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Walter Energy (NYSE:WLT)

Q4 2010 Earnings Call

February 15, 2011 10:00 am ET

Executives

Joe Leonard - Interim Chief Executive Officer and Director

Walter Scheller - President of Jim Walter Resources and Chief Operating Officer of Jim Walter Resources

Lisa Honnold - Interim Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Controller

Mark Tubb - Vice President of Investor Relations & Strategic Planning

Analysts

James Rollyson - Raymond James & Associates

Mark Parr - KeyBanc Capital Markets Inc.

Brian Gamble - Simmons and Company

David Lipschitz - Credit Agricole Securities (NYSE:USA) Inc.

Andre Benjamin - Goldman Sachs Group Inc.

David Khani - FBR Capital Markets & Co.

Curt Woodworth - Macquarie Research

Wayne Cooperman - Cobalt Capital

Alex Rackwitz

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Mark Levin - BB&T Capital Markets

Operator

Welcome to the Walter Energy Fourth Quarter Year 2010 Earnings Call. [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, Audra. Good morning, and thank you for joining us for Walter Energy's Fourth Quarter and Full Year 2010 Earnings Conference Call. Today's call is being webcast live over the Internet and a recording of today's call 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 fourth quarter and full year 2010, our views on the market, our updated business outlook and recent developments. 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 the forward-looking statements, please refer to the company's SEC filings.

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

Joe Leonard

Thank you, Mark and good morning, everybody. 2010 was a fabulous year for Walter Energy. Before I turn it over to Lisa to go through the financial results for the quarter, let me highlight some of our accomplishments.

We finished 2010 with earnings of $7.25 per diluted share on revenues of $1.6 billion, primarily from record revenues and operating income from our coking coal operation. While we made great progress in a number of strategic fronts, we kept that business focused on operating as safely and as efficiently as possible, highlighted by a 21% reduction in incident rate at our underground mines. Coking coal sales volumes increased by 18% in 2010 while production increased 10% year-over-year.

Walter Minerals increased year-over-year sales volumes by 20%. Walter Coke achieved its second highest operating income ever at $32.5 million. Late in the year, we announced the acquisition of Western Coal, a transaction that will create the leading publicly traded pure-play metallurgical coal producer in the entire world. We remain on track to complete that acquisition by April 1.

We also accomplished, acquired the assets of HighMount Exploration for $210 million, which has significantly boosted our natural gas production, but much more importantly, it will also help ensure the future coal production areas will be properly degasified, enhancing the safety and operational efficiency of existing and future underground coking coal production in that area.

We leased an additional 22 million tons of coking coal reserves in an area very near our existing underground mining operations. We acquired the Mobile river terminal of the Port of Mobile ensuring that we'll have adequate future export capability at competitive costs for our Alabama coking coal production.

Finally, we returned $90 million in cash to our shareholders in the form of share repurchases and regular dividends. In summary, we accomplished numerous key objectives during the year, all designed to continue adding value for our shareholders.

We're pleased that the market has recognized our stock as a strong investment as evidenced by our share price, which finished the year near its all-time high and up almost 70% for the year.

I'll come back in a minute and discuss some other strategic current activities, but I'll turn it over now to Lisa to discuss our financial results.

Lisa Honnold

Thank you, Joe, and good morning, everyone. Yesterday, we reported earnings of $1.75 per diluted share for the fourth quarter, highlighted by operating income of $144.6 million from our Underground Mining segment.

Consolidated revenues in the fourth quarter were $400.8 million, up $164.5 million or 70% as compared to last year's fourth quarter. Consolidated operating income of $144.7 million was up $107.9 million, almost triple the amount in the prior year.

Revenues and operating income benefited from significantly higher coking coal prices and sales volume growth. Coking coal prices averaged $196.47 per short ton in the fourth quarter, a 55% increase. And our sales tonnage increased more than 300,000 tons, a 25% increase as compared to the fourth quarter last year.

Increased sales volumes resulted from increased production capacity at our No. 7 Mine, increased recovery rates from our No. 4 Mine and opportunistic sales of purchased coal during the fourth quarter.

