Cloud Peak Energy's (CLD) CEO Colin Marshall on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Cloud Peak (CLD)

Cloud Peak Energy, Inc. (NYSE:CLD)

Q2 2014 Earnings Conference Call

July 29, 2014, 5:00 PM ET

Executives

Karla Kimrey - VP, IR

Colin Marshall - President & CEO

Michael Barrett - CFO

Gary Rivenes - COO

Analysts

Brandon Blossman - Tudor, Pickering, Holt & Co.

Caleb Dorfman - Simmons & Company

Evan Kurtz - Morgan Stanley

John Bridges - JPMorgan

Neil Mehta - Goldman Sachs

Kuni Chen - UBS

Mitesh Thakkar - FBR Capital Markets

Lucas Pipes - Brean Capital

Brian Finkelstein - Key Group

Paul Forward - Stifel

Operator

Ladies and gentlemen, and good afternoon, and thank you for joining the Second Quarter 2014 Cloud Peak Energy Earnings Call. My name is Ryan, I’ll be the operator on the event. And at this time, all participants are in listen-only mode. We will be opening the lines to facilitate questions and answers. (Operator Instructions) And as a reminder, we are recording the event for replay.

And now, I will pass the call over to your host, Ms. Karla Kimrey.

Karla Kimrey

Thank you, Ryan. Good afternoon and thank you for joining us. With me today is Colin Marshall, Cloud Peak Energy's President and CEO; Michael Barrett, CFO; and Gary Rivenes, COO.

Today's presentation may contain forward-looking statements regarding our outlook for our company and industry, financial and operational guidance, volumes, prices and demand, transportation availability and performance, growth strategies, capital resources and other statements that are not historical facts. Actual results may differ materially because of various risks and uncertainties, including those described in the cautionary statement in today's earnings release and in our 2013 Form 10-K.

Today's presentation also includes non-GAAP financial measures. Please refer to today's earnings release for the reconciliations and related disclosures. Our earnings release is available on the Investor Relations section of our website at cloudpeakenergy.com.

Now, I’ll turn the call over to Colin Marshall.

Colin Marshall

Thank you, Karla. Good afternoon and thank you for joining our Q2 results call. I’ll make some opening remarks before handing over to Michael Barrett, our CFO, to cover the financials. Once again, we are joined by Gary Rivenes, our Chief Operating Officer.

I’m sorry to have to let you know that last month a haul truck operator at our Spring Creek Mine died in a single truck incident. Our thoughts go out to his family and friends, work colleagues and work colleagues who are pulling together to support each other through this very difficult time. We are working with MSHA to ensure that they have all the information they need to complete their investigation of this very unfortunate incident.

There was one other reportable injury during the quarter, which left us with an All Injury Frequency Rate of 0.77 so far this year. During 32 days of MSHA inspections across our three mines, we were issued four S&S citations.

I’m pleased to be able to report that the Cordero Rojo Mine was awarded a Wyoming Governor's Summit Safety Award and the Spring Creek safety performance in 2013 was recognized by the Rocky Mountain Coal Mining Institute Safety Award.

Turning to our second quarter operating performance. Shipments from our three owned and operated mines of 20.6 million tons were once again reduced by ongoing rail delays. I would like to take this opportunity to thank all our employees for their focus on reducing costs and improving efficiency that allowed our per ton cost to reduce this quarter.

Our mines ended the quarter in good shape with healthy inventories and advanced pre-stripping that will allow us to increase shipments as rail performance hopefully improves through the rest of the year.

During the quarter, international prices continued to decline due to new supply from Indonesia and Australia. Demand continues to be strong as our Asian customers are keen to increase U.S. coal import to diversify their supply options. Even at low current pricing, our Logistics business continues to operate with small margins, thanks to our hedging program. These earnings are in addition to our mine site margins.

In June, we began our conformational drilling program on the Crow Reservation. The data collected will be used to develop detailed mine plans, which will allow us to optimize our mine development as additional terminal capacity becomes available. We are reviewing the possible implication with the EPA’s proposed Clean Power Plan.

While the complexity with the many different requirements of the plan and assumptions made in justifying it make it difficult to interpret, it is clear that it will take a long time to implement and is likely to be delayed due to litigation. Overall, this is another factor in the broadening regulatory approach to reducing CO2 emissions, which appears to be heading in a direction that will have significant detrimental impact to the economy and potential greater liability with minimal reductions in US CO emissions.

As such, it appears to be driven more by politics and emotions than science and economics. In contrast, it is encouraging reading that Japan is increasing its investment in new high-efficiency coal power plants as a realistic way to reduce CO2 emissions and provide badly needed low-cost power for themselves and developing nations.

With that, I’ll hand over to Michael before I turn to cover the current outlook.

