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Executives

Peter Socha - Chairman, Chief Executive Officer and President

Elizabeth Cook - Director of Investor Relations

Coy Lane - Chief Operating Officer and Senior Vice President

Analysts

Brian Gamble - Simmons and Company

Justine Fisher - Goldman Sachs Group Inc.

James Rollyson - Raymond James & Associates, Inc.

Brett Levy - Jefferies & Company

William Burns - Johnson Rice & Company, L.L.C.

Justine Fisher - Goldman Sachs

Michael Dudas - Jefferies & Company, Inc.

Shneur Gershuni - UBS Investment Bank

David Khani - FBR Capital Markets & Co.

Curt Woodworth - Macquarie Research

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

James River Coal (JRCC) Q4 2010 Earnings Call March 7, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Company Fourth Quarter Earnings Call. [Operator Instructions] And now I'll turn the call over to Beth Cook. Please begin.

Elizabeth Cook

Thanks, Tyrone. And thank you, and good morning. Welcome to James River Coal Company's Fourth Quarter Earnings Call. We released our earnings yesterday evening and our current releases and presentation are posted on our website and were furnished to the SEC on a Form 8-K.

On the call with me today are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; and Jim Ketron, Vice President and General Counsel.

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

I'll now turn the call over to Peter Socha.

Peter Socha

Hey, good morning, Thank you, Beth. Good morning, everyone. We appreciate your time. Also, on the call with us today are Gary White, the Chief Executive Officer of IRP; and Joe Czul, who is in Charleston. I think Joe's in listen-only mode, but if I say something stupid he's going to send me an e-mail. So he's kind of on the call.

Anyway, we are going to walk through the slides and discuss the IRP transaction. It is a transaction that we've been working on since December, and certainly, since January in a very hard way. And we're very excited about it. It is the perfect fit, as I've described to several of you in e-mails and text messages that we got overnight. It's the perfect fit for James River Coal Company, and certainly, those of you who have followed us for the last several years recognize it to be that way.

Just going through the overview, it is a transaction for $475 million cash-free, debt-free, all cash consideration. Synergies, I'll talk to in a few moments. We do have -- we've not quantified all of the synergies, but they are definitely there. We haven't obtained, from Deutsche Bank and from UBS, $375 million of committed financing. Our intent is to access the capital markets before that committed financing is required. And so, I'm sure we'll get to that in the Q&A. We do expect it to close fairly quickly, and we do not expect much in a way of regulatory issues or conditions preceding to closing.

It is an accretive transaction in virtually every scenario that we have modeled. It's accretive on earnings per share and on cash flow per share, that is assuming the permanent financing is in place Obviously, with the bridge financing it would be very accretive, but we don't believe that, that is appropriate or prudent. But it is accretive on a cash-flow and EPS basis, permanent financing in place.

You can see on the next slide that IRP and L&K are very profitable. They, like us, focus very much on margin. Let me back up a little bit and say that we first met with all of the principals of IRP and L&K back in January. And we had looked at it. We had some information on it presented to us in December. But culturally, just in terms of comfort, when you're in the room with the principals and you get a sense of how they run their business and how we run our business, it was an exact fit.

On the L&K side, they start with the customer. They start with that direct relationship with the customer, constant contact, understanding what they need. On the IRP side, in the mines, they start with the employees. They start with the community's. And they start with safety. Those are all things that are dearly important to us. And inside of 10 minutes of that first meeting, I was absolutely certain we were going to do this transaction, that it would be best fit. C.K. said to me, this is the best fit of any company we have looked at ever at James River. So that's something we're very, very pleased. And I'll talk about it, hopefully, in the Q&A.

What it does for James River? And what it does for IRP and L&K? We got size and scale. If you have followed us for a while, size, scale, diversity of assets is important to us. It adds metal shipments; it adds global coal shipments; and it adds -- it's union-free, so we will not have the UMWA issues possible later this year; and it has minimum legacy liabilities.

You can see on the next two sides, I think. Yes, the next two sides, you can see how it fits up with us geographically. Southwestern, West Virginia and Eastern Kentucky, Laurel Mountain Resources are the former Miller Bros. properties in Eastern Kentucky and at Hampden Coal Company down in Gilbert.

Looking over to the next slide, it details -- in yellow, you can see, Laurel Mountain Resources and Hampden. And you can see where they fit with us geographically. So they are right in the heart of our territory.