Results in our Surface Mining and Walter Coke segments also contributed to our revenue and earnings growth in the fourth quarter. Coking coal cost of sales in the quarter increased about $9 per ton to a weighted average cost of $85.47 per ton. This increase was primarily a result of higher royalty and freight costs.

At our Surface Mining operation, we sold 348,000 tons of coal in the fourth quarter at an average selling price of $96.78 per ton, an increase of 25% versus the fourth quarter of 2009. Although operating income in that segment increased a mere 7%, EBITDA for this segment increased 27%, which is in line with the revenue growth.

At Walter Coke, we sold 87,000 tons of furnace and foundry coke in the fourth quarter 2010, approximately the same as in last year's fourth quarter. Average metallurgical coke pricing increased 22%, reflecting increased demand in the domestic steel market in the fourth quarter of 2010.

Earnings for the quarter were negatively affected by $5.9 million of costs related to our Western Coal acquisition and $2.3 million environmental reserve increase to establish a long-term monitoring program at Walter Coke. These charges, which are included in SG&A, are one-time in nature, and we do not expect these to recur. Combined, these charges reduced fourth quarter earnings per diluted share by almost $0.10.

Cash on the balance sheet at December 31, 2010, was $293.4 million, compared to $165.3 million at year end 2009. Today, liquidity is $281.2 million, following our acquisition of 25.3 million shares of Western Coal from Audley Capital in January for $293.7 million.

Our effective tax rate for 2010 was 32.6% and our current expectations for 2011 is that our effective tax rate will be approximately 30%. Our outlook for capital expenditures in 2011 is between $150 million to $175 million. This number includes $50 million to $60 million in our Underground Mining operations for equipment designed to expand the phase on two of our longwalls as well as several new shacks planned during the year. It excludes any potential impact for our planned acquisition of Western Coal.

I'll now turn the call over to Walt to discuss our operational results for the fourth quarter and our outlook for 2011.

Walter Scheller

Thanks, Lisa, and good morning. I'll start my comments this morning with a brief comment on safety. At Jim Walter Resources, our full year reportable injury rate for 2010 was down 21.1% year-over-year. At Walter Minerals, the unfortunate fatality we experienced earlier in the year with the only incident for the entire surface operation. Finally at Walter Coke, our reportable injury rate was slightly better than 2009.

I said when I joined Walter Energy that one of our primary goals was to make our operations safer for the people who work here. While I'm pleased to see year-over-year safety performance improvements in our Underground Mining segment, we still have work to do in eliminating accidents in all areas of our operation. This is an area that will remain a key focus for the entire Walter Energy team.

Turning to our fourth quarter operating results, coking coal sales in the quarter totaled 1.7 million tons, at the low end of the range we provided in October. Sales volumes for the quarter were negatively impacted by the effect of production issues during the period, including a longer-than-expected longwall move at the No. 4 Mine and adverse mining conditions at both mines. We also lost at least one vessel in the quarter due to the port damage at Praia Mole in Brazil.

Fourth quarter coking coal production totaled more than 1.5 million tons, up nearly 200,000 tons from the prior year. As I mentioned earlier, we had a longer-than-expected longwall move. When production resumed, we experienced difficult mining conditions which slowed advance rate. We also saw difficult mining conditions and slower advance rates at Mine No. 7's north longwall, which cost us about 100,000 tons of production in the quarter.

Turning to the market. 2010 turned out to be a record year for global scale production with world group steel production up to more than 1.4 billion metric tons, representing an increase of 15% compared to what was an admittedly soft 2009. Global steel utilization was 73.8%, up slightly versus the comparable period in 2009.

Focusing on our key markets of South America and Europe, steel production in both regions experienced significant gains. Production in South America totaled nearly 44 million tons, up 15.9% for the year, while full year 2010 steel production in Europe increased 22.9% compared to 2009 to more than 205 million tons.

On the supply side, impacts from Australian flooding continue and reports suggest that the problems there have surpassed 2008 levels. In 2008, you'll recall the flooding led to the loss of more than 15 million metric tons of coal supply into the market, causing prices to spike to more than $315 per metric ton.

