okay? I started coming up with a list. And then I flipped it over and said, well, I’ll just write down the things that you can ask me about. So we could talk about betting [ph] football or how to boil an egg?

Michael Dudas – Jefferies & Company

Next Wednesday, bring those questions, Peter. You mentioned in your prepared remarks, 11 better than 10, 12 better than 11. What over the last few months has allowed to kind of portray those thoughts?

Peter Socha

Yes, we’re just seeing the market tightening up a little. Inventories are still high. I’m probably not as worked up about the inventories coming down as others. I’m probably more on the cautious side of that. But if you just look at the mass, Mike, our average sales prices this year, as I said, is either $95.12 or $95.10, something like that. For Central App, the forward curve for 12 right now is $83. So the market has to improve in the next 18 months by $12. The last time the market tightened, the price went up by $90. We went from $50 to $140, rough numbers. Rough numbers, $50 to $140. And for me to get back to the $95 where I am, and that’s where I think people misunderstand us a little.

They think, gee, James River, they got so lucky last time. They will never get that lucky again. Yada yada yada. Well, yes, we got lucky with some 125, some 130. But our average sales price is $95. So to get from today’s forward curve for 12 to the $95 that we’re shipping at today is $12. I’ll take that bet. That’s why I think 12 – I mean, we’re clearly heading into a tightening phase, whether it’s the MSHA and the state regulators or permitting or whatever, what we really need is we need an industrial economy. We need some load coming back on the industrial side. And I don’t see it right now.

I know Southern is up and AEP is up, but they are up off a very low base. And next year, I think if the election, for some change in one of the houses of Congress and with all of the money that has been pumped into the economy and all of the liquidity, I could see the economy doing better next year. If the economy does better, then you probably got a five – certainly a solid 5 handle on gas, maybe 6. So you take that away, and you’ve got coal burn that’s going to pick up, that’s going to notch up just a little. And you probably got coal supply coming down just a little on a market that doesn’t have the overhang going into it that we had this year.

Michael Dudas – Jefferies & Company

On that latter point, Peter, maybe some observations of what you’re seeing with your neighbors in Eastern Kentucky, what you’re hearing in Southern West Virginia, relative to permitting labor capital and uncertain difficulties amongst the competitors.

Peter Socha

CK?

CK Lane

As far as labor, I mean, the labor market has been tightening up over the last six to nine months. The workforce continues to get a little bit older, but we’ve seen a tightening labor market as far as capital. I mean, nothing really new on that stance. I think everyone is seeing the – if you’ve listened to the calls, I think everyone is seeing the increased scrutiny on the regulatory side and everyone is concerned about the new bill that’s going through the Congress right now on how that shakes out and the impact of that. Permitting, we haven’t seen a lot of changes. I mean, there has been a couple permits issued, but no real permits have been turned loose. And that seems to still be bottled up. So I haven’t heard anything really new at that point and haven’t seen a lot of progress on the permitting issue in the last three months.

Michael Dudas – Jefferies & Company

Terrific. Peter, I’m targeting nine wins this year. Thanks.

Peter Socha

Yes, I read this morning. They are expecting 120 play a game. I guess you can do that when you don’t have a depot.

Michael Dudas – Jefferies & Company

Touché.

Peter Socha

See you next week.

Operator

Thank you. Our next question comes from Justine Fisher with Goldman Sachs.

Justine Fisher – Goldman Sachs

Good morning.

Peter Socha

Good morning, Justine.

Justine Fisher – Goldman Sachs

The first question I have is, I was wondering if you guys could give us some color on the difference and in the costs that you see based on increased number of regulator visits versus the intensity. I know, CK, you were saying that you haven’t necessarily seen more visits but that there is more downtime, etc. And that’s what most of the Central App companies have been saying. And I’m wondering – is there a difference in the higher cost that you might see based on a more intense visit as opposed to higher numbers of visits? I mean, is it less expensive if they are just more intense?

