Executives
Roger L. Nicholson – Senior Vice President, Secretary and General Counsel.
Bennett K. Hatfield – President and Chief Executive Officer
Bradley W. Harris, Senior Vice President, Chief Financial Officer and Treasurer
Analysts
Shneur Gershuni – UBS
Brett Levy – Jefferies & Company, Inc.
Jeremy Sussman – Brean Murray, Carret & Co.
Garrett S. Nelson – BB&T Capital Markets
Tom Bishop – BI Research
Jamie Melzer – Bank of America/Merrill Lynch
Jeff Cramer – UBS
Shneur Gershuni – UBS
International Coal Group, Inc. (ICO) Q4 2010 Earnings Call February 3, 2011 11:00 AM ET
Operator
Good day ladies and gentlemen, welcome to the Fourth Quarter 2010 International Coal Group Earnings Conference Call. My name is Katie and I’ll be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions) I would like to now hand the call over to your host for today Mr. Roger Nicholson, Senior Vice President, Secretarial and General Counsel. Mr Nicholson, over to you please.
Roger L. Nicholson
Thank you. Welcome to International Coal Group’s fourth quarter 2010 earnings conference call. I’m Roger Nicholson, Senior Vice President, Secretary and General Counsel of ICG. We released our earnings report yesterday after the market closed.
With me on the call today are Ben Hatfield, President and CEO of International Coal Group, Brad Harris, Senior Vice President, CFO and Treasurer, Mike Hardesty, Senior Vice President, Sales and Marketing and Ross Mazza, Director of Financial Reporting and Investor Relations.
Before we get started, please let me remind you that various remarks we may make on this call concerning future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
These statements are made on the basis of management's views and assumptions regarding future events and business performance as of the time the statements are made. Because these forward-looking statements are subject to various risks and uncertainties, actual results may differ materially from those implied. Factors that could cause actual results to differ materially are contained in our filings from time to time with the Securities and Exchange Commission and are also contained in our press release dated February 2, 2011.
Non-GAAP financial measures will also be discussed. You will find a reconciliation of the differences between the non-GAAP financial measures and the most directly comparable GAAP financial measures at the end of our press release, a copy of which has been posted to our website.
At this time, I'd like to turn the call over to Ben Hatfield for his opening remarks.
Bennett K. Hatfield
Thank you for joining us this morning. Our solid fourth quarter results were achieved amidst a challenging operating environment and despite weather related shipping delays. Although we experienced a modest excalation in cost, expanded metallurgical shipments increased adjusted EBITDA and per ton margins by 19% and 21% respectively compared to fourth quarter of 2009.
An improving world economy is driving increased steel consumption and stocking demand for metallurgical coal. When coupled with the supply constraining impact of flooding in Australia, we expect metallurgical process to remain strong for the foreseeable future. In addition, we anticipate that continuing economic recovery and growing export demand in conjunction with tightening Central Appalachia supply will also result in meaningful thermal price increases.
At this time I’d like to turn the call over to Brad Harris, our Chief Financial Officer.
Bradley W. Harris
Thanks, Ben. We are pleased to report fourth quarter and full year results that closely align with the guidance provided on our third quarter conference call. Although full-year tons produced and sold fell slight short, cost performance was better than expected and EBITDA and realization per ton were within the ranges provided.
For the fourth quarter of 2010, we reported total revenues of $260.4 million including $243.4 million attributable to coal sales of 3.5 million tones. Fourth quarter 2009 revenues totaled $246 million, of which $231.3 million was attributable to coal sales of 3.8 million tones.
Adjusted EBITDA for the fourth quarter of 2010 was $47.8 million which compares favorably to the $40.3 million reported in the same period of 2009.
Net income for the fourth quarter of 2010 was $9.6 million or $0.05 per share on a diluted basis compared to net loss of $11.3 million or $0.07 per share for the same quarter in 2009. Net income for the current quarter included a $0.4 million pre-tax loss on extinguishment of debt related to repurchases of convertible notes. Excluding the loss on debt extinguishment, adjusted net income for the fourth quarter of 2010 would have been $9.8 million or $0.05 per share on diluted basis.
