James River Coal's CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: JAMES RIVER (JRCCQ)

James River Coal (JRCC) Q1 2011 Earnings Call May 10, 2011 11:00 AM ET

Executives

Joseph Czul - President - Logan & Kanawha

Peter Socha - Chairman, Chief Executive Officer and President

Samuel Hopkins - Principal Financial Officer, Chief Accounting Officer and Vice President

Elizabeth Cook - Director of Investor Relations

Coy Lane - Chief Operating Officer and Senior Vice President

Analysts

Paul Cheng - Lehman Brothers

Lance Ettus - Mortar Rock Capital Management

Justine Fisher - Goldman Sachs Group Inc.

James Rollyson - Raymond James & Associates, Inc.

Justine Fisher - Goldman Sachs

Shneur Gershuni - UBS Investment Bank

Michael Dudas - Jefferies & Company, Inc.

Brian Gamble - Simmons & Company International

J. Haberlin - Davenport & Company, LLC

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

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Beth Cook, Director of Investor Relations. Ma'am, you may begin.

Elizabeth Cook

Thank you, Gavin, and good morning. Welcome to James River Coal Co.'s First Quarter Earnings Call. We released our earnings this morning, and our current release and investor presentation are posted on our website and were furnished to the SEC on an 8-K. With me on the call 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; Jim Ketron, Vice President and General Counsel; and Joe Czul, President of Logan & Kanawha.

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 on our annual report on Form 10-K and other SEC filings. I'll now turn the call over to Peter.

Peter Socha

Good morning, everyone. Thank you, Beth. We have a fairly short slide deck today, so we'll get to the Q&A, and hopefully, Q&A will be a little bit longer.

Just turning on Slide -- what is my -- Slide 4, we did complete the acquisition just a couple of weeks ago of IRP and L&K. We're very, very happy with the transaction. We're happy with how everything has gone and the integration so far. I think the integration has gone smoother than we would have expected, and I would expect it to continue to go very smoothly. We've been pleased with all sides on how things have gone on that transaction. The capital markets transactions also went smoothly, as those of you who we saw on the road show are aware, that all 3 transactions were very well oversubscribed, and we are pleased with the results and pleased with the quality of the investors and with the geographic dispersion of the investors. We did have some short-term impact in the first quarter. We knew it going in. Anytime you do a transformative transaction like this, you're going to have costs, both direct and indirect. And that was one of the things that we weighed in late January, early February. C.K., Sam and I went away for a couple of days, and that was one of the things I thought about very hard, which was, could we divert ourselves away, because we are a small company and we are thinly staffed. Could we divert ourselves away? In fact, we decided the risk was worth it, and it's turned out to be worth it. We had some direct costs in the quarter of about $5 million, but there were also indirect costs. But over the long term, we think that those will be minimal.

The synergies, when we're on the road show, we talked about $20 million to $30 million of annual synergies. Right now, we're saying $25 million, but we do believe it will have upside bias. The ones that we're looking at today are all product-related. They're all product mix in that we are trucking our metallurgical coal from McCoy Elkhorn over to Gilbert and that is being shipped under L&K orders to the international seaborne coal markets. We are in the process of doing engineering work on the upgrade to the Sunny-Knott loadout facility that IRP has, and we'll be able to stoker coal there. And then we're also, the one that I think has surprised me a little bit more, maybe it shouldn't have, and that is PCI coal. Crossover in PCI. Joe and his team have really been diving in on that. And so we've been very pleased with what we've seen. So today, we're looking at $25 million with upside bias to that.

We did sell, since we last spoke to you a couple of weeks ago, we did sell about 800,000 tons of 2011 coal, about 1.3 million of 2011 and 2012, of the 800,000. And I know this will be one of the early questions from either Riley or Jeremy, depending on who's in the queue. Of the 800,000, about 500,000 of that was thermal and the remaining 300,000 was metallurgical coal. So we've been pleased with the pricing. We've been pleased with the transaction, and we believe it sets us up well going forward. And with that, I will turn it over to C.K. to go through operation.

Coy Lane

Thanks, Peter. First, I just wanted to go over the first quarter NFDL rate for the existing James River mines. It was 1.45, which is tracking lower than our last year's number, and also, well below the national average. We are still continuing to work on our tracking and communication systems. We're down to having all but about 3 of those installed. They will be installed by June 15, complying with that. We're continuing to work through the issues with the EPA on permits. The permit that we are focused most on now is our Stacy Branch Surface Mine permit in the hazard area. We have been working on that permit since 2006 and that's very active. We had a meeting in Atlanta with the EPA as late as yesterday. We're continuing to make adjustments to the mine operations to comply with the new and the modified MSHA regulations. The new dust standards are on the horizon for respirable dust. The new rock dust standards, mine evaluation standards and many more to come. And those are having an impact on underground mining costs pretty dramatically across the cap region.