On the following side, the reserves and resources, it adds substantial met coal and thermal reserves and resources. The reason why we included both here is that -- but for drilling activity, a fair amount -- not a fair amount -- but there are a number of tons that will come from the resource category to the reserve category. And we're in the process, in one case, the least has just been agreed to, within the last several weeks, I guess. And we need to drill up and put some more drill holes down. But there will be some migration from resource to reserve.

IRP, the loadout facilities, this gives us more of a presence on the Norfolk Southern, which for export. I think, most, if not all of the L&K exports are conducted through the Lamberts Point Terminal on Norfolk Southern. It also gives us additional loadouts on CSX and on the river on market that we traditionally have not played in.

On Slide 10, L&K. Cannot say enough good things about L&K. Joe Czul, the President of L&K, is very, very well regarded within the coal industry. They do market met coal and steam coal from the IRP properties. They purchase and they blend, and that's really where the direct customer relationship comes into play. And that day, they are able to source coal, blend it with other coals and come up with the exact mix that a customer requires. And that's a profitable business for them, but it requires a lot of different elements.

They are one of three U.S. sales companies that sell directly into the Indian steel mills. Joe has spent a very long time developing the Indian market, and L&K is also one of the largest suppliers of coal to the Indian market. For those of you, again, who followed us for a while, you know how much we have followed India. We think India is, without a doubt, one of the highest growth markets for coal and for energy in the world. And so this gives us a great opportunity to access that market, and in and at, real-time expertise and global coal knowledge.

Joe is always on the road. He's always out with people. He's always meeting people. He's understanding the market. He puts together the mosaic of the market analysis, which is very similar, if not identical, to how we do things in the thermal market. So there's a great fit there between their knowledge and their approach to the met market and our knowledge and our approach to the thermal market.

You could see on the map on the following page, where they ship to, virtually, all over the world, to customers all over the world, And it is a who's whose list of customers.

The contract position, I think is, as far as other companies that we have seen, this is the premier contract position in the U.S., particularly, on the met market, on met side. They are very -- again, I'll come back to this, they practice things the way we do, which is they are patient. They let the market come to them. And you can see that in their contract position, in what has gone on. And this is a snapshot of three years, but it goes back much longer than that. They don't rush into price coal. There's no need to do that. They let the market develop first. They take a global view on the market, and then they build price when they believe it's appropriate to price.

I do want to point out. An engineer sent me an e-mail last night. Freight, if you take 3,723 for last year times 116.71, you come up with less than $490 million of revenue. The difference is freight, and that's not included in the average price per ton. Now that we're into exports, we're into the freight market as well. You can also see that they have maintained a fairly healthy exposure to the 2011 settlements, to the settlements coming up here in the next several months. And so we believe that, that is further upside.

And on Page 14, Slide 14, there are synergies without a doubt. There are synergies. We will have an input into pricing of thermal coal for them. They will have an input into pricing of met coal for us. One reason we kept our met coal on price was because we knew this transaction was coming along. And I wanted to give Joe a chance to provide input. And if he wanted to, he could take that into his trading activities and decide what he wants to do.

As all of you know, we do have tremendous relationships in the European thermal market with end-users, with the generating companies and the utilities. It's something we have spent the last six years developing, or five years developing and I love where we are there.

Where we don't always get the benefit of that is on the domestic side, and that is either sourcing the coal or on the export logistics. And clearly, L&K has that in abundance. And so I really see that, maybe not this year, but certainly next year and the following year as Europe continues to tighten up. We see that as a further synergy.

The next slide is just a whole series of global views on how we're looking at the transaction and that we're very, very pleased with it, and we're pleased to discuss it with our shareholders and analysts. And Tyrone, we will now open it up to questions.

Question-and-Answer Session

Operator

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

James Rollyson - Raymond James & Associates, Inc.

I guess, first question, you guys highlighted kind of last year's results from IRP and L&K. Can you talk a little bit about the cost side of the business? Kind of what your all-in, cash cost per ton kind of looks like, and maybe how that matches up with you?