The fourth quarter 2009 financial results included a $13.3 million pretax loss on extinguishment of debt resulted from private exchanges of our 9% convertible notes for shares of the company's common stock. Excluding the loss on extinguishment of debt in the fourth quarter of 2009, net income and diluted earnings per share would have been essentially break-even.
Average coal sales per ton for the fourth quarter was $68.61 compared to $60.29 per ton for the same period in 2009. While cost per ton sold was $53.94 in the fourth quarter versus $48.18 for the same period in 2009.
Margin per ton increased by 21% to $14.67 in the quarter compared to $12.11 per ton in the fourth quarter of 2009, primarily due to higher realized prices for metallurgical coal and the sale of more metallurgical tons. Metallurgical sales increased by 64% to 571,000 tons.
Depreciation, depletion and amortization expense totalled $26.2 million for the fourth quarter compared to $26.8 million for the same quarter last year. Corporate SG&A for the fourth quarter was $10 million compared to $8.1 million for the same period in 2009, primarily due to increased legal costs.
Our effective income tax rate for the quarter of 27% reflects the impact of excess depletion. For the full year, we recognize an intact income tax benefit due to the impact of excess depletion and the loss on extinguishment of debt.
During the fourth quarter 2010, we repurchased $10.3 million of our 9% convertible notes incurring a $0.4 million loss. The repurchase was funded with cash on hand. As of December 31, 2010 we had $215.3 million in cash and $19.6 million in borrowing capacity available under our credit facility.
At year end, debt outstanding was $329.1 million, net of a $33.2 million discount consisting primarily of a $115 million aggregate principal amount of our 4% convertible notes and $200 million aggregate principal amount of 9.125% [ph] senior notes.
Our total assets were $1.5 billion at December 31, 2010 compared to $1.4 billion a year ago. Capital expenditures for the fourth quarter totaled $36.6 million.
At this time, I will turn the call back over to Ben.
Bennett K. Hatfield
Thank you, Brad. Now I’d like to provide an update on key developments in the fourth quarter. Construction at the new Tygart Valley #1 deep mine complex experienced minor weather related delays during the fourth quarter. The major earthwork is now complete with site development expected to wrap up in March 2011
Excavation of the slope commenced in early November and work on the shafts began in December. Initial coal production is projected for late fourth quarter 2011. At full output, currently projected for early 2014, Tygart Valley #1 is expected to boost the company’s annual metallurgical sales to approximately 5.5 million tons.
Vindex Energy’s Dobbin Ridge preparation plant began processing coal in January 2011 after a $7.7 million upgrade. The associated Bismarck deep mine, despite a slower than anticipated start, is expected to contribute approximately 180,000 tons of low-volatile metallurgical coal sales in 2011, and achieve the targeted run-rate of 250,000 annual tons by the fourth quarter of 2011.
As disclosed in our SEC filings and discussed on earlier conference calls, we are in litigation with Allegheny Energy over a contract dispute. Allegheny is seeking over $225 million in damages for failure to timely deliver coal under a lack of mine contract supplied from our Sycamore #2 mine. The trial related to this matter concluded on February 1, but a decision by the Judge is not expected until mid-March.
The company has asserted to force majeure advance and believes that if liable and if there are damages at all, the evidence does not support a significant award. International Coal Group continues to enjoy improved safety performance in 2010. The company's 2010 non-fatal days lost or NFDL accident rate was 2.10 which is a 7% improvement over 2009 and 16% favorable to the weighted national NFDL accident rate. Our mining operations received 21 safety awards in 2010.
I’d like to turn now to our current guidance focusing first on 2011. Our coal production sales are expected to be between 16.1 million and 16.7 million tons including 3.1 million tons to 3.5 million tons in metallurgical coal. The average selling price is projected to be between $73 and $77 per ton with an average cost ranging from $55 to $57 per ton excluding selling, general and administrative expenses.