Michael Barrett

Thank you, Colin. Given that our shipments were restricted to 20.6 million tons for the quarter, we were pleased with the resulting adjusted EBITDA of $45 million. This is a 21% increase over $37 million in the second quarter of last year. This brought adjusted EBITDA for the first half of the year to $84.6 million, very close to the $85.5 million achieved last year.

The strong financial performance in the second quarter was largely driven by our continuing focus on controlling all variable costs. Unit costs for the quarter were reduced by 3% to $10.48 per ton, compared to the $10.81 last year. This was primarily the result of our continuing asset management programs, which enabled us to ensure the integrity of our equipment at optimal cost.

With the lower-than-planned shipments, we were able to assess the health of equipment and extend equipment and component lives, thereby reducing maintenance costs. We were also able to complete more work with our in-house rebuild shop rather than using external contractors. At the same time, we focused on managing the right levels of staffing throughout the business, working hard with all of our suppliers to reduce costs and focusing on continued reductions in SG&A costs.

In addition, even though volumes were lower than expected, they were slightly ahead of the second quarter of last year. And as you can see from the shipment numbers in the earnings release, the proportion of Antelope tons was slightly higher than last year. This helped us achieve a higher average realized price in the quarter of $13.08 per ton, compared to $13.05 last year. As a result, the owned and operated segment generated margins of $2.60 per ton in the second quarter, a 16% improvement compared to $2.25 last year.

For our Logistics segment, we delivered 1.2 million tons in the quarter, compared to 1.4 million tons last year. Rail service continued to interrupt some of the deliveries that we had planned. Low international coal prices also reduced export revenues.

Physical sales revenue was $55 million and we realized gains on hedges of $7 million for a total of $62 million, compared to $70 million last year. Fewer tons resulted in lower total costs this quarter, which gave adjusted EBITDA for Logistics of $2.7 million, compared to $2.8 million last year.

For the six months, Logistics’ adjusted EBITDA was $3.1 million, compared to $4.1 million last year. We continue to expect to export between 4 million and 4.5 million tons this year to our Asian customers and we’ve been successful in working with the BNSF Railway, Westshore and our customers to reschedule ships to reduce demurrage costs incurred when ships wait to be loaded.

At continued low New Castle prices, we have not layered in any additional hedging for 2014 or further out years and our existing hedge book remains significantly positive. At the end of the quarter, the mark-to-market value of our open hedge position for the remainder of 2014 was almost $15 million. For 2015, the value of the hedges is almost $11 million.

Even at current low New Castle prices, we expect our export business to remain economic when we include the margin at the mine site.

A couple of other points on the income statement, you’ll notice that our SG&A costs for the six months are 5.7% or $1.5 million lower than 2013. This reflects the SG&A cost reviews that we initiated last year as we continue to scrutinize all aspects of our costs.

During the quarter, we received approval from the Wyoming Department of Environmental Quality to release and self-bond $200 million of reclamation surety bonds. The approval is a reflection of our balance sheet strength and we hope to save around $2 million per year in future surety premium costs.

And finally, interest expense has returned to its normalized level on an ongoing quarterly basis following the refinancing transactions that we completed in the first quarter.

Turning now to our balance sheet and cash flow, in the second quarter we generated cash flow from operations of $23 million. We continue to focus closely on ensuring that we spend the right amounts on capital based on the condition of our equipment. In the quarter, we spent $2.6 million in capital expenditures, almost entirely associated with ensuring the ongoing integrity of our existing equipment. We also continued to benefit from the plans to cascade equipment from Cordero Rojo to the other mine sites.

For the six months, the operations generated cash flow of almost $50 million, excluding the $14 million one-time refinancing costs paid in the first quarter, and we spent $8 million on capital expenditures, which means that the operations were significantly cash flow positive.

We finished the quarter with cash on hand of $225 million and available liquidity of $757 million. As a reminder, the second half of the year will include the fourth West Antelope LBA payment of $69 million with the fifth and final payment in 2015.

Our balance sheet remains strong with net debt of just $285 million. Our trailing 12-month adjusted EBITDA is $227 million, which gives us a net debt to EBITDA leverage ratio of 1.26 times, gross debt leverage of 2.2 times, and normalized interest coverage of 5.7 times. Overall, this leaves us well positioned to withstand the current market and gives us the financial flexibility to consider opportunities should they arise.

We are continuing to progress the reduction of tonnage at Cordero Rojo from the start of next year to better meet market demand for 8,400-Btu coal. As we have explained, this is driven primarily by the capital expenditures that would otherwise be needed to maintain production rates. As such, reducing our production by 10 million tons will lower revenue and overall EBITDA in 2015, compared to 2014.