Elsewhere, several Russian and Canadian producers have experienced labor and transportation issues, further constraining supply. Further, most U.S. suppliers are already committed in their respective export markets. As a result, we believe that our supply-demand imbalance will act in our favor as supplies of coking coal, particularly high quality coking coals, remain scarce. This, coupled with an improved economic growth rate in the Asian markets, has led to reports of stock prices of high quality coking coal similar to 2008 level.

In addition, the outlook for contract prices have continued to strengthen with many reports suggesting benchmark prices will average in excess of $250 per ton for the remainder of this year.

Turning to our outlook. For the first quarter of 2011, we expect to sell between 1.6 million and 1.8 million tons of hard coking coal from the Underground Mining segment and margins between $83 and $87 per ton. Coking coal sales prices for the first quarter are expected to average approximately $215 per metric ton. This price reflects significant tonnage first from the fourth quarter due to previously mentioned production delays and is priced at or above the fourth quarter benchmark price of $2009 per metric ton. The remainder of our first quarter volumes priced at or above the current benchmark price of $225 per metric ton. We also expect higher emerged [ph] cost due to previously mentioned volume issues.

On the volume side, some of the difficult mining conditions we encountered late in the fourth quarter have carried over into the first quarter. In addition, first quarter production will be impacted by two longwall moves.

For the full year, we are taking a cautious approach in estimating coking coal production in sales. Given the loss of production over the past couple of months our best estimate is that coking coal sales will likely not exceed 8.5 million tons for the year. It was up to 500,000 tons of the full year total coming from purchased coal opportunities.

We have implemented and continue to implement initiatives to improve operating efficiencies and increase production, so that it will take time to realize the full benefit on production levels. We expect to be in a better position to estimate full year production after we move the two longwalls I mentioned earlier.

On the plus side, with benchmark prices increasing significantly over the past several weeks, we expect pricing gains to more than offset the lower production. We are essentially sold out in the first half of the year, and we had nearly all of our available second half tons opened for what we expect to be higher pricing.

Driven by strong pricing and despite the production issues I mentioned, we remain fully confident that 2011 will be a record year for us with record revenues and EBITDA from the Underground Mining segment as we continue to execute on our Alabama expansion initiatives to drive organic growth.

In the Surface Mining segment, we expect to sell between 406,000 and 426,000 tons of metallurgical steam and industrial coal in the first quarter. I'll expect that steam and industrial production volume are contractually priced. However, operating income in the first quarter of 2011 is expected to be negatively impacted by a shift in sales mix, the lower margin coal contracts, higher costs due to unfavorable mining ratios and higher fuel prices.

At Walter Coke, first quarter sales volumes are expected to be approximately 100,000 tons. Operating margins are expected to reflect higher metallurgical coke prices, offset by higher coal raw material costs. In the first quarter, we had our first international shipment of metallurgical coke in 10 years. This is in line with our strategy to expand our metallurgical coke customer base. As we move forward with this strategy, we're very excited about future export opportunities.

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

Joe Leonard

Thank you very much, Walt. I'd like to take a few minutes to update you on our strategic initiative. As you may know, Western Coal published its informational circular to its investors in early February. A special meeting of Western Coal shareholders is scheduled for March 8, where they will consider and vote on the acquisition.

The case for the acquisition was very, very strong. With the resources of Western Coal, Walter Energy will be positioned as the leading publicly traded pure-play metallurgical coal producer in the world with strategic access to high gross steel producing countries in both the Atlantic and Pacific Basins, which includes three of the most important steel producing markets in the world, Asia, South America and Europe.

In the not-too-distant future, the combined companies will have more than 20 million tons of coal production. We would have significant reserves available for future production. The majority of which is high demand, hard coking coal with the diverse geographical footprint and operations in the United States, Canada and the United Kingdom.

If the necessary approvals are received and everything goes as planned, and we believe they will, we would expect to be able to close and complete the transaction on April 1. The financing for this transaction has exceeded our expectations so far as very strong demand has driven the financial terms in our favor, such as lower interest rates and lower upfront financing fees.

Separately, we're in the process of finding a replacement for me as interim CEO. Once we made this announcement, we would expect to move very rapidly to round out a world-class senior management team and begin integrating the two companies. We will provide more information on these events in the future day.