CK Lane

We’re seeing a lot more on our production shift. Equipment is shut down to be checked for safety issues. And so you’re actually losing some productive hours during your shift is where I think you will see that more than anything. And to make up that tonnage, you might have to work over time or work on Saturday to make up to stay close to your budget level. So I think we’re just losing some production hours and then having to work some extra over time to make that up would be my best characterization of it.

Justine Fisher – Goldman Sachs

And so the $1.22 or so of other costs that was related to things up to them, visits etc., I mean, as long as the scrutiny remains intense, that cost item is pretty much going to be in there?

CK Lane

Something changes, I don’t think it’s going to get any less going forward. And it appears that the new bill, we will have to see when that come out and how that impact is going to be enforced.

Justine Fisher – Goldman Sachs

Okay. And then a question on stoker coal pricing, Massey is one other company that actually breaks out their industrial sales. And I know it’s not 100% comparable, but I’m wondering if you guys can give us a color on where you are seeing industrial pricing. You mentioned that you had a customer that actually asked to delay shipments, and Peter, you were talking about that as a recovery –

Peter Socha

That was – yes, that was thermal coal in the Midwest. Stoker coal in the East is, right now it’s 80 to 90. And we have sold some at each number.

Justine Fisher – Goldman Sachs

Okay. Can you remind us what the difference is between the stoker coal you guys sell and Massey’s industrial coal? Their realization is down to the high-60s for the quarter. Is there any extrapolation to make between you guys? Should we –

Peter Socha

We never ever talk about other companies.

Justine Fisher – Goldman Sachs

Okay. And then I have another strategic question. So I know – I'm not asking about what you may do or not do under the shelf that you just filed. But from a higher level –

Peter Socha

That’s an easy one because right now, there are no plans.

Justine Fisher – Goldman Sachs

Right, okay. But so – so then – from a higher level, though the model-out to 2012, I get you guys having enough cash when your bonds mature to pay those off in cash. And on the one hand, maybe you don’t need a really low levered balance sheet, but on the other hand, the operating leverage for equity investors become significant if you don’t have to pay the $15 million of interest on the bonds, etc. Is that something that you would consider doing given that your cash balance is pretty high already?

Peter Socha

Would I consider taking some cash out to –

Justine Fisher – Goldman Sachs

You’re taking the bonds out –

Peter Socha

– May, to June 1st of 2012 and then just paying off the bonds? Probably not.

Justine Fisher – Goldman Sachs

Yes. I mean, do you have enough – do you have $200 million [ph] of cash then?

Peter Socha

Justine, it’s a good question. And the answer is probably not. I mean, the high yield market right now is very strong. I looked at some term sheets earlier this week with some people that some banks that wanted us to consider refine. I’m a client right now. What I’ve told them is I’m a client right now to stay where I was, and that was sometime next year, most likely in the back half of next year, the middle of the year. We will look at refinancing out those dollars.

Given a choice, I would deleverage a little bit. I mean, what we were looking at this week was 150 for 151. That doesn’t do anything for me. So – but the ideal structure for me would be the middle of next year, to do 100 or 125, a seven-year notes that with no amortization in years one and two, and then $10 million a year for five years. So I’m deleveraging over a period of time. But I do want to deleverage. We do want to deleverage. And substituting a 150 or 150 doesn’t do that for me. I mean, (inaudible) so I can’t do anything.

Justine Fisher – Goldman Sachs

Great. Thank you.

Peter Socha

I hope that answers your question. That would be the –

Justine Fisher – Goldman Sachs

That did.

Peter Socha

That would be the ideal structure for me. So, of our cash, if you were to look at the middle of 2011, 2011 is free cash. The way 2010 is, our cash is going to continue to build. I would take $25 million. The bonds are 150, but there would not be a prepayment premium or anything like that. So I would say $25 million, maybe $50 million of cash and pay down the bonds and then refinance them with something smaller that I could amortize over a period of time. I mean, if you want to have strategy and want to ask what my current thoughts are, that would be my current thoughts.

Justine Fisher – Goldman Sachs

Great. Thank you.

Peter Socha

Thanks, Justine.

Operator

Thank you. Our next question comes from Brian Gamble with Simmons & Company.