Talking about Central App, Appalachia, our first quarter was impacted. We did, as Peter said, spend a lot of time on the acquisition and due diligence. It was a large transaction for us. We had minor geologic issues at several of the mines and nothing major in the issues, but during the first quarter, we had them in a lot more mines than normal. So a lot of mines faced some issues there. We were impacted by the weather, on labor in our surface mines with the large amount of rain that we've had in the first quarter and also, in April. Working through the learning curve of the new operations, we have taken the Kentucky surface operations that we acquired from IRP and merged those together with our operations, with James River Coal services, into one operating unit. That puts us a pretty large surface mine player in East Kentucky now. And the Hampden Coal operation will be a stand-alone subsidiary. Jesse Justice will be the mine [indiscernible] of that subsidiary reporting to me. We are seeing cost pressures on the raw material labor side. This is the flip side of the high met prices that we're seeing. Steel has been impacted, huge impact on the diesel fuel and on equipment pricing.

As far as the James River metallurgical mine, as Peter said, we have 2 mines currently producing. We are looking at adding a third section in the third quarter to increase that production, and all that production is now being trucked over to the Hampden loadout in Gilbert, West Virginia, and blended with L&K shipments to take advantage of the higher export prices. In the Illinois Basin, all the operations there were hit hard by the rain and flooding. Indiana was hit especially hard in March and then into April. They were impacted on their costs with the fuel and explosives being predominantly surface mining, a real impact on the fuel side. We did complete one significant major move at our first underground mine, and our second underground mine is up and running, operating one shift a day, and we hope soon to move that to 2 shifts a day.

The Log Creek development is continuing on schedule. The plant is well underway on construction, and we are looking at an early third quarter startup of the preparation plant at Log Creek.

Moving over to IRP, as Peter said, we closed the acquisition on April 18 and acquired the operations at Hampden and the East Kentucky surface operations, also L&K. L&K will focus primarily on met and export and PCI sales. Our existing sales group will be focusing on the steam and thermal side and stoker sales. As Peter mentioned earlier, we are expecting at least $25 million in synergies.

Most of those right now are on the maximizing of contracts, along with the things that Peter had mentioned earlier on the extra stoker at Sunny-Knott, PCI that we're bidding out, our Bell County operation now. The met coal going to Hampden Coal. We are also trucking the surface coal from the new surface mines in East Kentucky to our McCoy preparation plant, and we're also trucking highwall miner coal to be washed at our McCoy preparation plant. I think this will free up capacity at Sunny-Knott to increase the surface production, and also increase our highwall miner production off the existing surface mines. So we're pleased with the direction that that's going so far. The preliminary results for the first quarter for IRP. This would be combined, the East Kentucky surface operations and also the West Virginia met operations. Shipped about 1.2 million tons, an average sales price of $127.50, capital of about $7.4 million and their SG&A was $6.8 million. Costs, those 2 average operations were in the mid-90s and wanted to follow up, especially with IRP, we think it's a really good fit with the culture of our company. It adds a lot of benefit for us. So we'll see that by moving the contracts around and hope to take advantage of some of the synergies on the equipment pricing and with some of the raw materials and labor -- or raw material side. But also in the first quarter, Hampden coal, which is the U.S. Virginia operations, had an NFDL rate of 1.58 and the surface operations in East Kentucky had a zero NFDL rate. So they are operating well in the safety range, and we are very pleased with that. And with that, I'll turn it back over to Peter.

Peter Socha

Thank you. We're going to mix up this next slide a little bit on the market. We only have Joe for a few more minutes. So Joe, you want to speak a little bit about the international markets?

Joseph Czul

Sure. I mean across the board, I would say, it's characterized by inventory. Levels are pretty low still, our customers pretty much in all countries across all continents. And so that's keeping the market firm. We really saw the market change in February, where it ran up really almost on a daily basis from the beginning of the month to the end of the month of February. Since then, it's been really quite stable, and we don't see a whole lot of really, variability now. So it looks pretty firm. Like I said, inventory levels are pretty low across the board. So there's still very steady demand really looking out as far as we can see.