Peter Socha

In the Kentucky side, we're going to end up -- and let me process this by saying, we're not going into huge detail today, and the reason for that is that there are SEC filings being prepared. There's slideshows being prepared that will have much more detail. And we have to be careful how we lay information out there. So having said that, going forward, we'll have four cost buckets in the company, one is in Indiana, obviously, one is Kentucky. And in Kentucky, their surface mines are roughly comparable to ours, in that their costs are going to be in the 60's. And then we have the met coal mines, the IRP met coal mines, and then we'll have the trading activity of L&K. The IRP met coal mines, their costs are going to be in the 90s. Again, that's somewhat comparable to our own, but we focus much more on the margins than we do on the cash cost. I haven't quite figured out yet how we're going to report out the L&K side. Because it's an important side, and I understand that, but on the other hand, what we do with the blending, and what we do with customer-specific things, I'm not sure how we're going to report that out.

James Rollyson - Raymond James & Associates, Inc.

You mentioned the financing side of this. Probably, or at least, the goal sounds like it's to hit the public markets before you even get into the kind of temporary financing. Are you just going to work towards financing this transaction, or have you thought about just refinancing your whole debt piece since you've talked about that in the past us?

Peter Socha

That's a Justine [ph] question, but I'll answer it anyway. We're going to just finance this transaction right now. We do have the $150 million of bonds that are due in June of 2012. We will look at doing something with those as part of this transaction. But I think, at launch, what you would see would be just the finance of this transaction. And my goal would be that if existing bondholders wanted to come into this new paper -- so you might see during the course of the offerings, if there are offerings, you might see something get upsized. The upsize would probably be due to the tendering in the bonds, the bringing in of old bonds. So the leverage ratio, themselves, are not going to change, even though you might see the new-issue, high-yield bond, the dollar amount go up, it's probably replacing an existing high-yield bond.

James Rollyson - Raymond James & Associates, Inc.

And from a pricing strategy standpoint, you mentioned, obviously, your patience, and it kind of shows across the board here, where you're pretty well booked now for '11, for the most part, and I assume we'll get a little update on what production volumes all-in are going to look like when you give us guidance once this thing's done, but you're pretty wide open for '12. Maybe a little bit of conversation about just kind of on a combined basis how you're both thinking about pricing '12. Are you still waiting for the Europe situation, et cetera to continue to tick your pricing...

Peter Socha

Good question. We're in conversations on '12 right now. We've probably seen more domestic buy-side activity on thermal in the last three or four weeks than we saw in the three or four months prior to that. And so we're very encouraged by that. We'll continue to play quarter-by-quarter. We still think the market is tight. The domestic thermal market is in a tightening mode, but it's just tightening slowly. There's still an overhang of deferred tons from back in '09, that's still hanging out there. Inventories appeared to be down pretty close to normal. It's not too dissimilar from what we talked about in our last call. They aggregate around normal, but there are some that are very low and there's some that are very flush. But we are seeing much more physical buying activity in the U.S. right now. Now that doesn't mean it's good. It's good pricing, it doesn't mean it's good activity, it's just better, on a relative basis it's better. But we will continue to play until the market develops, where we think it's capable of developing. We'll continue to go quarter-by-quarter.

Operator

Our next question is from Shneur Gershuni of UBS.

Shneur Gershuni - UBS Investment Bank

You sort of touched on this in your prepared remark, where you talked about the synergies and so forth, The last couple of years has been volatile in terms of pricing and production levels as a result. And we've seen the impact of fixed cost absorption, something that's shown up for many of the centralized players in the last couple of quarters and so forth. Can you talk about how the increased footprint with this acquisition can potentially change your ability to absorb more of the fixed cost on a general basis?

Peter Socha

That's a good question. They're such different businesses. The West Virginia piece now will be almost totally met, and we will manage that with a different mindset and a different view as we should. In Eastern Kentucky, that's still going to be mostly thermal, and we'll manage that in a way that we continue to manage it. You're right, we are continuing to run the mines in Eastern Kentucky, the thermal mines at a dialed-back level. And as long as we continue to do that, that will have an impact on cost. On the other hand, given our contracts, we don't need to go out and mine additional coal to make a $4 margin or a $5 margin. That has no interest to me at all. That's giving away our resource. And so as long as we're generating the cash we're generating, and we have the cash we have, we don't have to do that. They're different businesses.

Shneur Gershuni - UBS Investment Bank

Just a follow-up to one of Jim's questions, you talked about longer-term financing and so forth. Are you thinking just debt? Is there a target leverage ratio, or are you also thinking converts or potentially some equity as well too?