Committed and price sales for 2011 total approximately 12.9 million tons, or 79% of planned shipments, at an average price of $72.25 per ton. Uncommitted tonnage includes approximately 2.5 million tons of thermal coal and 1.0 million tons of metallurgical coal.
Adjusted EBITDA for 2011is expected to be in the range of $270 million to $310 million, the range of $270 million to $310 million. Capital expenditures for 2011 are expected to be between $225 million and $245 million including approximately $125 million related to development projects at our Tygart Valley #1, Illinois and Vindex operations.
We expect to fund all of our 2011 CapEx with cash flow from operations. We project our 2011 effective tax rate to be approximately 30% Now, shifting to our 2012 guidance, coal production sales are expected to be in the range of 16.5 million tons to 17.5 million tons including 3.3 million tons to 3.7 million tons of metallurgical coal.
The average selling price is projected to be between $80 and $86 per ton. Committed and price sales for 2012 totaled approximately 3.6 million tons or 21% of planned shipments at an average price of $53.75 per ton.
Uncommitted tonnage includes approximately 10.2 million tons of thermal coal and 3.2 million tons of metallurgical coal. The vast majority of the 2012 committed sales consists of lower priced Illinois Basin and Northern Appalachia legacy contracts.
In summary, we see market improvement and pricing for both metallurgical and thermal coals that we expect to continue throughout 2011.
At this time, I will open the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Shneur Gershuni from UBS. Please proceed.
Shneur Gershuni – UBS
Hi, good morning guys.
Bennett K. Hatfield
Hi, Shneur.
Shneur Gershuni – UBS
I guess my first question is just kind of with respect to pricing expectations, I was kind of wondering if you can give us some color on pricing several producers have kind of mentioned that pricing at the mines for highwall coals seems to be very attractive recently? In addition to that, I was wondering if you can sort of share your thoughts on steam exports and some of them were talking about Illinois Basin exports to the UK and so forth. So, I was just wondering if you can sort of give us your color and view on that if you don't mind?
Bennett K. Hatfield
Sure, I’m going to ask Mike Hardesty, our Senior Vice President, Marketing and Sales to address your question.
P. Michael Hardesty
I'll start with the easiest piece first. As far as the Illinois Basin from our perspective for this year we are essentially sold out. So I don't see us participating in that avenue. I know it's going on pretty heavy though by some of our competitors.
With regard to the pricing, we would see other sort of ranking but here starting with our Beckley product, I would rank it in the 200 to 230 range for new sales or our spot sales. FOB mine have dropped back to our Vindex low wall. I would price it somewhere in the $170 to $200 range. Then dropped down to Sentinel, which is our highwall A [ph], I would place it in the 160 to 190. And then our big coals and PCI coals, I would put them in 110 to 130 range.
Shneur Gershuni – UBS
Great, and my second question for you Ben is with respect to your cost performance in the fourth quarter it was quite good especially when you consider the fixed cost absorption aspects with your tons being delivered and so forth. How are you achieving these efficiencies and do you expect them to potentially positively surprise in 2011 as well?
Bennett K. Hatfield
Well I think we had a respectable cost performance in the fourth quarter given the low-volume and you’ve correctly picked up that it’s certainly a challenge when you have low shipment amount for the whole holiday origin [ph] and so forth, but we still had some variances from our expectations particularly our East Kentucky thermal mines had a few localized challenges and as we noted in our press release the thermal mine had some operational disruptions because of unplanned fiction moves, that also negatively impacted cost performance.
So I believe we have the potential to do better than we demonstrated certainly in the fourth quarter and I do believe further that the guidance that we have offered 2011 is pretty conservative, it’s kind of the order of magnitude indicating a possible year-over-year increase on the order of 8%.
We saw significantly less than that obviously from '09 to 2010, but there's a lot of regulatory uncertainty that certainly causes us to be fairly cognizant of that impact to our operations particularly with respect to the underground mining. So I think we’ve been relatively cautious, but I do believe there is substantial upside on cost performance, because we certainly have several bright spots where our performance is exceeding expectations.