We will seek to reduce costs as much as possible as we reduce tonnage, but some fixed costs will remain. Nonetheless, the economics of the overall decision remain compelling.

I’ll now touch on updates to our 2014 guidance. With the rail interruptions, we are reducing our tonnage range by 1 million tons to a new range of 85 million to 89 million tons. Based on our strong cost performance, we are maintaining our guidance for adjusted EBITDA. We continue to expect adjusted EBITDA for the full year of $180 million to $210 million.

With our success in asset management, we are confident that we can reduce our capital expenditure midpoint by $15 million or 30% to a new range of $30 million to $40 million.

In summary, the operations continued to generate positive cash flows. We are controlling costs and capital expenditures tightly and our balance sheet is in good shape to give us financial security and flexibility.

With that, I’ll hand back to Colin.

Colin Marshall

Thanks, Mike. Now, turning to the markets. The most significant factors impacting PRB coal markets have been the slow start to the summer cooling season and reduced shipments. After the cold winter, we were hoping for a normal or hot summer, but that has not happened yet. As a result, we have recently seen reduced demand for electricity and the ability for utilities to conserve coal.

Low electricity demand has also allowed natural gas injection levels to be high enough to start to replenish depleted storage levels. With this, we have seen natural gas drop below $4 and a recent drop in near-term coal prices.

We are effectively sold out for this year and will be concentrating on fulfilling existing 2014 contracts. As normal, our approach to bidding on our space in future years will be based on ensuring we have sufficient sales to run our mines efficiently by layering in sales through the year.

During the second quarter, we fixed prices on around 3 million tons of indexed contracts for 2014 delivery at $11.93 per ton. The pricing was based on OTC prices and the quality mix. This takes our 2014 fixed price position to 87 million tons at an average of $13.05 per ton and leaves us with 89 million tons contracted for the year.

For 2015, we now have 61 million tons contracted, of which 48 million tons are under fixed price agreements with weighted average price of $13.22. The average price for the 10 million tons of coal contracted during the quarter was around $12 per ton. This reflects the mix of different coal qualities, prevailing OTC prices, and a competitive marketplace.

We will be targeting total production around 80 million tons next year as we reduce production at Cordero Rojo and move the dragline to Antelope where we needed to overcome increased strip ratios. As we have previously mentioned, we are not planning to increase production at Antelope significantly when the dragline is commissioned in 2016.

International thermal coal outlook continues to be characterized by growing Asian demand that is currently being overcome by increased supply, particularly from Indonesia and Australia as suppliers try to drive down the unit costs by increasing production in the face of low prices and large take-or-pay commitments.

This oversupply is continuing to put pressure on pricing leading to current New Castle pricing around $70 per metric ton. All our analysis indicates that Asian demand will continue to grow strongly. We are continuing to develop our supplier relationships with utilities in Japan, Taiwan and South Korea who are building new highly efficient coal-fired power stations in the face of growing electricity demand and we want to diversify their energy supplies.

While we think it will take until at least 2015 for international prices to move significantly, we continue to be confident that demand growth will overcome excess supply, allowing prices to return to more sustainable levels.

To sum up, once again we were impacted by low shipments during the quarter. Our financial performance was greatly helped by our ability to manage costs through good maintenance and operating performance. The mines are now well placed with stripping and inventory to reduce our cost per ton as shipments increase.

Our reduced shipment guidance reflects our experience so far with the rail performance, but does anticipate improved performance through the rest of the year. We feel comfortable not moving our adjusted EBITDA guidance range even with lower shipments due to good cost performance so far this year. As you would expect, rail performance represented the greatest risk to our full-year guidance.

With that, Mike, Gary, and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes through from Brandon Blossman with Tudor, Pickering, Holt & Co.

Brandon Blossman - Tudor, Pickering, Holt & Co.

I guess the big one, CapEx cuts, that’s a big change. Can you - any color around what the drivers of that change are? And then, of course the follow-up there is how sustainable is that in ’15 and ’16 and beyond?

Gary Rivenes

Yeah, Brandon, this is Gary. It’s pretty sustainable. We really are just pushing out our equipment lives through our assets and predictive maintenance programs have allowed us to extend the life of not only equipment, but components in the major repair area. The draglines and shovels being a key focus to make sure that we’re keeping those reliable and ready, so we need them when the market picks up. So we’re taking pretty good care of that stuff.

As far as the longer-term forecast, pretty similar, we do have some capital to spend in addition in 2015 with the relocation of the dragline but -- so that will be the one major hitter for next year.

Brandon Blossman - Tudor, Pickering, Holt & Co.

And then, a little bit of detailed question, but on the international tons, several moving parts quarter-over-quarter, looks like hedged revenues were actually up and cost of products sold down slightly, what are the pieces there?