With that, operator, we'll open the session for questions. I would ask that initial round, people please refrain or limit your number of questions to two in order to give everybody a chance to get in.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jim Rollyson with Raymond James.

James Rollyson - Raymond James & Associates

Joe, you talked about, I guess, the first half of 2011 being sold out from like a volume and pricing standpoint. You guys gave guidance on 1Q. Can you give us a little more color on what's sold or kind of what you're looking at an average pricing in the second quarter?

Mark Tubb

This is Mark. As we looked at the second quarter, the new contracts for that period are going to be well above the first quarter benchmark pricing of that we're seeing in the market. But at this point, we've got to be careful because we've got some carryover tons from Q1 that are going to move into Q2. So it's just a little too early to give you a good hard average number, but certainly the new contracts are well above the current benchmark.

James Rollyson - Raymond James & Associates

Maybe to go back at that a little bit, how much carryover goes into 2Q, so when we actually give guidance or we can plug in our own guesses obviously. I'm Just trying to -- I don't want to get numbers too high. I'm just trying to get how much is maybe already committed for 2Q at that rollover tons?

Mark Tubb

Again, it's a little bit early to be that specific. Just as we've got in Q1, we got probably 25% of our Q1 volumes are carryover from Q4. So it's just again, it's a little bit too early to try to nail that number down.

James Rollyson - Raymond James & Associates

One question on cost. Despite volumes coming in a little bit lower than you guys had hoped in the quarter, costs actually looked pretty darn good. I thought just maybe how that transcends into future quarters as you start getting volumes up hopefully, second quarter through the fourth quarter? Are you still kind of thinking production costs come back down into the low to mid-50s kind of like you had talked about historically?

Walter Scheller

Yes, this is Walt. I would expect our production cost to be in the $55 to $60 range.

Operator

Our next question is from Andre Benjamin with Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc.

I was wondering first, could you do a little bit of color on your expected trajectory of production in cost through 2011? Like should we expect it to be pretty slow and steady say, moderate progression in second quarter and then full rate by second half or a little bit more color on that would be helpful?

Walter Scheller

Sure, this is Walt. We struggled a bit in the first quarter. I would expect the second quarter to be much stronger in terms of volumes. But assuming that we are able to resolve some of the issues that we have had and we have throughout the rest of the year, we'll have four more longwall moves, two of the longwall moves have occurred or occurring in the first quarter. So I would expect us to be able to get up to run rates that are better than we will see in the first quarter.

Andre Benjamin - Goldman Sachs Group Inc.

And then I guess as you continue to work through a lot of the geological challenges in the second quarter that you had some meaningful issues, does that make you call in to question or maybe issue a little bit more caution with respect to your ultimate goal, I think the 2012 guidance for the stand-alone company was to reach around 9.5 million tons by 2010. Do you see any reason to be more concerned about being able to reach that run rate?

Walter Scheller

I think we will achieve that run rate. The question of exactly when we will achieve that run rate is a little more difficult to answer. Some of the issues we are incurring, I don't think impact that final end run rate. So I think that we still have all intentions of having these three operations collectively get up to the nine -- or these two operations get to the 9 million to 9.5 million ton run rate.

Operator

Our next question is from Curt Woodworth with Macquarie.

Alex Rackwitz

First question is on the adverse mining conditions that you mentioned. You experienced them in both No. 4 and No. 7. Can you just give us more color on what that is? And when you get the longwalls, the move completed, what are you looking for? Because I mean there's been, I think you had two major delays last year and now one this year. Is there anything different with kind of the geology or the mine plan relative to maybe what you're thinking six months ago in terms of getting back up to the 8.5 mine run rate?