Shneur Gershuni – UBS
Great. Thank you very much.
Operator
Your next question comes from the line of Brett Levy from Jefferies & Company
Brett Levy – Jefferies & Company, Inc.
Hey guys. In terms of your open volumes for 2012 is your inclination to fill up either the 10.2 [ph] of thermal or the 3.2 of met anytime soon or is it kind of let that roll closer to 2012 before you start thinking about that?
Bennett K. Hatfield
I'll offer a few comments and see if Mike Hardesty wants to add to my comments. But I think we’re in position now to actively proceed layering in the made commitments. We have active discussions with several customers as we speak. So I think you'll see in the next call significant closing of deals in the frost [ph] ranges that Mike indicated is being achievable in the near-term.
On the thermal side, we are in reasonably good shape in the first quarter. More of our recent deals are generally focused on the first quarter thermal position. So we have a lot, we believe of upside moving later in the year with processing improvements. So there we’re going to be just a little more cautious about where we pull the trigger on thermal commitments, but I believe we’re positioned to be somewhat selective in that regard.
Brett Levy – Jefferies & Company, Inc.
And then with respect to the Allegheny lawsuit, I mean I know it's tough to sort of talk about, it’s tough while it’s still in the mix. I mean the $225 million sounds like a big number and you are fairly sure that it will get resolved for a much more minimal number. Can you give investors a little bit more comfort why we shouldn't take the name plate number on that suite for granted and why you feel like it will even in the worse case scenario will not be a bad number?
Bennett K. Hatfield
Well again, I don't want to add a lot of detail to that because it is a matter of active review
at this point by the judge, but I think it's sufficient to say that the company (inaudible) well we believe is a very strong case, we believe we presented the facts accurately and effectively.
This is clearly a situation it’s far different than most contract disputes where the customer not be alleging that sales were diverted to take advantage of attractive spot processing or something of that nature. That's by far the more typical contract case in the coal business.
In this particular situation, not one ton was taken anywhere else for any inappropriate purpose. So there was no misconduct with respect to diverting tonnage. Every ton that came out of the mine was sold under that contract at the contract price. The primary dispute on the part of Allegheny is they believe we should have given them more tons.
We believe we've done all we can do without putting our people at risk which is something we draw the line on quite frankly if we can don't believe we can safely proceed in a lot of the situations where we have unmapped a 100-year old gas wells and we're simply not don't put our people at risk in that fashion. So the core of the dispute and that's what we feel strongly that we put forward an effective case and expect a favorable outcome.
Brett Levy – Jefferies & Company, Inc.
And then the last one is I know you guys keep a small revolver available. Given the liquidity in the capital markets are more open, why not get a bigger bank line?
Bradley W. Harris
We believe the credit facility we have now is adequate. The facility was primarily use to support the bonding requirements related to reclamation purposes. As Ben mentioned, we expect to be able to fully fund our capital expansion with the funds from operations and the cash we have on hand.
When we did our capital restructuring back in early 2010 that was the level of cash we raised at time we had that fully in line mine. So we believe we have an adequate cash position and there is really no need if you want to pay for additional capacity that we do not plan to use. So we believe our liquidity position to be adequate.
Brett Levy – Jefferies & Company, Inc.
Thanks very much guys.
Bennett K. Hatfield.
Thank you.
Operator
Your next question comes from line of Jeremy Sussman from Brean Murray. Please proceed.
Jeremy Sussman – Brean Murray, Carret & Co.
This is Lucas Pipes calling for Jeremy Sussman. Earlier in this call, you gave us some good color on the met coal prices for your various met coal products, and I wondered if you could maybe walk us through your met coal quality breakdown for 2012?
P. Michael Hardesty
2012 is going to be roughly 50-50, maybe a little bit more skewed to the highwall status. We're starting to get some Tygart tons in 2012. But essentially it's going to be in that 45 to 55 range of each product. It is very depended on output.
Lucas Pipes – Brean Murray, Carret & Co.
Okay, so...
Bennett K. Hatfield
As you noted, we have very little of the 2012 metallurgical tons priced at this point. So we see pretty substantial upside there.