Peter Socha

We're still evaluating all of the long-term financing, but suffice it to say, I like the capital structure we have right now. I will say this, I like the capital structure we have right now. It has high-yield bonds, it has convert, it has equity. I like the ratios, where they are right now. We're not going to go out and over-leverage the business as part of this acquisition. I don't think that, that's prudent. I don't think it's the right thing to do in a commodity-related business. But we're still looking at all of the various pieces that might go into it.

Shneur Gershuni - UBS Investment Bank

Is this the last of the deals, or is it the first of the deals that you're looking at and so forth? Do you think that there's some other opportunities once you're able to absorb this acquisition?

Peter Socha

'09 was recuperate. And '10 was pause and reflect. And '11 is something different.

Shneur Gershuni - UBS Investment Bank

One final question. Can you give us some color on the met coal? Is it an A grade, an A+ grade or a B grade. I'm just wondering if you have some -- a little bit more detail on the quality of the coal.

Peter Socha

Gary, I'm going to toss that one to you.

Gary White

I would prefer Joe to answer that. But typically, our product is a high reflectance, quality met coal. We also have in small quantity, very low-ash , foundry-coat type product, but we typically move into the market on the upper side of the scale.

Operator

Our next question is from Jeremy Sussman of Brean Murray.

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

Just a follow-up on Shneur's question there. Would it be fair to say kind of blended, you've got like a mid-ball-type product? I mean, just for a sense of kind of pricing?

Peter Socha

It's mainly high ball. It's a good high ball, and there's some mid ball. And Gary, if you disagree with this, step in please. There's some mid ball that they sell, but by and large, what they sell is a very good high ball. Some of it's very, very good high ball.

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

And then in terms of the trading, the marketing, the brokerage business, can you give us a sense where margins are there, and maybe how, we should all be viewing this business for James River?

Peter Socha

I promised Joe yesterday I wouldn't say anything stupid, and so I'm going to defer on that comment. It is a great business and it's one that we will bring more clarity to it for our shareholders and for our analysts, but I'd I prefer to not do that today.

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

And just lastly, Peter, I know you'll update us with guidance once the transaction closes, but can you give us a sense maybe of expected tonnage and cost levels? Or are you going to...

Peter Socha

I'll wait on that. I'll tell you why. That has much to do with where the market is moving very recently. In that I'm kind of close to the stage of saying to C.K., let's start taking things up a little bit. And then also on the crossover tons, to the extent that we have an opportunity with crossover tons through L&K. That would also take production up, which would, obviously, have an impact on costs. So in that case -- and by the way, on the L&K question, what Joe does is that it's very specialized, and it's very -- and I'm going back to your earlier question, because I don't want to totally disregard it, but it's is very specialized and it's very customer-specific, and the coals that he buys and the coals that he blends. I said he, but it's really they. It's a group of people in Charleston. And they're very successful at it. They have done it for a long period of time. They have the knowledge, they have the expertise, and they have the relationships. But how we present that to the public markets is something that Joe and I and Gary, and the rest of the team, we haven't really settled on what we want to say and what we don't want to say, and so I don't want to get too far ahead of ourselves on that.

Operator

Our next question is from Michael Dudas of Jefferies & Company.

Michael Dudas - Jefferies & Company, Inc.

Certainly, this acquisition checks the bucket of more met, more international exposures. Can we read into this how you and the board feel about the potential and the outlook for U.S. thermal market activity, longer term? And is there something we should see more from James River or other companies like yourselves as you move forward?

Peter Socha

As I was talking about a couple of minutes ago, Mike, the U.S. thermal market is still kind of in the doldrums, but it's better than being on the deathbed where it was. So as that market improves, if we were to -- I guess, you're asking an M&A type question. If we were to consider transactions, we would do it in advance of when we see is an improving market. And I do not want to wait until the market is $130 to go out and do a deal.

Michael Dudas - Jefferies & Company, Inc.

But it does dissuade you from investing more or getting more exposure into U.S. thermal activity at the expense of other areas?

Peter Socha

No, not at all, because we thought It's where the relationships are. Those customers will continue to need coal, continue to need thermal coal. So absolutely not.

Michael Dudas - Jefferies & Company, Inc.

