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Walter Energy, Inc. (NYSE:WLT)

Q3 2010 Earnings Call

October 27, 2010 10:00 a.m. ET

Executives

Mark Tubb – VP, IR and Strategic Planning

Lisa Honnold – Interim CFO, SVP and Controller

Walt Scheller – President and COO, Jim Walter Resources

Joe Leonard – Interim CEO

Analysts

Jim Rollyson – Raymond James

Brian Gamble – Simmons & Co.

Jeremy Sussman – Brean Murray, Carret & Co.

David Connie – FBR Capital Markets

Shneur Gershuni – UBS

Andre Benjamin – Goldman Sachs

Meredith Bandy – BMO Capital Market

Dan Mannes – Avondale Partners

Mark Levin – BB&T Capital Markets

Operator

Welcome to the Walter Energy’s Third Quarter 2010 Earnings Conference Call. All participants are in a listen-only mode. (Operator instructions)

Now, I would like to turn the meeting over to Mr. Mark Tubb, Vice President of Investor Relations. Sir, you may begin.

Mark Tubb

Thank you, Tonya. Good morning and thank you for joining us for Walter Energy's Third Quarter 2010 Earnings Conference Call. Today’s call is being webcast live over the Internet, and a recording will be archived on our website for up to 30 days.

Joining me today are Walter Energy’s Interim CEO, Joe Leonard; Interim CFO, Lisa Honnold and Jim Walter Resources President and Chief Operating Officer, Walt Scheller.

Today we will discuss earnings and performance for the third quarter, our views on the market, and our updated business outlook. Following our prepared remarks, we will open the call to questions.

We may refer to forward-looking statements made in yesterday's press release and may make those and other forward-looking statements on today’s call. For more information regarding risks associated with forward-looking statements, please refer to the company’s SEC filings.

Now, I will turn the call over to Lisa to discuss the financial results for the quarter.

Lisa Honnold

Thanks, Mark, and good morning everyone. Yesterday we reported earnings of $2.57 per diluted share for the third quarter, highlighted by record operating income of 202.8 million from our underground mining segment.

Consolidated revenues for the quarter totaled $464.3 million up $186 million compared to last year’s third quarter. Consolidated operating income was $207.8 million up $165 million compared to last year’s third quarter. Both revenues and operating income benefited from significantly higher coking coal prices, which include the effect of 153 tons of coking coal at carry over prices, exceeding $315 per ton.

Coking coal cost of sales in the quarter was up slightly to a weighted average cost of $81.36 per ton, primarily as a result of higher production cost at our Number 4 mine, due to difficult geologic conditions in the mine, which slowed production in July and August. Since then, we have been achieving normal production and run rates at that mine.

At our surface mining operations, we sold 368,000 tons of coal in the third quarter at an average selling price of $87.93 per ton, an improvement of more than $9 per ton versus the third quarter of 2009.

At Walter Coke, we sold 111,000 tons of furnace and foundry coke in the third quarter of 2010, compared to 38,000 tons in last year’s third quarter, generating a $6.5 million improvement through operating income versus the prior year.

Our third quarter results also include the effect of an increase in our effective tax rate, from 31.9% for the first six months of 2010, to 32.3% for the nine months ended September 30.

Due to changes in certain tax deductions for the calendar year, we expect our fourth quarter 2010 effective tax rate to be approximately 31.6%.

Cash at September 30, was $218.4 million compared to $95.7 million at June 30. Available liquidity was $458.2 million at September 30, compared to $335.5 million at the end of the second quarter. Our debt balance was $175.7 million, which is well below our cash position.

Capital expenditures for the third quarter were $35.2 million and we expect capital expenditures of the fourth quarter of approximately $45 million.

The company spent $11.9 million on share repurchasing in the third quarter, purchasing 173,360 shares, at a weighted average price of $68.58. Through the first nine months of the year, share repurchases totaled $65.4 million and we paid $8.7 million in dividends, returning more than $84 million to shareholders so far in 2010.

We will continue to evaluate opportunities to benefit our shareholders including acquisition, share repurchases, and dividends.

I’ll now turn the call over to Walt, to discuss our operation results for the quarter, and our outlook for the remainder of the year.