Lucas Pipes – Brean Murray, Carret & Co.
Okay. So and, just to make sure we get this right, so with the 50-50 is roughly between highwall and your low wall Beckley and Vindex products. Is that correct?
P. Michael Hardesty
Yeah. Well, I'll just try to breakout the walking around numbers as I would call them, as Beckley is going to be in the, I won't give you ranges, but it’s going to be in the 1 million ton to 1.2 million ton range. Vindex, next year, depending on, I'm going to say it's in the 300,000 ton to 500,000 ton range. Sentinel is going to be in the 1.2 million ton to 1.3 million ton range. And then our various, our two highwall B coals will be in 300,000 ton to 500,000 ton range. And hopefully that adds fairly close to what we've put out there. And if it doesn't, I'll have to correct that.
Lucas Pipes – Brean Murray, Carret & Co.
No, that that's very helpful. And then could you maybe expand a little bit on your export business, particularly on the met coal side? Do you have any targets for 2010? What is going to be exported versus what's going to be your domestic business?
P. Michael Hardesty
I don't have any specific targets. I'll just give you what's happened over the last two years. In 2010 we were about 65% to 70% export and the remaining be in domestic. We've completely flipped that. Going into 2011, we will be roughly 70% domestic and 30% export. And frankly I would expect that ratio to stay fairly consistent.
There is a lot of talk about how international prices are going through the roof because of the situation in Australia and in improving demand, but there is a lot of congestion at the ports and we think there’s going to be a fairly significant demurrage risk and execution risk going forward on exports this year. So we've purposely tried to skew our position a little bit more domestic.
Lucas Pipes – Brean Murray, Carret & Co.
Thank you, very much. That was very helpful.
Operator
Your next question comes from the line of Garrett Nelson from BB&T Capital Markets. Please proceed.
Garrett S. Nelson – BB&T Capital Markets
Hi, good morning, gentlemen. Just a follow-up on the last question if you're willing to provide a general quality mix of the million uncommitted net funds for this year?
Bennett K. Hatfield
Sure, we'll provide some round number. Mike you want to speak to that?
P. Michael Hardesty
Yeah, we are going to be roughly a third, a third, a third of highwall A and highwall B.
Garrett S. Nelson – BB&T Capital Markets
Okay, great. And then on the ramps of 5.5 million tons of net production when Tygart hits full output in 2011, obviously given net shipment guidance for this year index. So what kind of step up of general range are you expecting in 2013?
P. Michael Hardesty
Yeah, again just kind of correct, I think I missed a statement there, we're actually going to see initial production from 2011 from Tygart. At the end of 2011 that will be in the form of kind of a de minimus level construction output that will just let us get a few times out. Then you’ll see more substantial tons coming online in 2012. I think we’re projecting on the order of about 300,000 tons of production in 2012 in Tygart. And it will ramp up there to thereafter that full output pace that we expect to hit in the first quarter of 2014.
Garrett S. Nelson – BB&T Capital Markets
Is Tygart a project that you consider teaming with a JV partner? Are you committed to developing it yourself?
P. Michael Hardesty
We obviously like the notion of keeping all the margins for ourselves at that this point. We have had interest from various parties, a few customers and a few landholders certainly offering us cash for an equity position but to this point we feel very good about the position we’re in where we’ll keep the whole thing and operate it, I think as a very successful project.
Garrett S. Nelson – BB&T Capital Markets
And then finally, have you conceded sale lease back transactions in order to a mark to value of reserve space, just curious as to the pros and cons of this kinds of arrangements in the conning environment?
P. Michael Hardesty
It’s certainly an option and that’s something we’ve discussed in previous calls. It’s a source of funding if funding is needed. But we view it quite frankly as a expensive financing and to this point given our projected generation of operating cash flow and our ability to fund Tygart built out from operating cash flow, we just didn’t really see the need to undertake the more expensive financing. So we feel very good about the position we’re in.
Garrett S. Nelson – BB&T Capital Markets
That's all, great. Thanks very much.