Peter Socha

Hey, Brian.

Brian Gamble – Simmons & Company

Good morning, Peter. What’s going on?

Peter Socha

How are you?

Brian Gamble – Simmons & Company

The eight minutes of prepared remarks was impressive. I appreciate that. That’s why on a Friday.

Peter Socha

Yes. I mean, given it over and under, (inaudible) over on us.

Brian Gamble – Simmons & Company

The pricing that you got for ’11 on that 1.6 million tons, it looks like it was about priced at the average of the ’11 curve for the quarter. If you were to be citing more coal right now, is the curve a good representation of what utilities would be willing to pay right now, or are they going to pay a little bit more during the hot summer?

Peter Socha

Yes. I mean, those prices were put out early in the quarter. This is true for both basins, for both Midwest and Illinois basins. Midwest, maybe even prior to that. And I think the one characteristic that we have found with the utilities, maybe June, let’s back to the June, early July, they are considering their options for a lengthy period of time. I guess it would be the best way to put it and the accurate way to put it. Now they are starting to say, okay, that price you gave me six weeks ago or so, I’m interested in that. Could we go out and could we sell at the curve today or above the curve? Yes, maybe. Yes, maybe. But again, I think the curve is rising, not falling. And so I don’t know. We are not really actively engaged in any conversations with the utilities today that I can give you an accurate answer on that, Brian. As I said, I mean, I’ve told the guys to stand down for a little while.

Brian Gamble – Simmons & Company

That kind of – and it gates my second question a little bit, but also I’d ask it anyway, just to maybe get your market feel. When you look at – and you kind of mentioned this year. You mentioned, in any improving environment on the demand side, both commodities going up, gas included. You mentioned a $5 to $6 gas range. Without gas getting to that $5 range, staying in the mid-to-high 4s, where do you feel confident in the coal strip actually moving to? Because you’re going to be – especially from the Southeastern standpoint, you’re going to be competing and you’re going to see some come back as gas does not move. Does it –

Peter Socha

Arguably, the scenario that you just sketched was the scenario we’ve had in May and June. And there were some switching, but it was not widespread. And we’ve talked – I've talked about this in public forums before. So we saw some, but not a lot. Nowhere near the extent that we saw last year. So I think from our standpoint, coal to gas switching is probably with us for a while. And the only question is, to what degree? Is it to a large degree or to a small degree? Well, last year was – I don’t know what your model shows, but say, 40 million tons. That’s probably the high end. And the low end may be 10 million – 10 million to 12 million or 15 million. And that might be where we are right now and then something in between.

I would argue that that supply is probably coming off faster than that – faster than the switching is going on just because of all the impediments that we talked about. And so – I mean, I still think with gas, if you look at the 9.14 data, I don’t know if you guys put out a note on this the other day or not, but gas production up just a little bit year-over-year. I don’t remember the numbers. It was like 57 or 59 – 57 last year and 59 this year. So that’s not a whole lot. Month-over-month, it was flat.

So production – and a reason for that is, as you guys know and as Rolly and most of the other gas guys know, Gulf of Mexico is way down and onshore is up, and it ends up being almost a push. But I still come back to – we need the economy to pick up. Everything else is all nice to look at, it’s all – it's great theoretical conversation. And it’s all those kinds of nice things to consider, but until you have the economy pick up, you don’t have anything.

Brian Gamble – Simmons & Company

And then one quick one, I might not need to talk to him later, same factor for next year, changing very much in this year?

CK Lane

For 2011?

Brian Gamble – Simmons & Company

Yes, sir.

CK Lane

Yes, it probably will change. So we’ll have to come out with guidance on that. It has to do with how much of the NOLs we use up.

Brian Gamble – Simmons & Company

Appreciate it, guys. Have a good weekend.

Peter Socha

Thanks, Brian. You too.

Operator

Thank you. Our next question comes from Jeff Kramer with UBS.

Jeff Kramer – UBS

Hey, good morning, everyone.

Peter Socha

How are you doing, Jeff?