Walt Scheller

Thanks, Lisa, and good morning. As I mentioned to you last quarter, our two primarily goals are to achieve quarterly coke and coal production of more than 2 million tons and improve safety throughout all of our operations. I’ll talk about production in a minute but regarding safety, we’ve improved safety performance over the first nine months of the year compared to the same period last year, and have launched new initiatives to help keep our employees safe.

Turning to our third quarter results, coke and coal sales in the quarter total 1.9 million tons, in line with our expectations, and slightly ahead of sales in the second quarter. One of the keys to our results in the quarter was our logistic team’s ability to overcome some transportation issues during the period.

Early in the quarter we experienced some shipping delays due to planned maintenance on the Black Warrior River. In addition, in September the Medupi Terminal was closed due to a conveyor belt repair work, originally scheduled to take place in early October.

Our team did an outstanding job dealing with these difficult circumstances and they were instrumental in helping us meet our objectives for the period.

Third quarter coke and coal productions total nearly 1.8 million ton, up more than 260,000 tons from the prior year and in line with expectations we provided in early September. We experienced some difficult mining conditions at Mine Number 4 earlier in the period, however, we seen much better normal mining rates over the past several weeks as we’ve mined further down the panel.

At Mine Number 7, we continue to make very good progress on the development of the next panel in the east expansion, and expect to start up the longwall in early December.

Looking ahead to future production, we recently updated our long-range plans and are in the process of putting together our Annual Business Plan for 2011. Based on estimates from our current mining plan, we maintain our previous expectation that coke and coal production, and sales, will range between 8.5 and 9 million tons in 2011, and between 9 million and 9.5 million tons in 2012. We will be adding equipment and manpower over the next several months in our underground operations to get section development ahead of the longwalls to minimize delays in the future.

Turning to the market, we continue to see robust demand for coke and coal in our core markets of South America and Europe. Steel production in Europe was up 5.6% in September and is up 29.5% year-to-date compared to last year. South America was down slightly in September, however, demands among our customers remain robust. Steel production in South America is up more than 20% year-to-date compared to last year.

For the fourth quarter, we expect to sell between 1.7 and 2 million tons of hard coke and coal from the underground mining segment at margins between 84 and $87 per ton. Prices will be lower by about $11 and cost per ton will be higher due to the delayed start of the longwall in Mine Number 7 East, in December.

Walter Coke is expecting a modest decline in sales and profitability in the fourth quarter 2010, driven by lower volumes in pricing related to recent softness in the domestic steel markets. We believe our organic growth plans position us to generate significant earnings in cash flow growth over the next several years as we expect coke and coal demand to strengthen in 2011.

Some recent market signs include, coke and coal imports into Brazil increased significant this year, and with the number of steel production expansion projects we currently see their coke and coal imports into Brazil could reach up to 40 million tons over the next five years.

Some of these efforts could restrict energy consumption resulted in slightly reduction in steel production. However, steel production in several key regions has restarted and is ramping back up. In addition, PCI prices are reportedly rising in China, further evidence of a return to strong steel production.

The world’s steel association recently reported, recently provided it’s updated short-term outlook and estimates that steel demand will grow by over 5% in 2011 globally, including increases of more than 9% in South America, and more than 6% in Europe.

Along with the robust outlook for demand, logistical and production constraints continue to plaque the global market according to industry sources. The immediate weather patterns are present across the globe and are expected to be with us until May 2011. When these weather patterns were present in 2008, they disrupted the supply chain in Australia and resulted in lengthy vessel cues.

Capacity constraints on some Canadian terminals are expected to affect timing and volume of coal deliveries. Australian vessel congestion continues to be a problem on at this time and these problems will only be worsened with weather conditions reminisces of 2008. We continue to see reports of production problems in key coking coal mines around the world, further limiting supply.

As to the outlook for coke and coal prices, analysis estimating increases in 2011, especially for premium coals like ours. Recent upward movement in the Australian dollar also points toward higher prices in the next cycle just to keep pace with the fourth quarter benchmark price of $209 per metric ton.

While most of our coke and coal volumes are committed for 2011, these commitments are subject to agreement on price. All of our 2009 sales volumes is currently un-priced, which leaves us very well positioned to benefit from what we see is a strong price environment.

With that, I’ll turn the call over to Joe.