P. Michael Hardesty
Thank you.
Operator
Your next question comes from the line of Tom Bishop from BI research, please proceed
Tom Bishop – BI Research
Hi, good morning. Should we be using like 20 million more shares going forward due to this convertible and 4.6 million less of interest, and also I noticed that this year it has jumped 7 million in Q4 versus Q3, so, I do know if some of that has started to shake through already or how this convertible will work, if you can just put on the same page on that?
Bennett K. Hatfield
Sure, I’ll ask Brad Harris to clarify that for you.
Bradley W. Harris
It’s only the, the increase of the share count is due to a couple of things. The convertible notes, while they are technically not convertible right now, the impact that needs to be considered in the share calculation. That's accounting for the biggest piece of the difference, but also there are additional stock options in the length that become in the money as our share price has increased considerably over the past year.
I think the numbers that you’re seeing for the fourth quarter, they are more representative of the numbers you should expect to see for 2011 and if the share price continues to increase you could anticipate an increase in the number of diluted shares outstanding but that our obviously is depended upon where the share price goes, but for planning purposes I think what you’re seeing there for the fourth quarter, that should give you a pretty good indication.
Tom Bishop – BI Research
Okay so, we don't need to consider the, I mean if you divide by 5.83 and I’m not sure if that's the right number, because there is this 30% thing, but I guess that it will be another 20 million shares. So I’m not sure why we didn’t include that whole thing, now that we are above $8 say?
Bradley W. Harris
There is an average price that goes into the calculation so again I think the fourth quarter is pretty representative of what you should expect to see.
Tom Bishop – BI Research
Okay, well good enough on that. Also, I’m trying to come up with why Q4 was, I mean I heard some references, but why Q4 was as much less in production than Q3. I’m seeing 4.3 million in the prior quarter versus 3.5 million tons in the current quarter. And I’m wondering that’s a pretty big drop and I’m wondering what cause that? I know you had to lose some sections and all that, but...?
P. Michael Hardesty
So a couple of things going on, one thing in 2009 we had substantial amount of brokered coal that has essentially expired. We had some contract positions on brokered coal that round down and we’re a very much very small number in fourth quarter of 2010.
And you can see that in the breakout on the last page. That’s the proportion of it. Additionally we made a concentrated focus if you will, given the weaker thermal market in the first half of 2011 to focus our growth more, growth and our resources on generating more metallurgical than thermal. So in a few select location we actually curtailed thermal production in favor of moving those resources toward more metallurgical. So we’re focus more frankly on optimizing margin than optimizing tons or maximizing tons and that’s what you’ll generally see going forward.
Tom Bishop – BI Research
Yeah and that make sense. All right thank you. Also could you just tell us what the capital cost if Tygart is expected to be and how much has been showed up so far?
Bradley W. Harris
Sure, the total project is about a $325 million projected expense. I’ll call it $325 million to $335 million range in total and we spend thus far about $28 million through the end 2010 and I think we’ve acknowledge in 2011 we expect to spend about $80 million on Tygart.
Tom Bishop – BI Research
So it will ultimately be $200 million more than that.
Bradley W. Harris
Yes it spread out over 2012, ‘13 and ‘14.
Tom Bishop – BI Research
Alright, all the way up through there. Okay, all right thank you.
Operator
(Operator Instructions) Your next question comes from the line of Jamie Melzer from Bank of America. Please proceed.
Jamie Melzer – Bank of America/Merrill Lynch
Hello.
Bennett K. Hatfield
Hello.
Jamie Melzer – Bank of America/Merrill Lynch
Hi, good morning. First thing really quick, I thought (inaudible) on the release that the spending on Tygart next year was $125 million, is that correct?
Bradley W. Harris
That includes the three development projects and Tygart spend is around $80 million of it. There are also development projects in Illinois or the Viper mine the new portal and also a small mine expansion at our Vindex operation, that’s point of a boosting low wall metallurgical production.
Jamie Melzer – Bank of America/Merrill Lynch
Okay, prefect. Thank you. And then what are you brokered coal assumptions for 2011 and ‘12 in your guidance?