Michael Barrett

Brandon, this is Mike. The overall revenue was down slightly with the lower international prices and slightly lower tons. When you include the hedging benefits that came through, we obviously realized some good hedging benefits in the quarter, and then when you look to the cost of products sold, because we’ve shipped fewer tons, we had lower total costs. So, overall that came through to the results that we had with $2.7 million of adjusted EBITDA for the quarter.

Operator

Next question comes from Caleb Dorfman with Simmons & Company.

Caleb Dorfman - Simmons & Company

Do you have any more insights that you could possibly provide on how we should think about the post-2014 cost structure with the reduced production levels at Cordero? I know that you said on the last call that the headcount isn’t going to be reducing, but are there any other fixed things that you are going to be cutting out like explosives or lubricants [indiscernible] maybe quantify at this point in time now that the plan has advanced a little further?

Colin Marshall

Caleb, there is obviously a number of moving parts in our costs for 2015 and as there is a number of moving parts in the cost for 2014 as well. We’re certainly seeing some benefit in 2014 from some of the reduced repairs and maintenance and outside contractor costs. We believe that a lot of that will be sustainable and those are the types of costs that we’ll continue to focus on and make the absolute best use of our in-house rebuild shop as we continue to go forward.

As we look into 2015, there will be conflicting pressures as we reduce the tons at Cordero Rojo that will obviously mean that we’re spreading some fixed costs over fewer tons, which will have the impact of pushing tons up - sorry of pushing costs up. At the same, we’ll be very focused on maintaining all of the cost reductions that we can through the business and we’ll be looking at the normal increases that we would expect as the mines do get further away and the strip ratio increases on a natural basis.

So, overall, there will be pressures in both directions. I think the best guidance that we can give at the moment is that we would expect to see the kind of an average normal increase due to the normal inflationary pressures, the normal stripping and the normal haul distance pressures.

Caleb Dorfman - Simmons & Company

And then, I just go into the PRB contracting side, a lot of your peers have been contracting a lot of things so far. How are you thinking about it as a lot of your peers get very highly contracted earlier in the year, do you want to wait more towards Q4 to get fully contracted entering 2015?

Gary Rivenes

I think, Caleb, we’ve always said we’ll contract through the year to try and make sure we get to a level where we’re comfortable we can run the mines efficiently, but equally when we think prices are low, we’re reluctant to contract more than the sort of minimum level that will give us that comfort that we can run the mines properly.

So I think we’ve contracted a few tons obviously through this year for next year which gives us a sight of line of where we need to be to be fully contracted out, and I think given the relative positions between Cordero which will obviously be down below 30 million tons and Antelope which we’re very confident we can sell the 8,800 coal, I think we’re in a comfortable position, but we are very conscious that it’s competitive market and we need to balance - we’d prefer prices to be higher, it would be easier to contract more tons then.

So we’re keen not to just grab everything of what may be the bottom of the market, but obviously we’re conscious that they can go up or down. So I think we’ve carried on layering in sales and I think as far as I can tell from our analysis, we’re getting similar prices to everyone else which we should do, because it’s a very competitive marketplace.

Caleb Dorfman - Simmons & Company

Do you see a catalyst in the near term besides the improved rail service driving the prices higher?

Gary Rivenes

If it’s not too late for the summer to warm up that would be good.

Operator

Next question comes from Evan Kurtz with Morgan Stanley.

Evan Kurtz - Morgan Stanley

Question on -- kind of related to the last one a little bit, but we keep - we’ve been hearing about how the rail issues have been impacting PRB pricing and I was wondering if you can just elaborate a little bit on the interplay between rail service and pricing, how that impacts 2014 sales versus 2015 sales, I assume that most utilities are taking the attitude that maybe they can actually get the coals they ordered next year and I was just curious you can elaborate a little bit on how those two are working together.

Colin Marshall

I think the way I would look at it is that I think clearly utilities is the focus at the moment on getting delivery of their tons they previously contracted over – they have in many years before 2014. So that’s their initial focus. So, for many of them there is not too much reason to contract lots of coal in for immediate delivery even though obviously some coal is being contracted. We’re sold out, so we’re not entering into that.

But what I think we are seeing is at the moment there is, because shipments are down, there is still coal available for delivery in here and because there aren’t too many people focused on buying it, because they’re just trying to get their coal they already contracted. That’s leaving to short-term abundance of coal which obviously puts pressure down on prices.

I think for next year, everyone’s expectation is certainly by ’15 that the rail issues will be resolved and therefore people are actually just trying to balance how much coal they will have and what they need for next year. Clearly, coal that isn’t being burned this year that could be in inventory or delivered next year means that maybe some suppliers are looking to contract less coal than they would have if they had been able to get all of this year’s delivery.