Joe Leonard

Thanks, Walt. Just a couple of items that we’ve done. We’ve completed our office build out in Birmingham, and most of the people involved, we’ve moved them there effective in September. We continue to make progress acquiring reserves up in North River and the Chevron Mining locations. And we also are continuing to make progress in our search for CEO. We expect to make an announcement to that in the not-too-distant future.

So with that, we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. At this time we are ready for the question-and-answer session. (Operator Instructions)

Our first question comes from Jim Rollyson of Raymond James. Your line is open.

Jim Rollyson – Raymond James

Good morning, guys. Joe, I guess sense you entered it on talking about adding reserves, can you give us an update on that? I mean, a couple of quarters ago you guys had obviously started the process of leasing up a number of the reserves to the West of your current operations and profit gas company to declassify some of that coal. Can you give us a sense – I think you guys had talked about 100 to 150 million tons of potential over there, kind of where you stand and how you see that progression going forward?

Joe Leonard

I think Walt should – Chevron because he’s been directly involved as late as last Friday. We’re making progress in that regard. We have acquired some light from some individuals in that area and we continue to talk to some other individuals as well. And we’ve made some progress in regards to Chevron. We did run into some issues with mining conditions there that were a bit unanticipated as a result of our developments there.

Walt, do you want to comment further on the Chevron?

Walt Scheller

Sure. First of all the block of coal up there that we’re trying to secure totals about 170 million tons and we’ve tied up 22 million tons of that at this point, and we’re working with Chevron on about 52 to 55 million tons of that reserve. We continue to meet with and discuss issues with Chevron to try to come to agreement to finalize in the purchase of those reserves and the North River Coal Mine.

As Joe mentioned, they ran into some issue at their operation, which has kind of forced a slowdown in the process and had everyone kind of have to relook at the operating coal mine.

But we are making good progress in that regards.

Jim Rollyson – Raymond James

And that issue, I assume, is one of the thermal side? A couple of quarters ago you guys had anticipated thermal product had picked up because of that deal and that’s obviously slowed down. Any sense of how the limits of that part of it might come into play?

Walt Scheller

It’s really tough to say at this point, you know, in finalizing the deal, it will take what it takes and we’re working hard at it as are the folks in Chevron, but we’re not going to rush into anything.

Jim Rollyson – Raymond James

Fair enough. And then just as a follow up, there are kind of a few mixed signals out there today. It seems like some things are starting to look a little bit better, maybe picking back up a little bit on the margin and you know, Australian flooding situation helping out the supply side of things recently, then I guess you’ve got the steel guys that have kind of made some comments in the last couple of days, a little bit more negative. What’s your barometer telling you about the market right now as you go into next year for outlook for pricing?

Walt Scheller

Well Mike and – Mike Madden, our sales guy, and his folks have been, as recently as last week, over in Europe. Some of our customers are more cautious than others, but I believe that our outlook at the market is it’s going to stay strong. We continue to see a lot of strength out of South America and as I stated earlier in my comments, we think that Europe will stay strong as well.

Jim Rollyson – Raymond James

Okay. Thanks for the comments.

Operator

Brian Gamble of Simmons and Company, you may ask your question.

Brian Gamble – Simmons & Co.

Morning, guys. Walt, maybe you could just give us a little bit more color around the ramp to kind of the back half of this year to the first part of next year. I know that this is a longwall, it comes on line early December is the plan. You know, does it, does three longwalls running in early December mean that, you know, we could see a Q1 total sales number that equates to essentially a quarter of the guidance for ’11, or are we going to see a gradual ramp as we work our way through 2011? Just a couple details there would help.

Walt Scheller

Looking at the tail end of 2010, we are currently moving that longwall in the east side of our Mine Number 7, and we are finishing up the development of the next section currently to allow us to set that longwall back up.

As early as a quarter ago we had anticipated that that longwall would not start back up until mid-December. And at this point, we’re hopeful that that long wall will start up a couple of weeks before that, which would give us a couple of weeks of full production off that long wall in December.

Additionally we will be moving our long wall at our Number 4 mine in early December, but that will be a – should be a one-day move. We have a complete other set of equipment so that should be relatively a non-event. So we’ll have two longwall moves yet this year and we’ll go through the general or gradual ramp up of those two longwalls, but it should be pretty smooth.