Bradley W. Harris
Zero, but there might be some opportunities selectively, but in our guidance we don’t include any brokered coal income. It’s been a substantial I guess the measurable portion of our shipments over the last few years, because we had some older contracts in place with competitors to buy certain number of tons at a stated price and both of those agreements were satisfied and completed during the fourth quarter of 2010. So going forward we’re not planning on any measurable amount of brokered coal income.
Jamie Melzer – Bank of America/Merrill Lynch
Okay, perfect, thank you and then I guess on a go forward basis, I heard you guys starting to generate a fair amount of free cash flow in 2012 and forward. Do you have any other like CapEx projects or potential additional math you can bring you on, where will you be spending that money, I guess kind of the priorities for that?
Bradley W. Harris
Well again the big focus is bringing Tygart project to fruition and it is a big project that will consume over $300 million until it is up and running at full-scale, but other than that we have smaller development projects but no major mine complex that’s moving forward in the next few years.
We do have in our business plan as we look out over the five and six period, several other mining complexes that are essentially queued up for development. That could be brought into play and could become a focus of that cash opportunity, but for this purpose we’re looking at getting Tygart up running and just seeing what opportunities are out there.
Jamie Melzer – Bank of America/Merrill Lynch
Okay, thank you and I guess the last thing to the extend you can answer it, it seems to me like the guidance you’ve provided yesterday for your 2011 was pretty much in line with what you had provided previously and what kind the range of EBITDA that you gave yesterday. The Street hedge you had much higher number, what do think they were baking into that that is different from the guidance you had provided previously that would get to $340 or $350 million kind of number?
Bradley W. Harris
It’s pretty tough for me to try to reconcile the consensus because you have a pretty wide range of opinions out there, but I can only surmise that they may have assumed that we would be able to take advantage of substantially higher number of metallurgical tons being re-priced at recent inflated levels. I mean it’s actually the case, as with most coal companies we’re making commitments going forward each and every quarter and generally layering in those commitments.
So you really, can’t hold your breath and roll the dice in a one quarter period or certain amount of one-month period. So in part they might have been anticipating a higher number of premium metallurgical margin kind of tons, but other than that I’m unclear but we’ll say again that I believe that the guidance that we have offered is conservative by the time. We believe with respect to both calls when realization that they were within a safe range of estimation.
We believe further that there are some potential upsides as Mike didn’t make a note of it, but we’re working on projects now to maybe able to boost metallurgical sales further that could deliver another, annually and those 300,000 tons to 400,000 tones of low hall met, but we’re not ready to put it in the guidance yet, because those projects haven't been brought to fruition and we’ll be talking about them in the current quarters. So all that is to say that we believe our guidance is conservative, but it’s pretty hard for me to really explain what might have been considered by folks that were shooting for a higher number.
Jamie Melzer – Bank of America/Merrill Lynch
Sure, that’s a good explanation, thank you very much.
Operator
Your next question comes from the line Jeff Cramer from UBS. Please proceed.
Jeff Cramer – UBS
Hi. Good morning.
Bennett K. Hatfield
Good morning.
Jeff Cramer – UBS
Just ask, actually you have answered a few of the questions I had, just on the CapEx, for Vindex and on a way, that suggestion is 2012 or is that largely completed this year?
Bennett K. Hatfield
The Illinois project, I believe is essentially projected for completion by the end of 2011. So that represents a bulk of that project.
Jeff Cramer – UBS
What, on the total expansion, right, what, I guess from a tonnage perspective is the growth from that?
Bennett K. Hatfield
Yeah. It gives us a room if you will to boost output on the order of 500,000 tons to 600,000 annual tons, which normally has been operating in the 2.2 million to 2.5 million annual tons range there in Illinois constrained by conveyer configuration at our older folder location.