Let me go further on that. I'm certain, you've looked at many transactions over the past 12 to 18 months, could you maybe give us a sense of, generally, what you saw in other ones that tempted you? Certainly, you talked very eloquently about how this is a very good fit for your company, but were there other opportunities that were really very exciting, just price got in the way or size, or structure? Maybe a little bit sense of you making this decision and what were some of the reactions behind it?

Peter Socha

We've had some things we've looked at as any other companies would have in any industry really. We've had some things we've looked at more seriously than others. And the issues that have come up are pretty much all of the above that you just mentioned. And I can think of a case in size, a case in structure, a case in price, but this was the only one that we really, truly, the entire management team were engaged on, got into, and said this is one that we want to go ahead and do. But there have been others, and I'm sure there will be again.

Michael Dudas - Jefferies & Company, Inc.

One final thing, Peter. When you think about the marketplace from an operational standpoint, how are you seeing the labor front, productivity front? Are we going to continue to see industry-wide, generally, maybe in your company, specifically, some of the cost pressures, productivity situation that we're seeing from Central Appalachia? Do you think that abated at all during 2011 and beyond?

Peter Socha

I think the biggest productivity issue that has affected James River has been self-imposed. And that as we dialed back to mines, productivity goes down and some costs go up, but that's been at our choice. Labor itself, I think we're okay with where -- wait, I'm looking at C.K. now. I think, we're okay. Do you want to talk about this?

Coy Lane

I think labor, as always, as the market starts increasing for faster coal labor gets tighter. Our turnover has been very low in the Eastern Kentucky right now, so labor market is pretty good. I think what both James River's done and IRP has done is have a very aggressive training program. We have hired a lot of young people and brought them in the company and continually do that. And by doing that, that's allowed us to stay in pretty good shape for flavor. And I think both companies do that very well. So there's not a lot of experienced coal miners out there, you have to hire them young and train them. And I think we've been way ahead on doing that so far.

Operator

Our next question is from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc.

Since the bond refinancing was asked, I do have a few others. The first is can you go over your 4Q costs? I noticed there wasn't a cost bridge in the press release. And just if we're looking at what the margins of James River Steam business would've been, excluding the benefit of this acquisition going forward, it looks as though they've sort of moved firmly into the $70 a ton plus arena. And given that, that's what IRP's costs are, it seems as though, is that the cost we should be thinking of for smaller cap thermal producers, sort of $70 to $75?

Peter Socha

I think I would say, I might go down a little from that. I might say in the $65 to $72 or $73 range might be okay.

Justine Fisher - Goldman Sachs

And was there anything in particular that drove James River's cost stop so significantly during the fourth quarter? I mean, nonrecurring?

Peter Socha

You have the fourth quarter, anyway, so you have all of the seasonal factors that go along with that. And then you have the weather, and then you have the rails, and then we had a couple of geological issues. This is the same thing that we have talked about before in that when you're a small company, then you voluntarily dial the lines back, and then you have an involuntary thing like a railroad issue or a weather, I guess, the biggest thing that affected us is probably ice storms. When you do that, when you're typically going 100%, and then you go to running at 85%, and then you have an ice storm that dings you back for a week to 75%, it's going to affect your costs. And so, hopefully, as we get larger, those things will have less of an impact on us, but again, the biggest issue on our costs has been self-imposed for the last couple of years as we run to the dial-back level.

Justine Fisher - Goldman Sachs Group Inc.

And then I was wondering if I could dig a little bit deeper into the foreign/Indian sales. I know, if IRP is one of the largest sellers to the Indian market, it's still a 1.2 million met coal ton company, which vis-a-vis a broader U.S. market, it may not be that huge but as a percentage of what we export to India might be. So can you talk about the number of tons that were exported to India? And then maybe if that's increasing or decreasing?

Peter Socha

I won't go into the specifics on India itself, but about 2.5 million tons are exported. So out of 3.7 million tons, 3 million of that is met coal. And of the 3 million of met, 2.5 million is exported. Just round numbers, 2.5 million is exported and $500,000 is domestic.

Justine Fisher - Goldman Sachs Group Inc.

And then the last question is just so that we can think about the net back to the mine, met coal price for the tons that are being exported, I mean, I see that they're Eastern loadout facilities that you're acquiring and also some barge transportation. So if we're thinking based on pick a global met coal price, can you give us some round numbers for the transport costs, so that we can arrive at good net back to the mine met pricing for whatever our benchmark might be for 2011?