Looking into 2011, we have two longwall moves in Q1 of 2011. We’ll be moving our North longwall at our Number 7 mine in January and we will move the longwall at Number 4 mine again in late February

Brian Gamble – Simmons & Co.

So does that dictate doing – with those two longwalls moves scheduled in the quarter, in Q1, does that allow you to get north of that 2 million pun run rate in Q1 or is that more of a Q2 sort of a scenario?

Walt Scheller

I would say Q2 is probably likely to have a better production profile than Q1, but I’m not going to walk away from the puns in Q1 yet either.

Brian Gamble – Simmons & Co.

Okay, then on a question on that side of things, the inventory had expected to be down around 200,000 tons by the end of the year, with I guess a slight build in Q3. Given that you had production issues, what is your current inventory and what is your forecast for what it looks like at the end of the year.

Walt Scheller

Our inventory, as of the end of Q3 was 311,000 tons. We’re looking at – we’re still looking at ending inventory, assuming we don’t get the longwall startup as early as scheduled of 200,000 tons, but I think it’s more likely that we’ll be well north of that because while that longwall will come online, it’s going to be difficult to get those tons to market that late in the year.

Brian Gamble – Simmons & Co.

Sounds good Walt, I appreciate it.

Operator

Jeremy Sussman of Brean Murray, your line is open.

Jeremy Sussman – Brean Murray, Carret & Co.

Hi, good morning. I guess first question, in terms of you talked about pricing a little bit improving. Can you give us a sense maybe, where the spot market is relative to the last $209 benchmark?

Walt Scheller

We’ve seen the same thing in the – we seen the 220 range in some of the spots sales that are going on out of Australia, so we’ve definitely seen a strengthening.

Jeremy Sussman – Brean Murray, Carret & Co.

Okay, that’s good to hear. And then, just a follow up on the last question. Obviously, you’ve got volumes picking up next year, I guess, can you just continue maybe to walk us through a little bit on how you get there? I know obviously with the longwall moves, and the longwall at 7 East, that’s going to help, but I think you also talked about hiring some folks in your prepared remarks. Maybe, could you spend 30 seconds on that?

Walt Scheller

Sure, our issue is when we look at 2010, we will have in 2010 had two significant delays due to longwall issues or due to continuous miner issues that delayed the longwall both times at the 7 East longwall. And what we’re looking at next year is getting enough folks to ensure that we get our development units ahead of those longwalls so that we can reduce those delays to as close to zero as possible. That in of itself, given the delays that occurred earlier in the year, and the delay that’s occurring right now, will result in about 60 days of additional – potentially 60 days in additional longwall production. Additionally, if we can continue to improve on our timing, it lets us push those longwalls a little harder as well.

Jeremy Sussman – Brean Murray, Carret & Co.

Great. And last question, I appreciate that, that color. Obviously you’re benefiting from rising prices, your building cash, what’s your first reference on this front?

Joe Leonard

This is Joe. You know we’re constantly looking at opportunities for expansion either internally or through M&A activities. We get calls pretty regularly, if we can find something that meets with our coking coal strategy, we view that as an attractive opportunity, in the meantime, we look at share buybacks, as we’ve done this year, and dividends. So I think we’ve demonstrated there’s more than as management team that we’re very shareholder friendly and we’ll reward the shareholders in some fashion or the other.

Jeremy Sussman – Brean Murray, Carret & Co.

Great. I appreciate the honor.

Operator

David Connie of FBR Capital Markets, your line is open.

David Connie – FBR Capital Markets

Yeah, hi. Joe, you talked a little bit about progress on the search for a CEO, and you say not too distant future; is that days, is it months, is it weeks? Can you give us a little bit of color on that?

Joe Leonard

I’m a little afraid to because my credibility is weighting here if I say we’re close. But, we’ve got some very good candidates. As you know, people that we’re talking to have jobs, and they’re fully employed, so we’ve had some scheduling difficulties trying to get -- one of the things we’re doing is we’re having every board member interview the finalist here, and it’s a little difficult getting -- with everybody’s busy schedule, getting people matched up here. So that’s really the only delay that we’ve got here. But I would say, speculating a little bit, I’d say we’re talking weeks, not months.

David Connie – FBR Capital Markets

Okay, and is there a – obviously without knowing for sure, is the CEO going to be in Birmingham or is it more in Tampa, do you think?