Jeff Kramer – UBS

Good, thanks. If you test earlier and possibly looking to increased production next year, assuming that the pricing is there, is there a rough number to where kind of year-over-year you might be able to take production to?

Peter Socha

Yes. I mean, CK and I haven’t talked about this recently. But at the bottom end, we’ll do 6.0, 6.5. On the high end – current configuration, not be cold [ph] or anything like that. Not counting the met mine. Okay? So let me just put those things out there. We’re 6.0 to 6.5 on the bottom end, and 8.0 to 8.5 on the upper end.

Jeff Kramer – UBS

Got it. And would there be incremental capital or anything it has, or is it just –?

Peter Socha

Probably some. I mean, it doesn’t come free. So there would probably be some. But I don’t think – it's not going to be a Greenfield development project or anything like that. CK, do you have any thoughts?

CK Lane

No, I think that’s what you said in a range, Peter.

Jeff Kramer – UBS

Okay. And on the restricted cash that you guys have, I guess just assuming the revolver doesn’t grow and the LCD just assume that that $15 million stays there.

Peter Socha

Yes. Well, that goes up and down. The revolver is formula based. And if we are at the end of a month, and this happened – did it happen in the first quarter, Sam? Was it March or April? Somewhere in there, where – all of a sudden, the last day of the month, we got in a bunch of receivables. And so the formula got out of whack, and we didn’t have enough availability to cover the LCs. So we had to cover that with cash. And for this quarter what we did was, we just put the cash in there first and it turned out that the receivables were going to drop a lot on the last day of the quarter, we would still cover. But it’s more based on the formulas. It’s the AR and the inventory formula.

Jeff Kramer – UBS

Got it, okay. And just finally, given your financial position now and how much the shape of the balance sheet is it? I mean, as far as discussions with the agencies go, had those recently – I mean, should we expect anything in there?

Peter Socha

We have had them recently. And Sam and I, I think, are meeting with either one or both of them in September. And we’ll just kind of continue our dialogue. We get a long time with the agencies. We’re just a small Central App procedure, and so that has caution on their parts all the time. And we understand that. But I believe we’re meeting with them again next month.

Jeff Kramer – UBS

Okay. Thanks, and keep it up.

Peter Socha

Thank you.

Operator

Thank you. Our next question comes from Shneur Gershuni with Union Bank of Switzerland.

Peter Socha

Good morning.

Shneur Gershuni – Union Bank of Switzerland

Good morning, Peter. How are you?

Peter Socha

Great.

Shneur Gershuni – Union Bank of Switzerland

Most of my questions have actually been asked and answered. But just kind of wanted to follow up to the earlier question with respect to contracting for ’11 that was done during the quarter, did you have any price reopeners in place, and/or if you can sort of talk about the decision to go forward with it versus waiting to just kind of given your bullish comments on the conference call last quarter?

Peter Socha

Yes. I mean, the price reopeners – our major contracts in the east have price reopeners. The way we stay to them over a multi-year period. A percentage comes off every year. So there is going to be a price reopener in there. With those particular customers, the relationship is so close and so tight. I don’t really make that market call. I kind of step outside my normal market call and I’d say, when they want to talk about the market price reopener and when we’re ready to talk about it, we will go ahead and we work it out, where they go out to market and then they come back to us with a number. So those are a little different. The way I’m viewing it is that outside of those two or three contracts are really where I make my decisions on what we price and what we don’t price, and then Mike and Mark go out and execute.

Shneur Gershuni – Union Bank of Switzerland

Great. And then, are there any of those reopeners left for next year or now everything is pretty much open for the market?

Peter Socha

Almost certainly there is some in next year. But they show up as unpriced funds for you. From your standpoint, they are – because it’s not a fixed and known price for next year, it’s listed as unsold.

Shneur Gershuni – Union Bank of Switzerland

Right. Okay. Okay. But the point is that – is there still some openers for next year, for ’11 –

Peter Socha

I’ve got to believe there is. I don’t know out of top of my head, but every year, there are. So I can’t imagine there would not be. I just don’t know the number of times or anything like that. But those have already been worked out. I can’t think of one we’ve ever had, at least in my seven years here where we have not worked it out with the customer. Again, these are customer relationships that are measured in decades.