So I think that then puts some downward pressure on out years and certainly we always see that when the front of the curve goes down, it tends to put downward pressure on out years to some extent.

Evan Kurtz - Morgan Stanley

And then, just one other -- a more detailed question just on modeling the hedges for next year, just to be clear when you say that economic to ship even at current New Castle prices next year, are you assuming that roughly that just means that $2.5 or so of profit that you would normally make, selling your coal would offset a loss of similar magnitude at the export business?

Michael Barrett

Roughly, yes, that’s round about right.

Colin Marshall

There could be some impact on the mine margin, but we have to wait and see.

Evan Kurtz - Morgan Stanley

And then also the $11 million in hedges that you have for 2015, is that spread evenly through the year or is that front-end weighted?

Michael Barrett

Well, that’s spread evenly through the year.

Operator

Next we have John Bridges of JPMorgan.

John Bridges - JPMorgan

Just when did -- you are putting another dragline on Antelope, I presume that’s going to give you a step up in cost at that operation?

Colin Marshall

At Antelope, we are facing increased strip ratios. So the way the decision makings work is based upon - if we didn’t have the dragline to move down there, which is the lowest cost way of moving overburden, we’d have to put a truck shovel fleet in there, and spent all the additional capital to put in this truck shovel fleet.

So, yes, there is increasing strip ratios, but by being able to move the dragline, the cost of moving the dragline is lot less than buying truck shovel fleets, so we’ll be able to move that with the lowest capital and the lowest operating cost as we go forward. But, yes, as we always refer to in the Powder River Basin, the expectation should always be that every year as strip ratios rise [as the things] [ph] dip away to the West.

John Bridges - JPMorgan

Would it be a perceptible step up or would it be more gradual than that?

Colin Marshall

I think it will be sort of lost in the washes, the normal 5% to 8% we normally point to on the underlying costs excluding the fuel costs.

Michael Barrett

It won’t hit the dirt until middle of 2016.

John Bridges - JPMorgan

And then, a bigger question really, if a company like yours didn’t have fluff in the cost structure is finding the savings and the other companies are also reporting lot of savings now, what does that mean for the economics of the business going forward? How are you thinking about that?

Colin Marshall

I think we got to be very careful when we look at cost savings to make sure they are actually sustainable and we’re not actually sort of building up costs for ourselves in the future. We want to step up production. So certainly when we look at cost savings and the improvements and the increasing equipment lives, we are not looking at putting off maintenance, we are looking at actually extending the lives of equipment, so that we can actually make sure that everything is in good shape because rather like neglecting repairs on something like your house, if you do that for few years, the cost of getting things right again is very high. Mines are exactly the same, so we’re very conscious that we need to make sure we’re keeping things in good shape and actually making savings that are sustainable, that’s our focus.

As we build those in, that’s one of that factors that lets - our costs go up each year because of the increased workload, inflation and increased haul distances. That sort of work is a thing that actually lets us try and minimize the cost increases even though we always point out, but I’m afraid the extra workload inflation outweighs them just because of the way the numbers work I guess.

Gary Rivenes

We have a pretty active business improvement team and looking for ideas out there to improve the business that’s pretty ongoing activity, and then there is also technology increases that can help us into the future. So, pretty active area right there.

John Bridges - JPMorgan

How far along do you think you are, there is a piece in the journal this morning about how one of the mine, I think it was Goonyella in Australia, was going to set up sort of Formula 1 gas stations along the roof, so the trucks didn’t have to stop more than a few seconds. How many more savings do you think there are, how much more - in what innings of the game do you think you are with this sort of face of cost restructure?

Colin Marshall

I mean there is lots of areas to be scrutinized, I’m not able to put that quick of a value on it, but we’re out there efficient for ideas all the time to help the business move forward.

Gary Rivenes

I think the answer in my experience in mining is you never run out of places where you can improve either through technology, smart ideas, things changing. So it’s not like you’ll suddenly get to the end, but equally there is also other pressures increasing the workload and the costs associated with that.

So don’t worry about running out of improvements, we won’t, but I think this is sort of swimming against the tide of inflation and cost, so you have to run as hard as you can just to not go backwards too quickly and that’s been the experience in the Powder River Basin in my sort of 15 years of being involved in it.

Operator

Next we have Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs

So we’re getting close to the point, at least we get a line of sight to these LBAs rolling off, Cloud Peak is going to be generating free cash flow, how do you guys think about whether it makes sense for Cloud Peak to be a dividend payer or whether you guys would consider introducing a share buyback program, can you just talk about your capital allocation framework?