Peter Socha

Thanks, Joe. Joe has a meeting out at 11:30, and he spent virtually all morning on dealing with sales in India. So Joe, if you need to go, go ahead. On the domestic side, I'll just comment very shortly. We probably see more variability on inventory levels in our area for bituminous inventory in Southeast than I've ever seen. I mean, we were in Florida last week and saw probably 10 different utilities at various functions. And some of them need coal today. They need coal prompt. Others may not need coal for quite a while. So I think when you look at the averages, one reason we didn't include things like average rate of change in inventories, which we usually include, it's because the averages today, I think, are meaningless. So it really is the haves and the have-nots. So it's an interesting situation. We have been selling coal, as you can see. We have been selling coal. I've been very pleased with that. So our inquiry activity has gone way up, and this applies to both domestic and international. I have more requests from customers for meetings in Europe next week than I've ever had, probably twice the level of last year. So I'm pleased to see that. But we're also seeing increased inquiry activity here in the U.S.

I did put down the last bullet here, which is greater thermal price volatility. I think the nuclear, those of you who saw us on the road show heard us comment on this, the nuclear situation in Germany is probably the biggest impact, will have the biggest impact on the Atlantic market, the Atlantic thermal market, I think for the next 2 or 3 years. And it will introduce much more volatility than we have seen in the past because of the reliance on renewables and the fact that renewables really don't work so well in the winter time. So I think we're going -- it's going to be a traders' market for the next several years, anyway, until this is all sorted out.

And other than upcoming investor conferences, one did get left off of here and I need to apologize. Davenport has a conference here in Richmond on May 24 with Chris. We're going to be over there with Chris. I think I will be there. I will be right off a plane from Europe, and I think I will be there. If I'm not there, then Sam will be there. I will be in Nice next week, and then also at the Coal USA Conference in New York.

And with that, Devon, we will be pleased to answer questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeremy Sussman of Brean Murray.

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

On IRP, the press release said they sold, I think, 1.2 million tons at about $127 a ton. So obviously, some pretty good pricing there. Can we get a sense of -- first, can we get a sense of costs? And then second, can -- should we be annualizing that volume number?

Peter Socha

Well, we are going to go out with guidance in August with the Q2. By the way, I forgot to mention that, there was a discrepancy between the press release and the slides, the guidance. And you know this, because you followed us for a long time. The guidance will go out with the Q2 numbers in probably the first week of August. The cost number for them was in the mid-90s. I think C.K. mentioned that. Annualizing it, yes, you probably could. I don't think it will hurt you to do that. What was the third part?

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

No, that was it. And the next question is on the -- you alluded to this in your remarks, on the met coal side. I mean, I'm backing into about a $200 plus short ton at the mine figure. Can you confirm that?

Peter Socha

Yes, you're right. It starts with the 2.

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

It starts with the 2. And then the quality? Is it low wall? Is it midwall, highwall?

Peter Socha

Almost everything we sell is highwall. Occasionally, a little -- Joe, are you still on? Or have you gone? Yes, he had to go. Everything we sell pretty much is highwall and there's a little bit of midwall and then various grades of highwall.

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

Well, that's extremely helpful.

Operator

Our next question comes from Jim Rollyson of Raymond James.

James Rollyson - Raymond James & Associates, Inc.

Going back through, I guess, just the cost side, raw materials factors are here to stay for a while, it seems. But some of the other issues seem, the transient things like the focus on getting the deal done and closed and what have you, and maybe the weather impacts and what not. As you roll into 2Q, how much of that lingers since you still had to get the deal closed and still having at least, -- seems like you're having a little bit of weather?

Peter Socha

Yes, there's some. There will also be some direct costs in Q2, Jim, in that what you saw is direct costs, meaning, I think, it's in the P&L on the second page of the press release. It's like 4 million 7 something. That was the bridge loan. That was not -- those were not the fees for closing the deal. Those don't get incurred until you actually close. So we'll still have those. There's some lingering -- you're right on the raw materials. Those are with us. And as C.K. said, if that's the cost of taking these high met prices, then I'm willing to pay that. On the rollover, there's some in Q1 and Q2. There's some effect, without a doubt.

James Rollyson - Raymond James & Associates, Inc.

So we'll still have noise in 2Q, when that is normalized?

Peter Socha

We'll still have some noise, yes. Yes, I mean, actually, we had another issue that came up just last week, or came up to me last week, just a goofy tax issue, because there was a -- because the capital transactions closed in March and the IRP transaction closed in April. You cross over the quarter end. And so we end up with a negative tax rate. Well, that ended up being a negative, and this is a Shneur question, I'm sure. That ended up being a negative impact for us of about $1.5 million, because you cannot assume that you own IRP for the year. You can't assume that you own them at all. That will come back to us during the course of the year, as you true up. Sam was just fit to be tied last week over that. So we have a whole bunch of noise. And he called me about it, and he said, look, this is a problem. I said, Sam, look, once you have noise in the quarter, it doesn't really matter how much noise.

James Rollyson - Raymond James & Associates, Inc.

So that comes back in 2Q or just through the course of...