Peter Socha

I think I'll defer on the question now, but we'll -- probably, by the May call, we may be able to give you more color on that.

Operator

Our last question is from Brian Gamble of Simmons & Company.

Brian Gamble - Simmons and Company

You guys run pretty lean from at the top from a management perspective. How do you bring in the full management team of both L&K and IRP and remain lean? I mean, what rules does everybody fill up? Obviously, the L&K guys are on the trading side, but how do you integrate everybody else?

Peter Socha

Gary White, who's the CEO of IRP right now, he will continue to do what he's doing from Gilbert, West Virginia, except we're running the mines. The only difference is that C.K. will run all of the mines, but Gary is a heavily involved in property acquisitions in West Virginia, in permit processes in West Virginia, in the state government areas of West Virginia, the West Virginia Coal Association. So there will be plenty for Gary to do, and there'll be, obviously, plenty for Joe Czul to do. We are not doing this -- one thing I didn't mentioned earlier, but I should have and that is this is not a transaction that is built on cutting people or on consolidation of overhead range like that. There is plenty of work here for everybody to do. And the people that we have, we're in an industry that lost a generation of people, and so when you can pick up a group of talented and hard-working and smart people as we are here, you keep all you can. The numbers, the accretion/delusion numbers worked just great, with the cost structure of IRP exactly as it is. And so I'm very happy that Gary and Joe and their whole team, and when I say, whole team, I mean, whole team, will stay on board post-transaction.

Brian Gamble - Simmons and Company

I know you mentioned not wanting to get too much into the trading segment. One thing I would try to grab out of you, can you breakdown the EBITDA on a pro forma basis for 2010 between the two?

Peter Socha

I think I'll defer on that, just because we will be -- I mean, think of it as just an IPO, Brian. That's maybe the best way to think about it. And we just have controlled environments as how we need to dispense the information, how we need to let it out there, primarily, through things like SEC filings and slideshows that are much more expansive than what we have here. So we'll get you all of that information, but we'll do it in a very public forum, in a very public way.

Brian Gamble - Simmons and Company

And then maybe, you could talk a little bit about gaining exposure to the NS rail? People talk about a lot of issues on that rail in past, in the East. They're trying to catch up, but sometimes they lag a little bit. Maybe you can give your thoughts on the increasing exposure there?

Peter Socha

Increasing our exposure, we're actually spreading our exposure, because we're 99% CSX right now. We'll be picking up NS exposure. CSX, I mean, I'll give you our personal view on CSX. They've done a great job. We've always been happy with them. There were some issues in Q4. There were some issues in January, but they were all weather-related. When you get these ice storms -- but here's the issue. When you have a train crew, and they time out, or they can't work anymore that day, they stop the train, they call a taxicab to come get them and they take them into the hotel and then they go spend the night or they have their restaurant. When you have the ice storm happens, the taxicab won't go out. He won't go get them, so it just clogs up the whole train system. And that's not train, that's not CSX's fault, but that's not Norfolk Southern's fault. That's just the operating model that they have in the weather that they have, and it's been that way from the beginning of time.

Operator

Our next question is from Curt Woodworth of Macquarie.

Curt Woodworth - Macquarie Research

Question on L&K, can you just provide a little more color on how that model operates in terms of where they source the coal? It seemed they try to blend it to create this export product for sale. And how does the margin structure work? Do they get a fee per ton or they're really trying to blend and capture like a pricing arbitrage? I just don't really understand how that works.

Peter Socha

Again, we will lay out more information as we go along. But in general, they do not get a fee per ton. They source from multiple sources -- I want to say 20 some odd sources, although -- Gary, you could jump in there. They source from multiple sources throughout Central App at a variety of qualities of met coal, and they typically will blend that into a product that is desired by their customer, and they will capture the margin in doing so. They're creating something, because of the relationship with the direct end-user, they know exactly what the blend is that, that customer requires, and they're able to go out and put that blend together. And in doing that, they are able to capture margin.

Curt Woodworth - Macquarie Research

And do they have their own blending facilities, or do they do that at the terminal? How does that function?

Peter Socha

That's further than where I want to go right now.