Joe Leonard

Let me see if I can tackle this one in a couple of different parts. First of all, the delays that occurred last year were based upon continuous miner productivity and not having a home for the longwalls when they completed their panel. Some of the issues we've seen over the past several months or past couple of months are at 7 Mine on our north longwall. As the seam -- occasionally, the seam will thin down and it may thin down at either end where the gate ends are or could thin down a bit in the middle of the panel. And wherever it thins down, which occurs day-to-day, we have to cut either a little bit of rock out of the bottom or a little bit of rock out of the top in order to maintain a minimum mining height to bring the equipment through. Occasionally, when we do this, we'll run into some situations where either the top or bottom becomes extremely hard to cut, in which case if it's one or the other, you take it out of the other area. And every now and then, we'll run into situations where both the top and bottom become extremely difficult to cut, which lead to, I think what we previously discussed as hard-rock bottom. When we had some of that on our north longwall towards the end of 2010 that was the delay or the production issue at the north longwall. We've also had some situations this year where our east longwall has had likewise some difficult bottom conditions where the rock was harder than anticipated. And in order to maintain our minimum mining height, we had to cut some of that rock and it slowed us down a bit. At our No. 4 longwall, the problem we had was that we had some of the roof. We couldn't see in there, which means there's a seam that sits above the Blue Creek when we cut those seams and we had some of the roof sitting down on the back of the shield, creating a bit of a squeeze. And when that happens, it may happen over a single day or two, but the result is that you end up having to often times drill and shoot the rocks that have fallen down in front of the shield tip. And while you're drilling and shooting that, it's very difficult to address the mining. So you may have several days or even a week or two, where you're spending most of your time drilling and blasting that rock in order to regain the mining height you need to continue your operation.

Curt Woodworth - Macquarie Research

Just one last question on, kind of back to Jim's question on 2Q ASP guidance. I mean if you're totally sold out for the second quarter, I mean you still have a pretty good handle on that number. Could you just give us a sense for where it would stand relative to the $225? And also what's the timing on when those funds were put to bed because given sort of the consensus view of maybe 290, 300 settlement for this quarter, it seems that you definitely leave a little pricing on the table. So just any commentary on that strategy will be helpful?

Walter Scheller

Our marketing guys were out in the market after we started to see the flooding and some of the issues that were ongoing in Australia. So a lot of those tons, some of those tons were put to bed a little early. A lot of those tons were not. And the real issue on Q2 is that I'm kind of holding back because of the expectation in our production issues straighten up. And if they do and our production levels achieved our goals, we should be able to get more of those tons out in Q1, which would allow more of those Q2 tons to be sold at those prices.

Operator

Your next question is from Brian Gamble with Simmons and Company.

Brian Gamble - Simmons and Company

Maybe Walt, one thing that might help is to discuss anything that's abnormal about the longwall moves in Q1. Are these just normal moves? Or is there something abnormal that is causing you to be a little hesitant with regard to how quickly you think you can get back to a normalcy run rate?

Walter Scheller

We are in the middle of the moving the north longwall at No. 7 Mine. We don't have any reason to believe that will be an abnormally long move. The continuous miner unit has completed mining in that area. We've done all of the pre-work that we can to set up the new longwall. So we anticipate that being a normal move. The move at No. 4 Mine, which will occur should be mid next month, should be a normal move. We don't anticipate any issues there either. The continuous mining is just about complete in that area so we should be good there as well.

Brian Gamble - Simmons and Company

So essentially you're saying if things go as planned, you're just being a little bit conservative with regard to what your expectation for Q1 production is? There's no reason necessarily to be conservative just from a go-forward standpoint. You're just worried that things that because they went wrong in Q4 could go wrong again, you just don't want to get ahead of yourself?

Walter Scheller

Well, that's part of it. And quite frankly, I've been around enough longwalls and I've seen longwalls startups, post-move, go really, really well and get back to full production within a couple of days. I've seen longwall moves startups that struggled for weeks. I certainly don't anticipate that, but I'm also not going to say that, that never happened.

Brian Gamble - Simmons and Company

On the pricing side, maybe what are your sales guys seeing as far as their expectation for the longevity of the cycle either in relation to what we saw after the flooding in 2008 or just present day? Or what are they seeing on the spot price versus how long they expect it to continue?

Walter Scheller

We believe that the market will stay strong at least through Q2 and Q3 based upon our experience and what we're seeing out there today. We're not sure. I think there are still a few tons moving into the spot market, but I think really basing much on what's happening on those very few tons is not particularly valuable.

Joe Leonard

Suffice it to say that pricing is staying quite strong, and we have a number of people who would like to come in to see if they could get some additional tons as well.

Operator

Your next question is from Jeremy Sussman, Brean Murray.