Peter Socha

That comes back -- that will come back the rest of the year, that's correct. But a whole series of those little things.

James Rollyson - Raymond James & Associates, Inc.

You used to have diesel pass-through causes in your Midwest contracts. Do you still have those things?

Peter Socha

Yes.

James Rollyson - Raymond James & Associates, Inc.

That's still working kind of on a delayed basis?

Peter Socha

It is on a delayed basis, that's correct.

James Rollyson - Raymond James & Associates, Inc.

Okay. So you'll pick back some of that up as you go through the year?

Peter Socha

Yes, and we need to, as -- and I know we talked about this before. We need to start a hedging program, and now that we've got the LMR assets in Kentucky, where our diesel used, both direct and indirect, is much greater. So we need to start hedging the diesel that we burn that is not hedged through the Midwest contract.

James Rollyson - Raymond James & Associates, Inc.

And you gave us some figures for IRP in 1Q on a ton, its revenue per ton, kind of cost per ton ballpark? Any chance of giving us some kind of EBITDA numbers and maybe IRP allocated?

Peter Socha

No, because what that leads to -- I mean, one reason we didn't put all the numbers in the release is then you have to start doing pro forma. And we didn't want to do that. I mean, we bought -- the asset closed early in the quarter so in the future, it will be part of us. The pro formas just introduce a whole new element that we didn't want to go there.

James Rollyson - Raymond James & Associates, Inc.

Last one for you or Sam, when we go forward and get past all the financings, debt repurchase et cetera, what is your all-in quarterly book interest run rate -- interest expense run rate, look like when you incorporate the whole debt discount amortization stuff?

Peter Socha

I know there are still conversations going on, on the converts. And so we'll come back to you with that, and we'll put that in the guidance. And we'll look at your model. Rolly, if you're far off, I mean -- or most people are far off. But I think, Sam, correct me, what's the current rate we're using for book interest on the new convert?

Samuel Hopkins

It's around 9%, is what we're currently booking that at.

James Rollyson - Raymond James & Associates, Inc.

And then the cash force is just the actual coupon?

Peter Socha

And the coupon -- exactly, yes. The cash is the cash.

James Rollyson - Raymond James & Associates, Inc.

Okay. Helpful.

Operator

Our next question comes from Michael Dudas of Jefferies.

Michael Dudas - Jefferies & Company, Inc.

Peter, so it sounds like second quarter -- no, first half of 2011 for James River, is going to be kind of like benchmarking, kind of clearing things up to set up the second half of the year to 2012. Is that a fair assessment?

Peter Socha

That's a very fair assessment.

Michael Dudas - Jefferies & Company, Inc.

Timing of the market, you're going to Europe in a couple of weeks, the met market. Do you think over the next 2 to 3 months, there'll be a lot more activity, given what you talked to people down in Florida last week and what you may anticipate hearing in Europe, and will we see some thermal coal being shipped out of the old James River into the European markets for 2011?

Peter Socha

I think, you probably will. I mean, we haven't booked anything yet. And I never would, before I go over there. I do leave on Sunday. So I have got a ton of meetings scheduled. So I think you will. I think that's a fair comment that either later this year -- I mean, we've got people right now that want cargoes in Q4, which kind of plays into my view, which is Q1 is going to be very volatile for European power pricing. For the U.S., I've just been very pleased by the inquiry activity. The prices still stink as I put in the quote. We're still not happy with the prices, but you've got to start somewhere. I mean, you've got to start with the demand, and then you eventually, the inventories will clear and the market price will find a higher level. So I've been very pleased with the inquiry activity, not as pleased with the pricing.

Michael Dudas - Jefferies & Company, Inc.

You said in your prepared remarks, you've been pleased with some of the early indications of the synergies and merger and stuff. Maybe a couple of examples of that? And the $25 million annualized savings, can we start to think about that second half? Or is that a 2012 and beyond kind of number?

Peter Socha

No, those are happening today. They're kind of 3 buckets, Mike. One is on the James River met coal going through L&K. And these are kind of thirds. What we have said on the road show was they're kind of broken down into thirds. So a third would be James River Met coal being -- we're trucking it over to Gilbert and ship and blending it with those orders that are going out to India and Europe. That's number one. Number 2 is Sunny-Knott, which is a loadout that IRP has, it's called Laurel Mountain Resources, or LMR. And they historically -- they have not stokered coal. Of course, we've been stokering coal for a long time and selling stoker coal and picking up a fair amount of margin in doing that. So we will start doing that. And that's part of the optimizing. That will be -- C.K., what timing would you see on that?

Coy Lane

I think it will probably be 6 months, we'll get that up and running. So it will be end of third quarter, probably early first quarter -- or fourth quarter.