Joe Leonard

It definitely won’t be in Tampa. The board has demonstrated that if we had a small holding company; i.e. 10 people, that doesn’t necessarily have to be in Birmingham per se. Obviously, all of the operating people, and most of the corporate staff is now in Birmingham. But if it would help with recruiting a higher-quality group, the board has demonstrated to the potential candidates that we will be flexible where the holding company headquarters would be. So the answer right now is it would be in Birmingham, but that could change in due course depending on whether we’re successful in international acquisitions.

David Connie – FBR Capital Markets

Great. And Walt, I think you helped us a little bit on sort of building the bridge from going from this year’s production to next years. So it looks like you’ll have less down time of about 60 days hopefully, on the longwalls in 2011, 2012. How much of that – what else is needed, I guess effectively, to get to the production level that you’re forecasting for 2011? Is there anything else in there?

Walt Scheller

I think primarily it’s just us getting out in front of these longwalls of continuous miner units, and then that gives us a lot more flexibility on being able to run those longwalls extra days and extra shifts if we need to. Primarily, we’ve got to get out in front of the longwalls of the CM units.

David Connie – FBR Capital Markets

How many – is there spare capacity time? Do you have extra shifts that you actually could run the continuous miners to stay further ahead?

Walt Scheller

That’s one of the things we’ve been doing, is trying to run the continuous miners, more operating shifts. One of the challenges with that is having qualified operators for operating that equipment. Even though we could hire some new folks, folks coming in off the street aren’t qualified to run that equipment on the first day or probably six months later; it takes a lot to build a coal miner.

David Connie – FBR Capital Markets

All right, okay. And jumping back to you Joe, you talked about use of cash and would you guys be willing to do corporate acquisitions, and would you do it now before you have somebody in place?

Joe Leonard

Well, the answer is yes, we would, before we have somebody in place. But, these opportunities come at their own pace. We don’t necessarily – you know, you can look around and you can talk to folks, you can’t necessarily get them to agree with what you think is a good idea. So that timing kind of takes its own course. But if we were to have the right deal, we would move forward on that. Obviously we would work with our CEO, candidates and make sure that they’re in agreement, but this is a pretty active board and an active company, so if a good opportunity came up, and again, it’s got to be – it’s got to fit with our coking-coal strategy. And that’s going to go by steam, steam coal. If we found something in natural strategy, we’d move forward on that, post phase.

David Connie – FBR Capital Markets

Great. And then one last question before I let somebody else. Can you give us a sense of what you think the CapEx numbers will be for next year? Is it going to – I mean, without I guess, if you haven’t given us a formal number but maybe just directionally where you think it’s going to be? Is it going to up meaningfully, is it going to be flat?

Lisa Honnold

This is Lisa, I’ll answer that for you. We were estimated about 125 million of CapEx for this year and so you could expect that run rate for next year as well.

David Connie – FBR Capital Markets

Okay, great.

Walt Scheller

One thing that I didn’t mention, that I should have; as we look at the increase in production from this year to next year, there’s also the fact that we are moving into a thicker and thicker seam in the East side of that 7 mine, so our tons per foot is going up significantly, and that also contributes to the increase in tons.

David Connie – FBR Capital Markets

Okay, great, thank you.

Operator

Shneur Gershuni of UBS, your line is open.

Shneur Gershuni – UBS

Hi, good morning guys. Most of my questions have been answered, so I’ve got a couple of tie-ups here. I was wondering if you can talk the price that was secured for the fourth quarter for the open time, you know, by my calculations you would have still had some $315 carryover and so forth, and if you could talk that a little bit?

Joe Leonard

The pricing for the tons that have been priced in the fourth quarter has been at or above benchmark. We do have some carryovers that are in Q4, but all of the tons have been settled, have been settled at or above the benchmark.

Shneur Gershuni – UBS

Were there any adjustments for moisture as part of that as well too?

Joe Leonard

Yes.

Shneur Gershuni – UBS

Okay, great. And then, additionally, with respect to the guidance revision that you had in early September, you mentioned GAAP on the basis as an issue with the mines and it appears that you seem to have gotten past that. Have you drilled any additional ore holes just to sort of test if something that can pop up in the future? And do you have any plans to drill at all to try to [inaudible] future progression of the mine?