Curt Woodworth - Macquarie Research

And then in terms of the Hampden mine, what is the -- is that a high ball, B mine, or what's the volatile matter component there?

Coy Lane

The coal coming out of Hampden camp is primary all met, there's a little bit of thermal, and is the high ball B+ coal and from five underground mines and one surface mine.

Curt Woodworth - Macquarie Research

Is that sold domestic or for export?

Peter Socha

It's all part of the L&K. It's all part and parcel of what they have to sell.

Curt Woodworth - Macquarie Research

And in terms of the Indian, I guess, contract or how that function, is that a long-term type agreement, or are you just kind of one of the blends that they've kind of spec [ph] off on there for it's more of an ease of use [ph] export to them.

Peter Socha

It's all very long term relationships, and as far as the contactual relationships, I don't think Joe or Gary would want me going there. But they are very long-term relationships themselves.

Operator

The next question is from Bill Burns of Johnson Rice.

William Burns - Johnson Rice & Company, L.L.C.

I'd like to pitch this, Sam. Maybe you're very first question talk about doing a line item for the brokerage business and it sounded like, Peter, maybe you weren't so much in favor of that?

Peter Socha

We haven't decided yet. You know this Bill, we have worked very hard from the beginning on clarity and on disclosure and on transparency.

William Burns - Johnson Rice & Company, L.L.C.

You're the best company in terms of that.

Peter Socha

That's something we work very hard on. We don't IRP and L&K yet, and we haven't decided, and we haven't sat down with the principals, with Gary and Joe to decide how we want to try to maintain our reputation for clarity and transparency and at the same time, protect the business model that they have and that they've built and that they're justifiably proud of. And so those decisions have -- quite frankly, we've been too focused on getting everything signed up and getting the deal done and not as much on how do we want to handle disclosures in the future. But, we come at it from a standpoint of we prefer more transparency, not less, more disclosure, not less, but this may not be quite to the same level as we've had in the past on other things.

Operator

Our next question is from Brett Levy of Jefferies & Company.

Brett Levy - Jefferies & Company

In terms of CapEX going forward, does this change any of your CapEx plans with respect to your met coal mines? Can you talk a little bit about the acquired businesses, CapEX in round terms, either last year or going forward? Just kind of talk a little bit about the spending plans for the combined entity and each of the two separately.

Peter Socha

On the Kentucky side, no, we will not change CapEx at all other than some catch-up maintenance on equipment and things like that. But on the West Virginia side, on the Hampden side, we'll wait and disclose that in the proper way. They're CapEx is not extraordinary. On The IRP side, it's not extraordinary.

Brett Levy - Jefferies & Company

And so no major expansion plans sort of come out of this kind of assume that you guys continue to run at close to maintenance with a little bit of buildouts?

Peter Socha

Well, yes, we've got build outs. We've got a lot of break [ph] in Indiana which is a big buildout. So we're doing buildouts as we go along. But as far as major growth projects within the combined entity or within the IRP side, there are projects there. We just had not sat down and prioritized those projects.

Brett Levy - Jefferies & Company

And then on the cost-savings side, I know you've said you're going to sort of acquire these assets as is and it's not based on any dollarized amount of overlap for synergy savings. But I mean, is there some possibility? I mean, you've got two of a lot things now maybe even three.

Peter Socha

That's not a reason to do the deal. Honestly, that's not why we're doing this deal. It's because of overlap. This is not like a situation where you have musical chairs, and you have two chairs and six people, and when the music stops those six people got to find those two chairs. This is a case where there is minimal overlap at all. And quite frankly, I would rather grow into the point where there's no overlap rather than shrink to fit the number of chairs that are there today. But we are not doing this transaction because of overlap. The synergies, I think the whole concept of synergies and cutting and overlap is way overrated, way, way, way, overrated. The bigger synergies, quite frankly, without a doubt, the bigger synergies here are on the sales and contracting side. Our ways that we can optimize the combined portfolios, the ways that we can optimize the combined customer relationships and things like that. Those are our multiples, maybe double-digit multiples of what you would see on synergies from overlaps or even like that.

Operator

Our next question is from Lance Hughes [ph] of [indiscernible].

Unidentified Analyst

Given much detail, but just want to go over. Are there potential cost synergies here? Maybe you can't map out the numbers, just what they would be a guess?