Peter Socha

So that's bucket number 2, Mike. And then bucket number 3 is crossover coal from James River -- existing James River operations sold either as crossover coal or as PCI, and that's happening today. That's being bid out today. And that's what I said in my earlier remarks, particularly on the PCI side. I think I've been pleasantly surprised. We had thought from 2 of our operations for sure that Joe and his team would be bidding PCI coal. It turns out that we have a third operation that he'll be bidding from there as well.

Michael Dudas - Jefferies & Company, Inc.

And maybe, just finally, maybe for C.K., maybe some thoughts on the labor pool in the regions that you've picked up in your legacy James River and a sense of activity, productivity in the fields? Are we getting more sense of what MSHA wants and needs? Is that going to help some of those numbers going forward? Are we still going to struggle through 2011 to get used to it?

Coy Lane

With the MSHA side, I think, we'll still struggle through 2011 and probably into '12. There are a lot of new proposed regulations that are out there, namely the respirable dust issue and the new mine exams. We are trying to sort through the existing regulations now that MSHA has proposed. So I think that will continue. As far as the labor pool, the labor pool in West Virginia is probably tighter than it is in East Kentucky. A lot of competition in the area where we are at with other met coal producers. And as you see, the higher prices in met. That puts a lot more pressure on the labor side with everyone trying to increase production. So I think West Virginia, the area around the Hampden operation, is very tight on labor. In East Kentucky, I think labor is available. The issue there is the availability of skilled labor. And both in West Virginia and Kentucky now, we have very active training programs where we'll have 10 to 15 people in each one of the operations in training programs to train for foremen, examiners, electricians. And that's really been how most companies have survived. So you're hiring a lot of young people and training them and that takes time, but they are available. In Indiana, we've not seen that labor pressures that we have in Kentucky and West Virginia so far.

Operator

Our next question comes from -- excuse me if I pronounce this wrong, Shneur Gershuni of UBS.

Shneur Gershuni - UBS Investment Bank

Just a couple of quick follow-ups to some of the previous questions. It sounds like you feel the market is okay. You did have a bit of an inventory build and kind of was wondering if there was an issue between the bid-ask between -- viewing all the inquiries that are coming in. And then I was wondering if you can sort of comment on the incremental thermal tons sold as the buyers come in, will that help your cost at all on a go-forward basis? Will the cost be lower, because of fixed cost absorption? Or can we sort of see it at this level?

Peter Socha

I mean, the inventory build, I have -- I told the guys, I want to carry a little more inventory, because when trains are available, they're not always available where you have the coal. And it's much easier, while other people are shipping, particularly in the West Virginia kind of Southern Virginia area, while other people are shifting coal from the thermal markets to the met markets, trains do come available. So we'll get a call from the railroad, saying can you load some coal? It's much easier if you have it. I mean, as you would expect, it's much easier if you have it. So late last year, early this year, I sat down with both Sam and C.K. I said I want to carry a little greater inventory levels than we have in the past. And the other reason is as the market tightens, and we found this back in '08, as the market tightens, having coal available is a differentiating factor. When utilities get to the point where they need it, I don't see it right now, but I can see it sort of early next year. When they get to the point, where they really need the coal, if you have it, that allows you to get some orders that you wouldn't otherwise get. So that's correct. What was the second part of your question, Shneur?

Shneur Gershuni - UBS Investment Bank

The second part was about the net tons sold, is it a higher or lower cost from where you're at right now?

Peter Socha

It will be a lower cost. I mean, that's just -- yes, that's just the high fixed cost. That's the higher cost. And then you get into quirky calculus here, but for us to run the mines at 6 million to 6.5 million tons, it's very, very difficult from a cost standpoint, particularly if you have bad geology or you have a roof fall or you have something else, it just screws you up. And if we can run at 7 million to 7.5 million, it has an impact on the cost of all of the tons, not just the marginal tons.

Shneur Gershuni - UBS Investment Bank

Okay. And then one final question, with the acquisition done now, can you talk about what your reserved export capacity is at the ports? I mean, did you get some port space, whether it's on a long-term contract or do you own a position and so forth? Just wondering if you can give us a little bit more color on how you're going to access the seaborne market.

Peter Socha

Well, everything we do right now is through Norfolk Southern. Everything we did previously on export was through CSX. CSX, the terminals have allocated capacity. So we typically have to work with someone who has that capacity tied up. With Norfolk Southern, it's not allocated. It depends on who you are and where you're shipping from and how it fits into their schedule. You have to get into a queue, but there's not -- you don't purchase capacity on Norfolk Southern.

Shneur Gershuni - UBS Investment Bank

So do you feel that you've got adequate access if you have a successful trip in Europe next week and you're able to meet?