Colin Marshall

I think, Neil, I like the prices to go up and obviously with the LBAs dropping off, it would be great, that was something we are actively discussing with our Board and we’ll look forward to that today. When we do, we’ll make a call based upon how things looked, but at the moment the main thing is to make sure we got a strong balance sheet and we’re in a good position to thrive when markets pick up and the LBAs drop off so that we’re in a - we’ll be able to discuss those decisions.

Neil Mehta - Goldman Sachs

And then on rail here, can you talk about what you’ve seen in July specifically in terms of rail performance and any line of sight you might have here into August?

Colin Marshall

Well, I think what we’ve seen has just been pretty - we saw in June that there was issues with some extra -- sort of exceptional weather I guess that did seem to hit a few critical rail junctions, which impacted performance. I think it’s picked up slightly in July, but I would have to say not as much as maybe I was hoping. So it’s improved slightly, but it’s still at a level that we’re hoping for further improvements from both carriers we use.

Operator

Next is Kuni Chen with UBS.

Kuni Chen - UBS

I guess just piggybacking up the last question on how you will look to deploy capital going forward, can you just talk - just refresh us a bit on your view on M&A and in particular, talk about how you feel about mining opportunities and if you would see that potentially fitting into the portfolio at some point?

Colin Marshall

Specifically, we’ve still got the same sort of view on our M&A and projects, the business. The deal that we did to buy the Youngs Creek resource and then the options over the Crow call were very much focused on making sure we’ve got a [indiscernible] bottom of the market hopefully to be able to build a position where we can develop terminals for the export market where we see strong growth.

So we’re very focused. We still see that the export markets as a big opportunity for us in the medium and long term. So we’ve positioned ourselves for that. We’re obviously going to carry on looking for other opportunities, but one of the things that we always see, as a business, low liabilities, we’ve got a clean - strong balance sheet, we want to make sure that anything we look at actually adds to the value of the business, and we don’t just go and do deals just for the fun of it. And I think we’re very focused on ensuring that it is a fit and also something that would fit with our operating skills and our operating style. So those are the main things we look at.

In terms of opportunities, we also say we’ll pretty well look at anything just to make sure we understand what we’re saying no to, so there would be no change from us then. We do have a, what I believe is a good portfolio of things we can do particularly around Spring Creek where the focus is and that’s what we’re focused on doing internally and I’d say we will look at those things but those got to be a good fit.

Kuni Chen - UBS

I guess maybe just trying to dig in a little bit more on some of these mining opportunities, obviously it’s a different pricing dynamic, kind of a long-term situation there versus more of a market based pricing, does that - is that something that you would be open to down the road?

Colin Marshall

Well, we would look at something and if we could - there was value to be captured for our shareholders then we would be interested and that’s our criteria. But certainly we’re happy to operate any mines and look at things where we believe we can actually capture some value for our shareholders and not overpay or get into something with risks or liabilities that we either don’t understand or not comfortable with.

Operator

Next question comes from Mitesh Thakkar with FBR Capital Markets.

Mitesh Thakkar - FBR Capital Markets

Just a quick question on the Cordero Rojo Mine, you have tonnage falling off next year and also the spread right now is wide enough, can you walk me through, does it make sense to lock-in contracts on 8,400 right now or won’t you rather wait for a little bit of time when that tonnage roll off hits the market?

Colin Marshall

Well, I think the 8,400 market, Mitesh, clearly comes under pressure when supply is largest. It’s one of the reasons why we’ve seen the weaker pricing for 8,400 over the last couple of years and there is quite a decent spread at the moment, so I don’t think - I think the market has already taken into account those tones coming off and I would look at it and say well, I’m glad we’re not trying to sell those tons into next year because I think at the moment prices aren’t that attractive.

So it reinforces why we made the decision and we think that being able to deploy those assets to the draglines, some other assets around the business will give us the best return. It was definitely a decision which is based upon avoiding having to put a fair bit of capital about at least $200 million into LBAs and equipment to maintain production that we felt would have been into a market that was weak. So we took that opportunity, but I do think the pricing going forward already is taking into account any production reductions in Cordero Rojo.

Mitesh Thakkar - FBR Capital Markets

And do you think at these prices, Cordero Rojo when you are locking in tonnage, you covered the maintenance expense and the cash operating expense?

Colin Marshall

Yeah, it’s not great, but yes we are certainly making a positive EBITDA contribution at Cordero Rojo and it’s not a fantastic margin, but it’s still a profitable mine that’s very well run and can operate efficiently.

Gary Rivenes

And we are able to take the northern part of that mine, it’s a little bit higher cost, so it does have some advantages of moving out of the Cordero.

Mitesh Thakkar - FBR Capital Markets

And just follow up on the reclamation bond, can you talk us through how should we think about cash or dividend from that and would it be more of a third quarter scenario or how should we think about it?