Joe Leonard

Yeah, just trying to keep that as brief as possible. We had just continued horizontal degassing at the 4 mine a couple of years ago, because we weren’t seeing elevated methane levels. And we are reinitiating, and have reinitiated the horizontal degassing program at the Number 4 mine. So we will see the results of that. But it will take 8 to 10 months to see the results of that horizontal degassing.

The panel we’re moving into here at the end of the year is an area we don’t expect to see any delays due to the gas, due to methane, and the other thing we’re doing right now is, we are raising a shaft, doing a raised-boar shaft in that general area where we had the delays for the longwall. That shaft was already scheduled, however, we will have that shaft online early next year, and that will enable us to put a lot more ventilating pressure as well as better ventilating volumes across that new longwall faces.

Shneur Gershuni – UBS

So when Lisa gave the 125 CapEx run rate, that sort of includes all that work as part of that as well too?

Joe Leonard

Yeah.

Shneur Gershuni – UBS

Okay, great. One final question, the – that your margin guidance in the fourth quarter seems cost are going up. I understand, some of it is explained due to, or rather the contraction part of it is explained to the falling in pricing relative to the realized price in third quarter. But can you talk a little bit more, and give us a little bit more color with respect to what cost are mostly in play in the fourth quarter? Is it really just fixed-cost absorption or is it some other issues as well?

Joe Leonard

It’s called primarily fixed-cost absorption. We have less longwall tons to spread the cost over, and we have a longwall sitting idle for 30 to 40 days.

Shneur Gershuni – UBS

Great, thank you very much.

Operator

Andre Benjamin of Goldman Sachs, your line is open.

Andre Benjamin – Goldman Sachs

Good morning. Couple of quick questions for you. First, is there any update on your view of organic growth opportunity? I know in the recent past you talked about potentially looking at adding a longwall in Mine Number 4, but that would potentially limit in volume to some hoisting capacity.

Joe Leonard

I would view the real opportunity right now in – at the two mining operations we have by just tweaking the system that we currently operate and getting it operating at a higher efficiency rate, and see what we can get with those improvements first.

Adding a second longwall really adds a lot of complexity to an operation as well as quite a bit of additional manpower. And the [inaudible] capacity issues make it more difficult economically to justify hiring what is in essence a few hundred extra employees to manage that longwall.

Andre Benjamin – Goldman Sachs

Great, thank you. And I guess on the macro front, do you guys have any view on the potential impacts, you’ve been [inaudible] and rising steel imports on the underlying demand for met coal. I know you said you think imports could potentially reach 40 million tons in the next couple of years, but any commentary on exactly what that factor would have on demand and if you’re seeing any changes in the competitive dynamic for that market. Are you seeing any additional competition from people that were originally not targeting that market?

Joe Leonard

We have seen substantial encouragement in our market and Brazil in particular, South America in general, and Europe in general are outpacing the U.S. in other markets. So we’ve seen a very, very strong market, and we don’t see any reason, at least at this point that there will be an [inaudible] of demand for our product. You know, some of the best coal in the world and so we’re in somewhat of a unique situation in that our particular brand of coal is in very, very high demand and those markets seem to be continuing to be robust.

Andre Benjamin – Goldman Sachs

Great. Thank you.

Operator

Meredith Bandy of BMO Capital Market, your line is open.

Meredith Bandy – BMO Capital Market

Hi. Thank you very much for taking my question. I was wondering on the cost next year, I know you can’t really speak to the operating margin that you usually give since all of your tons are open, but at that 8 ½ to 9 million ton, would that put you at sort of the 50 to 55 cost guidance use you’ve given before?

Joe Leonard

Yes.

Meredith Bandy – BMO Capital Market

So you’re not seeing any pressures from, for example, the regulatory issues?

Joe Leonard

Well, we are very heavily regulated and inspected down here in Alabama year after year. So we have not seen a great deal of additional regulatory impact. Now, for any additional legislation or things coming down the road, I can’t really speak to that, but we believe we should be in the 50 to $55 range.

Meredith Bandy – BMO Capital Market

Okay, thanks.

Joe Leonard

And we’ve already spoke quite a bit on the safety regs and a lot of the issues that have been coming down the pipe.