Peter Socha

Yes, we did have conversations last week in Florida about some additional forward capacity investments that are being made in the U.S. and would we be willing to participate in those. Those are probably a year or 2 years away. But on the other hand, you have to start sometimes.

Shneur Gershuni - UBS Investment Bank

Right. Okay. Great.

Operator

Our next question comes from Brett Levy of Jefferies & Co.

Brett Levy

You sort of mentioned a number of different things mainly in the Illinois Basin, saying it's hard hit by rain and flooding. Would you guys have like a tonnage number or a dollar number associated with each of the items that are bullet pointed on Slide 8? So the rain, the fuel and explosives, the equipment moves -- I guess, Log Creek is not actually an expense. But sort of for those first 3 items, you said you were hard hit. Is there a dollar or a tons estimate that goes with each of those?

Peter Socha

No, we haven't provided that. Honestly, we talk about that internally, but it's not something that we dive deeply into. It just is. I mean when you get hit with rain, you could spend all your time sort of analyzing what's the impact of it. But we know internally, we have a range of numbers, we would have a range of numbers internally. But it's not something we provide externally.

Brett Levy

Got it. And then in terms of like moves for the back half of the year, are there a significant number of equipment moves planned for the back half of the year as well?

Peter Socha

C.K.?

Coy Lane

We have quite a few planned in the second quarter and it should decrease some after that. But we've got a couple of major moves that are ongoing in the second quarter right now.

Brett Levy

And then you guys have left yourself with considerable liquidity and financial flexibility, if and when you want to start considering kind of a next acquisition. Would you say that in terms of priorities, making that acquisition is a near-term priority? Or are you going to focus more on L&K right now?

Peter Socha

Well, we just closed the last one 2 weeks ago, Brett, or 3 weeks ago. So even though that one is going very well and the integration of that one is going very well, I think we're just going to stay on path. We are looking at various lease pieces we can pick up around all of our properties. And that's something we do all the time, anyway. That's not extraordinary, the way that IRP and L&K was.

Brett Levy

But probably at a year out or so in terms of when you'll look at the next sort of major acquisition?

Peter Socha

Yes.

Operator

Our next question comes from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc.

My first question is on the IRP coal sold for the first quarter. I know that you said that the average cost is in the mid-90s, but I'm wondering if you can tell us how much of that was mined coal and how much of it was traded coal, because 1.2 million seems to be more than what mined coal would be based on the numbers you guys spoke to on the road show. And then I also suspect that if someone could mine coal for a cost in the mid-90s, they wouldn't necessarily just sell it to the IRP or, I guess, the L&K assets -- for the mid-90s for L&K to sell. They would sell it themselves. I suspect the margin on the trading coal must be a lot thinner than the margin on the mined coal?

Peter Socha

Well, IRP and L&K will always sell more coal than they mine. That's part of what they do. It's part of their trading and their blending, and what -- how they sell their coal. As far as margin on it, we're not breaking out sort of how much was purchased coal or how much was mined coal. But their mines were operating and then C.K. and Jesse can confirm this. Their mines were basically operating in a normal pattern in the first quarter. I wouldn't say that was a material deviation from what they've done in the past. But selling coal that L&K purchases and blends with IRP coal, that's something they've always done. That's their business.

Justine Fisher - Goldman Sachs

So I mean -- if I remember correctly, from when you guys were on the road with the deal, it was about 60:40 mined coal versus traded coal. So is that about the ratio that it was in the first quarter?

Peter Socha

No. Other than saying that they kind of -- they basically operated within historical parameters, I'm not -- I don't want to get any more specific than that. We didn't own them in the first quarter.

Justine Fisher - Goldman Sachs Group Inc.

Okay. And then so that mid-90, I mean, even if that is a cost that we would need to use going forward, so you're saying that is the blended cost representing the cost of buying coal in the market?

Peter Socha

That is an all-in cost. That is an all-in cash cost. We would expect, and we did say this on the road show, we would expect that if the met market continues to stay stronger, that the coal that L&K buys and blends with the IRP coals, the cost of that will probably go up.

Justine Fisher - Goldman Sachs Group Inc.

Okay. And that cost include -- that cost includes the royalties that IRP pays for its lease reserves?

Peter Socha

That is correct.

Justine Fisher - Goldman Sachs Group Inc.

Okay. And then also, I was going to ask you about a sales base for 2012, so that we can calculate what percent you have priced. But I suspect that's going to be a number that comes out in August?

Peter Socha

Yes, I haven't even given a guidance for '11 yet, Justine.

Justine Fisher - Goldman Sachs Group Inc.

Just checking. And then the last question is just a housekeeping question. On the composition of long-term debt, for some reason if I add up the various bond issues, I'm not getting to the $720 million or so you guys show for the balance sheet. Am I using too high a number for the balance sheet amount of the convert?