Coy Lane

The way we would look at margin IRP into this is the Hampden coal will be set as much like our existing companies, our McCoy Elkhorn, our Blue Diamond, it will be a separate facility. So everyone is there working with the mine President. It will be just stay in place and it'll be ran very much as it is now. And you look at the Kentucky operations, we will merge our Elkhorn services, which handles our surface mines with Laurel Mountain Resources, so we're doubling our surface mount production. And most of the folks that we got working now have full-time jobs, so we'll be merging those two together and going forward with that so. That's how we plan on looking at it, so we'll run that much as it is now. And then the L&K piece will be a separate piece of business with the exporting and the trading business.

Unidentified Analyst

I guess, you don't really foresee any cost synergies I guess then?

Coy Lane

There will be synergies as we combine the purchasing power of buying ore from the same vendor and doing that. But their business is pretty much in the met side, in West Virginia and then combining our surface operations in Kentucky.

Operator

Our next question is from David Khani of FBR Capital Markets.

David Khani - FBR Capital Markets & Co.

Maybe, Peter, how much export you think you'll do this year in 2011? And what did you do in 2010?

Peter Socha

Zero in 2010, and if we were not doing IRP, L&K, we would do somewhere between 0.5 million tons and 1 million tons this year. And we did 1 million tons if you go back to '09 or '08, we did 1 million tons. While I got you, Dave, because I know how you view these things. Somebody just slipped a note in front of me, on the L&K side, on Logan & Kanawha, what they do is peer trading or match trading, so when they have the -- we were not talking about an open contract book here or trading risk per se, what they do is when they source the coal, they get with the customers, they figure out exactly what the blend is they need with the customers, and then almost simultaneously, they will close both sides of the transaction. So I don't want people coming away from the call with the impression that this is a big trading operation, it's more of back-to-back transactions.

David Khani - FBR Capital Markets & Co.

And if I remember correctly, they also -- looking at some of the articles out there in the trade rags that they would source them from sort of small to midsize players in Central App?

Peter Socha

That's a fair comment. They source from a lot of different people.

David Khani - FBR Capital Markets & Co.

Can you talk a little bit about the productive capacity? Just change over standalone has, because you talked about backing off on some of your production and running sort of 85%. What do you think you can do in sort of a full year, assuming the demand was running full bore?

Peter Socha

I think we can probably go up there in the 8 million range.

David Khani - FBR Capital Markets & Co.

8 million tons in Central App?

Peter Socha

Yes.

David Khani - FBR Capital Markets & Co.

And then how about in Indiana?

Peter Socha

3 million, 3.2 million.

David Khani - FBR Capital Markets & Co.

Is there any possible synergies -- I don't know if you discussed this on the call, of blending some of the James River production into the IRP/L&K side?

Peter Socha

They're close, but they're not that close geographically. The way I see that working is more the L&K said will help us out on the pricing. And they may be able to use some of our met coal in trade situations.

David Khani - FBR Capital Markets & Co.

MSHA, how's after a lot of blitzing and all this other stuff for the industry, how's MSHA been for you? Because you didn't mentioned much of that as an impact at all?

Peter Socha

It's definitely there. I guess, because it's just a constant that's why we didn't mention it. It's there, and I don't see it getting better, and I don't see it necessarily getting worse. There's some things coming out of Washington that we're all watching. But it's just something you have to live with, Dave. You can't spend all of your time sort of worrying about it, because you just have to do it. You just have to go out, you have to do whatever it is they want you to do.

David Khani - FBR Capital Markets & Co.

But it's not getting worse, which is good.

Peter Socha

I wouldn't say it's getting worse. I mean, some days are worse than others.

David Khani - FBR Capital Markets & Co.

Last question, contracts, just to keep some of the key employees here, because you said this is not about headcount reduction. Have you worked through in sort of locking in Gary and Joe?

Peter Socha

Their contracts are in place. They had contracts in place. And I think, I can speak for both of them that they're very comfortable with the transaction, and they are comfortable with thus.

Operator

Thank you. Ladies and gentlemen, that is all the time we have for questions today. I'd like to turn the call over to Peter Socha for any closing remarks.

Peter Socha

Okay, Tyrone, thank you for your help today. Thank you, everyone. And we look forward to discussing this transaction with you more in the coming days and weeks. Thanks very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.

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