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Can you give us a sense of maybe how much, how many tons were put to bed after the flood started occurring and maybe just give us a little bit of color, sort of what the negotiations were like? Were buyers panicking? I guess can you give us a little color on that front?

Walter Scheller

I think what I would say there is that a lot of the buyers learned a lot from 2008, and were far more disciplined this year as they looked at the market impacts with the flooding in Australia. And we saw that as we went out into the market. Again, I think the market is very strong, but I think we did not see the panic that occurred in 2008. Additionally, inventory levels going into this flooding period, inventory levels were up a bit over where they were in 2008 when the flooding occurred. And there's been very little spot activity.

Jeremy Sussman - Brean Murray, Carret & Co., LLC

And then just as a follow-up on the production front, I definitely appreciate the color on Mine No. 4 and 7. Can you give us a sense, I guess, of do you think your past the most difficult part of the geologic issues? Or how should we kind of think about that?

Walter Scheller

Well I don't anticipate. The area where we had the issues where the roof squeezed at 4 Mine. We will be moving the longwall out of that area. That's an area where the mine had experienced squeezes previously. We will be moving out of that area and not to return for quite some time. By that, I mean we won't be back in that area this year. So I would not anticipate having those same issues at our 4 Mine. At our 7 Mine, we know that we're going to encounter situations where the seam thins down and we have difficult cutting conditions. Our goal is to be able to make up for those, the days where we have some difficult cutting conditions with days where we're able to mine well above our expected daily rates.

Operator

Our next question is from Mark Levin, BB&T Capital Markets.

Mark Levin - BB&T Capital Markets

Couple quick questions, one, can you maybe comment on your coking coal customer inventory levels as you see them both in Europe, Brazil? And then secondly, how you may view a potential move from quarterly to monthly pricing and how that might affect where you guys do business?

Walter Scheller

The Q4 inventory levels and most of our customers were a little lower than normal. Could you repeat the second part of your question?

Mark Levin - BB&T Capital Markets

Yes, moving from -- what moved from quarterly to month -- the potential from moving from quarterly to monthly pricing? And how that may or may not impact the way you guys approach the market?

Walter Scheller

I don't think -- right now, our customers are actually looking at some of our customers wanting to go with six-month deals. We haven't seen much interest in monthly. We could see a combination of monthly and quarterly based upon just how volatile the market is. I don't think we're particularly concerned about what the periods are for our contracts. But we've seen a lot of interest in longer as opposed to shorter-term contracts.

Mark Levin - BB&T Capital Markets

And one final question just in terms of the potential naming of the new CEO, where you guys are in that process?

Joe Leonard

In that process, we think we're down to being able to make an announcement in the pretty near future. And I won't define the pretty near future, but we found some excellent candidates, and we narrowed -- the Board is narrowing in on final candidates here.

Operator

Your next question is from David Lipschitz with CLSA.

David Lipschitz - Credit Agricole Securities (USA) Inc.

Just question on the carryover stuff. Is there any older carryover or is it all fourth quarter, first quarter carryover into the Q2 period? Meaning do you have any $300 left in 2008 or anything last year or is it just all new stuff?

Walter Scheller

There is some carryover from 2008. But that will not -- those tons won't make it to market in the first half of this year.

David Lipschitz - Credit Agricole Securities (USA) Inc.

What do you suspect if everything runs right in the second quarter, what would be your run rate for Q2? Like what do you expect production including purchase to be? What would sales potentially be in Q2 if everything ran like you told?

Walter Scheller

We're going to have to nail down production for Q2 before we can get into the sales range at this point.

David Lipschitz - Credit Agricole Securities (USA) Inc.

Just quickly in terms of CapEx, what do you say CapEx was to be? I missed that.

Lisa Honnold

Yes, we think CapEx will be $150 million to $175 million in 2011.

Operator

Your next question is from David Khani with FBR Capital Markets.

David Khani - FBR Capital Markets & Co.

Could you give us a sense of what you think the total cost will be to acquire Western, sort of those extraordinary costs?

Lisa Honnold

Well, as you know we incurred about $5.9 million. What I would tell you is we expect costs to be on average, what other market participants say, which is 2% to 3% of the ton rate.

David Khani - FBR Capital Markets & Co.