Michael Barrett

Certainly, Mitesh, it’s Mike here. The $200 million worth of reclamation bonds those are surety bonds that we had in place with a variety of different surety bond companies, so it’s not actually a release of cash, it’s simply a release of those surety bonds.

Mitesh Thakkar - FBR Capital Markets

Don’t you have any security already against it?

Michael Barrett

No, we didn’t. We were down to zero collateral. It does not free up any cash or collateral. The only benefit for us is the reduction in the surety premium costs.

Operator

Next question is from Lucas Pipes with Brean Capital.

Lucas Pipes - Brean Capital

My first question is on your newly contracted 2015 volumes. If I saw that correctly, it’s about 10 million tons. Can you maybe share with us kind of the rough breakdown between 8,400 and 8,800 and what time during the quarter you were pricing those?

Gary Rivenes

Well, I’m not going to go into the details what time during the quarter we were pricing them, because I’m sure I don’t know. I think we probably through the quarter, but the real factor - what we’re actually going at was what price do we get for each one. I’m pretty comfortable that looking at the average OCC prices for the quarter, we were a few cents below because of the timing I think, but not much at all and I think the split was there is quite a lot of Cordero Rojo in there, Cordero Rojo tons. So we didn’t sort of miss out I think particularly but the major drivers are the difference in the qualities and the prices that go with those qualities from the three mines.

Lucas Pipes - Brean Capital

And then, secondly on the export side obviously international prices stuck at pretty low levels, kind of how are you thinking about this part of your business longer term especially heading into 2015 when some of the other [indiscernible] roll off?

Colin Marshall

I think as we look forward to the business, we are very positive about the export business and I was just in South Korea last month and looking at - they are increasing their power plants, I was at one power plant, 4-gigawatt plant, where they are actually adding - they are just finishing the construction at two more - two new units, 1-gigawatt each, so they are going to add 50% to that power plant.

They are doing that at six plants around the country that provide most of their coal power. So the imports from those mines alone, consumption from those plants alone will go from 80 million tons to 120 million tons, 50% increase and their - those plants aren’t speculative, they are actually being completed so the two units I was looking at one is coming on production at the end of ’15 and the other one six months later.

So if you look at that and all the other information you get from Japan, Taiwan, obviously India trying to increase its power supply and also from China, the underlying growth in that coal power generation is still there, so I’m very positive about the international market and believe that pricing will have to come up. I think this [$70] [ph] per metric New Castle is sort of unsustainable level and that does appear to be borne out by quite a lot of closures at different plants, but there is this underlying production surge that was set off by price increases and investments few years ago that we’re still working through.

I think we can’t expect prices to go up massively, it was -- met coal still $120, but I still think there is plenty of room for it to go from the current level of supply - sorry demand overcome supply and we feel very positive about that, but in the mean time we need to manage our operations and our cost to make sure we minimize any exposure to that, but I believe it’s a smart thing to do given the upside potential because I think it’s only a couple of years ago we made $50 million EBITDA from the Logistics business on sort of 4 million tons. So there is great potential.

It’s proven that when prices go up we’ve got some there we can capture, some additional margin, but we always knew it was going to be - prices are going to swing up and down and the main thing there is we view the hedges in place to manage the exposure through this cycle, but clearly they can only last so long. So we’re optimistic that prices go up, but we’re also realistic if they don’t we got to manage to that.

Lucas Pipes - Brean Capital

If I maybe can squeeze in one last question, it kind of goes along the line of one of the questions asked earlier that once your LBA payments roll off, you’ll switch into a cash flow positive mode and have you put any thought into the potential that another kind of corporate structure could make sense in that context?

Colin Marshall

I think obviously we’ll always look at what’s appropriate for us, but I think the -- I’ll be happy when that’s the number one consideration we’ve gotten, we’ll need to make sure -- maintain our balance sheet and wait for prices to go up as hopefully they will before too long. So that would be a nice problem to have and we look forward to it.

Operator

Next question comes from Brian Finkelstein with Key Group.

Brian Finkelstein - Key Group

Just had a question on the tons in 2015, can you provide any color of what type of mix that is?

Colin Marshall

As we normally say this time of the year, the percentage sold Antelope from Cordero Rojo are lower, I won’t give you exact numbers, but percentage at Antelope and Cordero Rojo to be sold are lower than the Spring Creek as we settle over the prices for the international coal at Spring Creek closer to the point of delivery. So we’re in - so that’s just the way it normally is and we’ll - we’ve got a few tons to sell but we’re certainly in sight of where we need to be.

Brian Finkelstein - Key Group

And just have a question just about the Logistics business, you guys I just want to make sure I’m understanding, so you guys book the derivative gain which was about $7.5 million, and I’m just trying to make sure so that underlying business it’s about $4 million to $5 million loss and then you guys will benefit from the hedge gains through the year, is that correct?