Peter Socha

I'll have Sam -- Sam can call you after lunch.

Justine Fisher - Goldman Sachs Group Inc.

Okay. All right.

Operator

Our next question comes from Brian Gamble of Simmons & Co.

Brian Gamble - Simmons & Company International

You mentioned not pleased with the number yet, but obviously going to Europe to sell as much as you can. What is not pleasing with the number, it entails for the 1.4 you did for the quarter? It just seems like -- it seems like you're not...

Peter Socha

The domestic, yes -- the domestic thermal number, if you just look at sort of where the pricing is, where market-relevant pricing is, it's in the 70s. It starts with the 7. I think sometime next year, it will be materially higher. So no, I'm not pleased to have cost to start with the 7 and prices that start with a 7. I don't know that anybody would be pleased with that. On the other hand, a market clearing, particularly a market that was in the dumps for as long as this one, you've got to start somewhere and where you start is with inquiry activity from people who need some coal. And that's kind of what phase we're in at the market today. And I'm pleased to see that.

Brian Gamble - Simmons & Company International

With that as the backdrop, I mean, it doesn't seem like your quarterly run rate is increasing until possibly later in the year from just a total production or sales standpoint. Is that a fair assumption?

Peter Socha

Yes, I think that's perfect. Yes, I think that's right. Depending on what we do with crossover and PCI, that will be accurate.

Brian Gamble - Simmons & Company International

Okay. Fair enough. And then you mentioned and we can all see the inventory build. Has it gotten to where you want it to be? Or do you think it's still going to be incrementally higher as we go towards the back half?

Peter Socha

The longer-term number's higher than where it was at March 31. But I don't care if it gets there in the next 6 months. I mean, yes, it has gone up but I'm willing to do that because the market, I do see some early signs of the market tightening and I know that having prompt availability 2 years ago mattered, and having the ability to take trains when they're available matters. So by the end of this year, you will probably see a higher number than you see today. Whether it's higher at June or higher at September, I don't know. That kind of depends on how the mines run and how the trains run. But we have made -- I have made a management decision. I want, going into a tightening market, I want a higher level of inventory.

Brian Gamble - Simmons & Company International

That makes sense. Opportunistic when you can do it.

Peter Socha

Yes, exactly.

Brian Gamble - Simmons & Company International

I was going to try to get Joe, but maybe I can get your opinion. I'm sure you've been talking to Joe, the global prices, the 3 major markets in the $120 metric ton range, the last quarterly signing at $330. How do you view either thermal prices over the next few months or the next quarterly met sign? And does Joe, or you, or both have an opinion on what that number is going to be?

Peter Socha

Yes, he told me this morning. What I can say is that they got very strong and they have stayed stable.

Brian Gamble - Simmons & Company International

Okay. Well, that means $300-plus is essentially what I'm reading into that?

Peter Socha

Yes, that was his -- he said -- you're okay, saying that. Now he's keeping a list, just like C.K. keeps a list, of all the things I say and I shouldn't say.

Brian Gamble - Simmons & Company International

Okay. That's it. I appreciate it.

Operator

Our next question comes from Chris Haberlin of Davenport & Company.

J. Haberlin - Davenport & Company, LLC

Last quarter, you had said that the market had started to move recently in that you were getting closer to the stage of telling C.K. to start taking production up?

Peter Socha

Chris, are you on speakerphone?

J. Haberlin - Davenport & Company, LLC

Yes. I'm sorry, last quarter you had said that the market was starting to move in that you were getting close to telling C.K. to start taking production up. And I know that there was, obviously, some weather impact in Q1. But have you started indeed taking production up a little bit to meet the increased activity you're seeing out there?

Peter Socha

Well, we're building the inventory a little bit. I wouldn't say production is at -- no, the answer is no. I haven't said okay, C.K. And he hates when I say this. If you ever want to like see C.K. with fingernails on a blackboard, say the term "step on the gas." I have not told him to step on the gas yet or C.K. and his team. But yes, we are seeing signs. We are seeing some signs. But we're carrying enough inventory right now that I'm comfortable with where we are. I'd like us to be producing a little more, mainly because of the impact on costs, not because the market is just dying to take the coal.

J. Haberlin - Davenport & Company, LLC

And then looking at the IRP, I guess, you said that it was safe to annualize that quarterly figure. Would it be safe to assume a 70:30 met-thermal split like we saw out of IRP and L&K last year?

Peter Socha

What do you think, C.K.?