And so with that, essentially and then we'd see that hit when it closes in second quarter basically, is that right?

Lisa Honnold

Yes, the majority of those would be incurred either late in March, which could affect our first quarter or the very beginning of April.

David Khani - FBR Capital Markets & Co.

And then could you give us an update on Chevron? Where you stand on those reserves that you're to acquire?

Joe Leonard

Yes, we're down to a couple of sticky points in the negotiations. It seems like there's always two sticky points with Chevron. But we think we're close to being able to make an announcement. We were hoping to be able to do that today, but we're not quite there. We remain quite optimistic.

David Khani - FBR Capital Markets & Co.

One last question just on the steam coal side, are you 100% sold out for 2011?

Walter Scheller

Yes.

Operator

Mark Parr with KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets Inc.

I really appreciate all the color. I -- never having tried to run a mine with two longwalls, but I'm imagining this is quite a challenge, and we're really looking forward to you getting the leverage out of that here, say as 2011 progresses. One question I had, I was wondering if you have any color on -- what you're hearing about Mongolian supply? That certainly did have an impact on the seaborne trade in 2010 to a certain extent. I just wondered if you have any thoughts about what incremental impact it might have on 2011 seaborne trade levels given coal coming out of Mongolia supplanting the ocean-borne material?

Walter Scheller

Right now, we're seeing very little coming out of Mongolia. And all that is coming out is basically going into China. We think 2012, maybe a year where it has a little bit more of an impact. But we don't think that 2011 should have much of an impact from Mongolia production.

Operator

Our next question is from Wayne Cooperman with Cobalt Capital.

Wayne Cooperman - Cobalt Capital

The guidance you gave for '12, your goal -- is that standalone? Have you guys given sort of pro forma tonnage guidance and cost guidance.

Joe Leonard

You mean with the acquisition of Western Coal?

Wayne Cooperman - Cobalt Capital

Yes.

Lisa Honnold

I would refer you to our December 3 earnings call that's been filed out there. However, I would caution that, that information has not been updated.

Wayne Cooperman - Cobalt Capital

So does that mean it's not...

Lisa Honnold

We're not in a position, I'm sorry, but we're just not in a position to update that right now given the fact that we're both competitors at this point and the acquisition hasn't been finalized.

Joe Leonard

Wayne, we're going to get out on the road very quickly after we close that deal.

Wayne Cooperman - Cobalt Capital

So average number that you've talked about is just assuming without the deal. It's just Walter standalone?

Joe Leonard

Correct, absolutely.

Operator

[Operator Instructions] Our next question is from Andre Benjamin with Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc.

I just have one follow-up question. I was wondering, do you anticipate any change in the competitive landscape with the amount of M&A that we've been seeing in the space? And without necessarily naming any names, do you believe that we're probably done with most of the major deals? Or should we expect to just use core and asset deals?

Joe Leonard

I guess the answer is we don't know. I mean it's been a pretty active year. Some of the folks that have done deals, I think, are kind of tapped out financially right now. But there's lots of suppliers out there and it's a big world. So it's hard for us to say.

Andre Benjamin - Goldman Sachs Group Inc.

So you don't really expect any change obviously given your higher coal quality, everything should remain pretty much the same for your operations?

Joe Leonard

Yes.

Andre Benjamin - Goldman Sachs Group Inc.

I guess the last thing would be how much lower is the quality of the met coal that you're purchasing for resale to make up for some of the production challenges, just trying to get a sense of a differential versus your benchmark?

Joe Leonard

Andre, it's kind of a tough question because we're going to get that coal from different sources. I would say though in terms of order of magnitude, the margins on that coal is going to be significantly lower than our premium Blue Creek coal.

Operator

At this time, there are no further questions.

Joe Leonard

Okay. Thank you very much. Obviously, we're very, very proud of what was accomplished by the team here at Walter Energy in 2010. It was a banner year for us, records in a number of areas. And we set the stage for what we think will be an even better 2011. We appreciate your interest in the company, and we appreciate your participation in the conference call this morning. There being no further questions, we'll adjourn the meeting. Thank you very much.

Operator

Thank you for your participation. Today's call has concluded. Please disconnect your phone line at this time.

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