With this new slope, we’ll be able to certainly expand production probably to as much as 3 million annual tons. So there is an increment of production growth and increased sales opportunity that's a substantial portion of the project. But another key driver and justifying the project frankly was enhancement of safety and reduced regulatory risk because the Illinois operation is a very mature mine with over a five miles of tunnels and entries that we have to maintain just to keep coal moving back from the spaces to the distinct preparation plant side.
And what this new portal does is essentially led us close all folds of the old mine and reduce that regulatory risk and that maintenance burden and get the coal to the surface much sooner and transport it to the over land conveyor back to the preparation plant. So it’s been proven in process efficiency and safety and regulatory risk as well as general market improvement. It essentially gives us a brand new coal mines to go forward for the next 15, 20 years. So it’s an opportunity that we’re pretty excited about.
Jeff Cramer – UBS
Got it, okay. So simply from a cost perspective, safety perspective, just to clarify 600,000 annual tons, where was the 3 million that’s down the road?
Bennett K. Hatfield
Yeah, the 3 million or so represents about 500,000 to 600,000 annual tonnage boosts from the norm of recent years.
Jeff Cramer – UBS
Got it, okay. You touched on your capital focus over the last couple of years, is M&A a possibility? I mean are there certain opportunities maybe size wise you would be interested in or really just you are focused internally right now?
Bennett K. Hatfield
We certainly are going to be looking for M&A opportunities that add value. We’ve been fortunate and blessed with 1.1 billion tons of reserves spread out over three coal basins. We have lots of opportunities to choose from. So we are looking both at internal growth opportunities as well as possible M&A activity. Certainly in this difficult regulatory climate and volatile market period, we see opportunities to certainly pick up what we call take-on or bolt-on kind of acquisitions that are on our boarders typically allow us to increase production or take advantage of established mining permits from our existing infrastructure. And we’re continuously looking at those and I expect we will be able to take advantage of some of those. But if something appears on the scope of a larger scale, we’re certainly going to take a look at it.
Jeff Cramer – UBS
Okay. And just speaking on the regulatory front any discernible differences from last time we spoke for as far as inspections and I know you guys have been doing fairly well to begin with but anything change on that front?
Bennett K. Hatfield
Well it’s just a tough environment, but I believe in national cohort performing at or better than the peer group in that regard, we moved up I think stepped up quickly to kind of set a higher standard at our operations to improve regulatory compliance performance we invested capital, we added crews just in the weeks after the (inaudible) accident that requisite that came readily apparent that there was going to be a strong focus on raising the standard if you will for maintenance of out by areas and ventilation and escape ways and things of that nature.
So we stepped up pretty quickly and I think it's paid off well. Our violations per inspector day rate which is kind of the metric that we focus on to measure regulatory compliance performance is essentially unchanged in 2010 from 2009, I think on 2009 it was on the order of 0.99 and 2010 it's about 1.02.
So essentially flat, which is remarkable when you consider how much the regulatory environment change from 2009 to 2010. So I believe that demonstrates that we are accomplishing good things and that our attentions were well focused. It doesn't mean we’re perfect. We certainly have risk as everyone in the peer group does and we sometimes have our errors but I believe the management team is focused on doing the job and meeting the standard and I’m pleased with where we are.
Jeff Cramer – UBS
Okay. Thanks guys.
Operator
Your next question comes from the line of Shneur Gershuni. Please proceed.
Shneur Gershuni – UBS
Hi guys, I just had a quick follow-up to the earlier question about the convert. Correct me if I’m wrong that the, it is a net share settlement, I believe the term is and so it’s not as dilutive as it appears, you don’t include the phase value, is that correct for the calculations?
Bennett K. Hatfield
Correct.
Shneur Gershuni – UBS
Okay, great. Thank you very much. That’s all I was looking for.
Bennett K. Hatfield
Thank you for that clarification. I didn't realize we've left it unclear, that's helpful.
Shneur Gershuni – UBS
No problem.
Operator
At this time I’m showing you have no further questions. I'd now like to turn the call back over to management for closing remarks.
Bennett K. Hatfield
Thank you for your interest in International Coal Group. Please plan to join us again for our first quarter conference call in April of 2011. Have a good day.
Operator
Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.
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