Meredith Bandy – BMO Capital Market

Okay. And can you speak to where your transportation cost are to the Port these days?

Joe Lenoard

Yeah, Meredith, we’re still in the 15 to 16 range and that’s an all-in cost from the line onto the boat. That includes rail, barge and [inaudible] as well.

Meredith Bandy – BMO Capital Market

Okay. Thank you.

Walt Scheller

I would just add in regards to safety, one of the plans, we have this 2011 plan, we’re going to bring in a third party, or perhaps even two third parties to take an independent view of our safety packages and see if there’s some recommendations they can make to even make this better. But our safety numbers are dramatically are improved year over year and that’s a major focus of not only the management team, but Ford as well. We want to be the absolute best in the world when it comes to safety.

Meredith Bandy – BMO Capital Market

Okay. Thank you very much.

Operator

Dan Mannes of Avondale Partners, your line is open.

Dan Mannes – Avondale Partners

Thanks. Good morning. A quick follow up on fourth quarter on guidance. You guys have said 172 of sales and I think you said you guys were going to draw down inventory. Maybe give us some color on how much you’re actually planning to product versus maybe purchase from third parties in the quarter.

Joe Leonard

Dan, I would say that the purchase whole number in the third quarter is about 800,000 tons, and you’ll see at least that much in the fourth quarter and possibly double that amount. So the balance would be production.

Dan Mannes – Avondale Partners

Yeah, less the potential 100,000 draw down in inventory?

Joe Leonard

Right.

Dan Mannes – Avondale Partners

Got it. Okay. And then just on that note, and as it relates to pricing in Q4, if you guys can just give a little bit of color given the benchmark was 209 and you were at or above that level plus the carryover, is it the purchase goal that’s sort of dragging down the potential realized price, or is there anything else going on?

Joe Leonard

That’s essentially it. You’ve got a lower – lower price on the branded product.

Dan Mannes – Avondale Partners

Got it. And then one last thing. Just on the surface whole business and actually to a less extent on coke, can you walk us through your current contracts there? I mean, are these pretty much locked in through the end of this year and are they fully open for next year?

Joe Leonard

The surface mine contracts are locked up completely. All the product is locked up for 2011, half of it’s locked up for 2012. So we’re pretty much locked up in all of our surface production through 2011 and coke has gained price on a quarterly basis as well, so we’re currently beginning negotiations for the first quarter of next year.

Dan Mannes – Avondale Partners

Got it. And also, you said locked up ’11, ’12 at current pricing or better?

Joe Leonard

Better pricing for ’11.

Dan Mannes – Avondale Partners

Got it. Thank you.

Operator

(Operator Instructions) Mark Levin of BB&T Capital Markets, your line is open.

Mark Levin – BB&T Capital Markets

Most of my question have been asked and answered, but I do want to follow up on point on the macro. This week we got sort of disappointing demand forecasts out of [inaudible] and then also U.S. I’m just curious, you know, how you guys perceive the microenvironment from a demand perspective and how that makes you feel with regards to pricing into 2011?

Joe Leonard

From a coking coal standpoint?

Mark Levin – BB&T Capital Markets

Coking coal perspective.

Joe Leonard

Yeah, globally we see – we see a firmness in the market. You know, we’ve got folks that are cautious but we do not see weakness in the market.

Mark Levin – BB&T Capital Markets

Okay. Fair enough. Thank you very much.

Operator

There are no further questions.

Joe Leonard

Okay, thank you very much, Operator. And thanks everybody for attending today. We appreciate your interest in the company. We got a number of things working in our favor, which we are ramping up production for next year as well as indicated, we’ve gotten through the gas and the Number 4 mind that slowed us down considerably in the first part of the third quarter. We’re making progress with our CEO and we’re making progress with the headquarter move to Birmingham.

So with our current operations performing well and a pipeline of longer-term growth, we continue to create value for the shareholders for 2011 and beyond. So with that, I’ll thank everybody. We are very optimistic about the company. We had a very, very good third quarter and looking forward to an exciting fourth quarter in 2011.

With that, the meeting is adjourned.

Operator

That concludes today’s conference call. All lines may disconnect. Once again, that concludes today’s conference call. All lines may disconnect.

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Source: Walter Energy Management Discusses Q3 2010 Results - Earnings Call Transcript
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