Shneur Gershuni – Union Bank of Switzerland

Right. Okay. Two more questions. Going back to your metallurgical coal business, and maybe this is a CK question, but when you think about your cost per ton with respect to mining those tons, I know it’s early in the process at this point right now. Do you expect it to be higher than your typical production for your thermal coal?

Peter Socha

No question. Yes, we said that. I mean, our typical production starts with a 6. And our net production is going to be in the 8 or higher. Yes, it’s going to be in the 8s. It is higher. I mean, it’s center call, It’s a little more gas. There is a little more complications.

Shneur Gershuni – Union Bank of Switzerland

Okay. And then one final question just –

Peter Socha

But again, it’s at a small tonnage there that on the overall of James River Coal Company, it just doesn’t move the needle a whole lot. But you can play with the spreadsheet all day long, and it’s hard to move the need on them.

Shneur Gershuni – Union Bank of Switzerland

No, I understand. We’re talking like 2 or 3 percentage internal production. But –

Peter Socha

Yes.

Shneur Gershuni – Union Bank of Switzerland

And then finally, you had mentioned at one point a comment about the curve for next year and you said something about the ‘80s. Is –?

Peter Socha

No, that’s ’12. That was when Dudas was asking about 12. 12, right now, the cap rate of 2012 price as of last night, and this is based on our friends, was 83.15.

Shneur Gershuni – Union Bank of Switzerland

Right. And – okay, perfect.

Peter Socha

So – and my point was, our average sales price now is 95. In 18 months, given what’s going on with inventory, given what’s going on with permitting and regulations and everything else and sort of given our view of the world, in 18 months, I’m willing to assume that the market improves by $12. I mean, I don’t – how much has it improved in the last three weeks?

Shneur Gershuni – Union Bank of Switzerland

Good. Good 10%.

Peter Socha

Yes. $6, $7 in the last couple of weeks. And so between now and 18 months out, I will make the assumption that the market improves by $12, again when we look at what happened back in ’08, the market improved by $90.

Shneur Gershuni – Union Bank of Switzerland

Right. Fair enough.

Peter Socha

So that’s why we are doing what we’re doing on 12. And that’s why I’ve told Mike and Mark, you don’t sell a Panama as well.

Shneur Gershuni – Union Bank of Switzerland

Great. Thank you very much, Peter.

Peter Socha

Yes, thanks again.

Operator

Thank you. Our next question comes from J.D. Kritser with Steelhead Partners.

Peter Socha

Good morning, J.D.

J.D. Kritser – Steelhead Partners

Hi, Peter. Just wanted to ask you, it seems like – I mean, you guys mentioned a lot of mine moves, both underground and surface. I wondered – it's kind of unclear in the cost data how much of that impacted you and will that reverse in the next quarter or help add back production? When did that fourth quarter –?

Peter Socha

I’ll try it first, J.D., and then CK will fight then. We always have moving lines around. That’s the type of mining we do. We don’t have the big new cannons and baileys and things like that. So we’re always moving things around, and we always have a mine or two that gets into some bad geology. And so I wouldn’t necessarily look at it and say, production is going to come back from those two mines or three mines. I think that’s getting two micro in what we are and how we do it. CK?

CK Lane

I agree. I mean, we’ve got – each quarter, we always had something happen. Those are visions to think that in this quarter. So if there won’t be these mines, there will be some other sub or group of mine.

J.D. Kritser – Steelhead Partners

Okay. I guess in the press release, you said something about strategic moves. So I guess I had extra more than normal quarters.

Peter Socha

Yes. CK mentioned that we mined out at one mine and we moved across the street and we moved down the road. So we know the mine. There is a – you do have a cost of that. You have the cost of opening the new mine. You have the downtime while you’re moving the men and equipment. And occasionally in some quarters, that will be an impact. That may be $0.10 a share or – $0.15 a ton or $0.10 a ton or something like that. And if it’s meaningful enough for us to mention we’ll put it in there, sometimes we’ll just put it into miscellaneous.