Coy Lane

I think with the purchased coal there, we will be increasing the Kentucky surface operations just for the impact of the full year, which, they only started mid last year. So I think you'll see that pick up. I think the West Virginia side will probably stay close to stable what they're running now. And then availability of purchased coal, really, is more in Joe's area there.

Peter Socha

So the 70:30 will probably go -- I'd forgotten that. The 70:30 will go down, Chris, because the Kentucky mines, were only operating for part of the year last year, which is thermal coal. And they will operate for the full year next year. So that 70:30 will go down.

J. Haberlin - Davenport & Company, LLC

Okay. And then 2, just kind of last -- kind of housekeeping questions, the $6.8 million SG&A that IRP had, is there any acquisition cost in there that we should back out? Or can we annualize that number?

Peter Socha

No, it will be lower. It's not acquisition -- to my knowledge, it's not acquisition cost for them. I mean, we had to pay, but they do have things like general partner fees and other items. If you take that down somewhat, maybe by $1 million or $2 million and then you annualize that number, I think you'd be okay.

J. Haberlin - Davenport & Company, LLC

Okay. And then last question, where does the share count stand here today?

Peter Socha

Sam?

Samuel Hopkins

About 37 million shares.

J. Haberlin - Davenport & Company, LLC

37 million?

Samuel Hopkins

I'm sorry, 35.7 million.

J. Haberlin - Davenport & Company, LLC

Okay. That's it for me.

Operator

Our next question comes from Lance Ettus of Tuohy Brothers.

Lance Ettus - Mortar Rock Capital Management

I have a couple of questions. First of all, the PCI coal, can you touch a little bit more on that, just because, I'm just wondering if this started to cross over last year and how many tons of this do you have, and I guess, what the price differential is?

Peter Socha

Well, I'm going to beg off on that one, because Joe and his guys are going through all of our coals, and as I said just a little bit ago, we're finding a little bit more of PCI than we thought that can be sold, little more coal that can be sold as PCI than we had originally thought. So I hesitate to give you a number until they have finished doing what they're doing.

Lance Ettus - Mortar Rock Capital Management

And as far as -- is that also already included in the $25 million of synergies, where there could be some more uplift?

Peter Socha

No, we had -- that's in the $25 million of synergies. We have described it more as crossover coal less so as PCI. And either way, I think it's in the $25 million. We feel good on the $25 million. I think, if you use the $25 million, you'll be okay.

Lance Ettus - Mortar Rock Capital Management

So if we use the $25 million, and then but if it goes to a third mine, instead of the original 2, you plan, there'll be upside from there, I guess?

Peter Socha

Yes, as I said, it's $25 million with upside bias.

Lance Ettus - Mortar Rock Capital Management

Okay. And I wanted to go over the IRP number. It was running at, I guess, 4.8 million tons annualized versus 3.7 last year. I know you're not giving guidance on that. But if we assume that the export market, obviously, has been very strong for the first quarter and that plays directly into IRP, can we assume that, that export market continues its strength in the first quarter? Is it safe to assume that, that will be reflected in an ongoing strength in IRP sales, I guess?

Peter Socha

That's kind of a bad -- you're like Brett Levy. I mean, you're saying, I'm not going to ask for guidance but give me guidance. So I'm going to hesitate on that one as well. I'm going to wait until August on that one.

Operator

Our next question comes from Paul Cheng of Deutsche.

Paul Cheng - Lehman Brothers

Regarding cost per ton, and it looks like it kind of went up a bit, and you commented on some cost synergies that you expect and kind of hedging programs in the future, kind of other than that, what else can we expect to see in terms of maybe attempts to kind of, I guess, mitigate cost escalation in the coming quarters.

Peter Socha

It's an absorption. I mean, when you are operating close to the minimum level, and I'll let C.K. follow me, when you're operating close to your minimum level as a company, and then you run into either geology issues or weather issues or some of these other things, it becomes like a top that is not spinning correctly. So it's really a volume-related thing. As we take volume up, we would expect cost to go down. But that would be my answer. C.K.?

Coy Lane

I would agree with that. I mean, the regulatory and governmental issues are going to be what they are and they're hard to predict, because they are changing. And right now, we are not spending a lot of extra money other than just the impact of the increase in raw-material prices. So the whole key is just increasing production to drive cost down a little bit as the market improves.

Paul Cheng - Lehman Brothers

Okay. Fair enough.

Operator

This is all the time we have. I'd like to turn the call over to Peter Socha for closing remarks.

Peter Socha

Okay. Great. Thank you, Gavin. Thank you for your help today. If anyone has a question, please give us a call, and thank you for your support. As we indicated at the beginning, we are working hard to make all this -- make the combined company what you thought it was and what we thought it was. And so far, that's exactly what we're seeing. So thanks very much for your time, and we'll talk to you in August.

Operator

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

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