Michael Barrett

That’s correct. When you look at just the Logistics segment, yes, Brian.

Brian Finkelstein - Key Group

I understand the New Castle price has been somewhat of an overhang, but are there any other things that you guys can do on the cost side to help anytime when New Castle price is weak to help offset that?

Michael Barrett

We’re obviously discussing with all of the suppliers that help us get the coal delivered as to whether there are opportunities to work with any of them. So that’s a commercial discussion that goes on, one we would have at any part of the business.

Colin Marshall

As we mentioned in our script, the work we - in the first quarter, we did incur some extra demurrage because of delays in getting coal to the port and we’ve -- as we’ve worked with the railroad and the customers and the terminal, we’ve reduced that in the same quarter, we want to make sure we reduce that later in the year by actually making sure we match the amount of coal that we can get to the port and the ships arriving so we can load them promptly. So we can do things like that.

And what we really need is just a steady flow so that we can get everything lined up which is what we previously had and unfortunately we’ve suffered a little bit in the last 10 months or so. So I think we can focus on things like that, and obviously we talk to the customers and - anyone we can to see that opportunities reduce our costs, but demurrage is an obvious one.

Operator

Our last question comes through from Paul Forward with Stifel.

Paul Forward - Stifel

Colin, I wanted to ask about, just following up on your trip to South Korea, when you visit customers over there, obviously they are expanding their coal import needs, they want to diversify their supply, how concerned are those customers about the terminal bottleneck in the U.S., the Pacific Northwest and what’s your latest thinking, how do you respond to their concerns about that bottleneck and what’s your latest thinking on the potential timing of the expansion projects there?

Colin Marshall

Certainly, when we’re talking to the customers in South Korea and Japan and Taiwan, one of the thing we made very clear to them is that if they are expecting the terminals to be built, that they need to play a part in we’d say pulling and using and making sure that when they talk to counterparts or with their embassies or their government or whatever that they are making sure that when they talk to American government that they understand that their allies in Asia are in need and they are expecting them to supply this energy to them to diversify their supply.

So, we certainly make them aware that there is no guarantee these ports will be built, because there is very strong opposition and that they must they have a role to play in making in trying to ensure that they actually are because they are absolutely expecting the coal to be supplied to them and they sometimes initially they find it difficult to understand why a strong ally of that country has all this abundant coal supply of low sulfur clean coal, wouldn’t be very keen to take their money and take the jobs and the money in America to supply them with something that they need and would improve their economies and make sure they are most secure.

So some of them actually - we need to explain that they do have a role to play, but once they get that and we understand that they are making appropriate contacts to make sure that that’s understood at different levels in America.

Paul Forward - Stifel

And I just wanted to ask about the volume guidance for this year at 85 million to 89 million tons, first half was 41 million tons, which if you think about the high end of that range of 89 million tons, then you would need to step up to 48 million ton second half which would be a big increase, 17% increase over the first half of the year, it seems like a lot of things would have to go right in order to hit that, anything really close to that figure, especially when you consider a sluggish start to the third quarter, can you talk about what prospects would be of being in the top half of that guidance range for the full year?

Colin Marshall

I think you’re exactly right, whenever we talk about guidance ranges, one of the first things people ask is how you’re going to get to the top and I think we would need a lot of things to go right to get there, but the important thing about a range is it gives you some feel for where we might end up.

After the sluggish July, who knows where we need to get the - you need things to go very well, but I think in terms of explaining where the business is and where we think the EBITDA range is then, we believe is the right -- obviously the right numbers to come out with. And we do expect, as I said in the script, that we are planning on having seen an increase in the rev performance and also the rev performance represents the largest risk to our business.

The tons are sold, the customers certainly have very low stockpiles would like to take delivery. We have the mines that are in good shape and we are very much like to deliver that coal in the second half and certainly as much as possible. So we’ll have to wait and see, watch the public information on the rail figures and we’re hopeful that the performance increase or the service improvement that the railway have been talking about coming on will be realized before too long and that the normal increase we see in the second half will be large.

Paul Forward - Stifel

Great. Thanks very much, Colin.

Colin Marshall

Okay, I think that’s the last question. I just like to thank you all very much for listening into our call and for your interest in the business. I like to thank all our employees for working so hard and producing this good result in terms of cost for the quarter. We are optimistic that things will improve through the second half, but I think also I’m very encouraged by the performance we’ve managed to produce in the first half in what’s been a period when we shipped less tons than we would have liked. So with that we’ll look forward to talking to you in our Q3 release. Thanks a lot.

Operator

Wonderful. Everyone thank you for your time and your participation and have a great rest of the day.

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