J.D. Kritser – Steelhead Partners

Okay. And then lastly, the cash flow you guys produced in the quarter was pretty impressive. It was more than I would have thought, given where EBITDA was. I mean, it’s a great EBITDA, but the cash flow is outstanding. And I’m just wondering – were there any other factors as it doesn’t look like things in the balance sheet, we’re really moving around all that much.

Peter Socha

Great question. Inventory has definitely come down. Inventory has absolutely come down. And I don’t think we are alone in that. I think that is becoming more true throughout Central Appalachia. Channel inventories are starting to come down. I had Mike – (inaudible) You’d just run a sort of sales group. And inventories on the river system are definitely coming down. But on CapEx, CapEx in the first half of the year has been a little bit lighter than it will be in the second half of the year, where you’ll see CapEx pick up a little bit. We did – I do need to mention, we did keep CapEx guidance flat. We do have a couple of projects that we’re working on, that will both in Central App and then more importantly, in the Midwest. And we need to discuss those with our banks. So you may see CapEx come up marginally. But we do a bank covenants that need to be (inaudible).

J.D. Kritser – Steelhead Partners

Okay. Thanks, Peter. Nice quarter.

Peter Socha

Thanks, J.D.

Operator

Thank you. Our next question comes from Brian Finkelstein with Catapult.

Peter Socha

Hi, Brian.

Brian Finkelstein – Catapult

Hey. Couple of quick questions. Firstly, and I’m not asking you to speak about your competitors. But if you look ahead that the peer landscape, the publicly traded company, the relates costs, the team kind of move from their low to 50 maybe even 60. (inaudible), and it seems like they have caught up with them or in the cost structure. So going forward, should we expect upward pressure from you guys as well or is there a certain reason why –?

Peter Socha

Yes, Brian, we talked about it in the past. And that is, it used to be in particular surface mining list was $10 a ton lower or thereabouts. So the companies that had a greater proportion of their coal coming from surface mining had much lower costs. And I mean, that’s just simple math. We’re just doing (inaudible) there. And the cost of surface mining – the gap between the two is now much narrower. CK, what would you say the gap is today?

CK Lane

On our minds, it’s pretty close to the same on some of the larger mines. I’m sure there is a gap of path of that what used to be $5.

Peter Socha

(inaudible)

Brian Finkelstein – Catapult

My second question has to do with, I guess in what we are lining, we heard something in the villages and some utility and I was hoping it could confirm that that’s the case. We’re seeing hope, and (inaudible) everyone cautioned from the (inaudible) for tonnage from underground mining.

Peter Socha

From above ground mining, is this kind of a dupe question about mountaintop removal?

Brian Finkelstein – Catapult

Yes.

Peter Socha

No, I think there are a lot of questions from the buyers. But I wouldn’t – I'm not sure I would quite describe it – I don’t know if I would describe it the way you did. But when I go out and see the buyers now, there are always a lot of questions about permitting and about MSHA and about state regulators. It’s more inquisitive. And I don’t know that I would describe it as determining how they buy or what they buy or where they buy or what they pay. It’s more – at last in our part, it’s more inquisitive. Publics companies may be seeing different things.

Brian Finkelstein – Catapult

Do you see it going that way?

Peter Socha

Do I see going towards included it or going towards them, making it as a deciding factor.

CK Lane

Making it as a designing factor.

Peter Socha

I don’t know. I haven’t seen it yet. I mean, that would be speculation on my part. Right now when I go out and see them and we go out and survey real estate, they asked a lot of questions than I thought.

Brian Finkelstein – Catapult

Okay, thank you. Okay, thanks, Brian.

Operator

Thank you. That concludes the question-and-answer session today. I’d like to turn the call back over to Mr. Socha.

Peter Socha

Okay. Thank you, Melina. Thanks for your help today. And thank you, everyone. We, as I mentioned, our next call will be Thursday, November the 4th. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the conference, and you may now disconnect.

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