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Executives

Joseph Czul - President - Logan & Kanawha

Peter Socha - Chairman, Chief Executive Officer and President

James Ketron - Vice President, Secretary and General Counsel

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

Coy Lane - Chief Operating Officer and Senior Vice President

Analysts

Jeffrey Cramer

David Beard - Iberia Capital Partners

David Martin - Deutsche Bank AG

James Rollyson - Raymond James & Associates, Inc.

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

Shneur Gershuni - UBS Investment Bank

Brian Gamble - Simmons & Company International

J. Haberlin - Davenport & Company, LLC

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

James River Coal (JRCC) Q2 2011 Earnings Call August 9, 2011 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Second 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 call, Mr. Jim Ketron. You may begin, sir.

James Ketron

Thank you, and good morning. Welcome to James River Coal Co.'s Second 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 our Form 8-K. With me today on the call today are Peter Socha, our Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; 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 in our annual report on Form 10-K and other SEC filings.

With that, let me turn the call over to Peter.

Peter Socha

Thanks, Jim, and good morning, everyone. We've got a few more slides than normal today. So we'll go as quickly as we can through the slides and get to your Q&A.

You can see on the slides, we did have earnings per share before the, what I would call, extraordinary items. But that has all kinds of accounting connotation, but before the extraordinary items of $0.31, with EBITDA of $54 million. We did complete the acquisitions of IRP and Logan & Kanawha. Very, very happy with the acquisitions, they are pretty much exactly what we had hoped for and maybe even a little bit better than that.

The integration is pretty much complete. We had the accounting side still to integrate, but everything else operationally and from a sales and marketing standpoint, we are acting and functioning as 1 company now. So we're very happy with that.

I do want to make 1 comment and I don't want to skip too far ahead on the guidance or anything and that is on cost. In that, you'll notice that the cost guidance number did go up quite a bit. Our mines right now are running the same way they've always run, maybe even a little bit to the better side of that. So our mining costs have really not gone up very much at all. Our cost guidance is up, because we're now in the Met business, and we're in the Met blending business, so we're buying a lot more coal.

But the operating mines both on the IRP side and on the James River side, very happy. I'm very happy with where they are in production. I'm kind of happy with where they are on cost. C.K. is never happy with either one, but we're continuing to run the company at a dialed-down rate. And as we've talked before, that does have an impact. But we're pleased with the operation.

On the selling side, on marketing. Clearly, in the domestic thermal market, we are seeing more market activity. It continues to be a bimodal market in that one or 2 accounts have a lot of coal. But there are also many accounts who are short of coal to the point where they could probably use some coal, some topping up here in the very short future. And so we're working with both accounts, actually, with both types of accounts. But there is not many that are in the middle. They either need coal or they won't need coal for a very long time, but we're pleased to see that.

And with that, I'll turn it over to C.K.

Coy Lane

Okay. Thanks, Peter. Just to touch a little bit on the safety and regulatory side. Our NFDL rate for the second quarter was 1.49. That's tracking very closely to where we were at, at this time last year. We are well below the national average. I'm very pleased with that. We have completed the installation of all the tracking and communication systems. They're in, working well and have that big project behind us. We have begun several projects to seal off underground areas to reduce the size of the mines. This is building the 120-psi seals. We've got probably 80 plus of those to build in the second half of the year. And really doing that just to reduce the size of the mines to meet the New Hampshire requirements is basically trying to make the mine smaller.

We've managed to stable the surface delays. We do have pending permits both in Indiana, Kentucky and West Virginia, but we were just issued a new permit last week in Kentucky which adds about 1.5 million surface mines on. So we are getting permits, but it is a delay -- as always, delayed in the timing.

As many of you know, we had the flood at the Gelco Mine in Bell County, where 3 miners were trapped in June. First, I want to thank Bell County and all the management and the supervisory people there. They did an excellent job in the recovery and reacting to this event. MSHA and the state worked very, very close with this and I will say positive things with them. They really helped and aided in it. We had several area coal companies that brought people, pumps and equipment that helped us and we're very thankful to those. And most of all, I want to thank the 3 miners and their families. The 3 miners did excellent and their families while we were going through the process. So I want to thank that group.

At Gelco, of course, most of you know, that Bell County and several other counties were just declared a federal disaster -- disaster relief effort and Millsboro was pretty much flooded, the whole town with water. We had a greater than 100-year storm. A 100-year storm is 6 inches of rain in a 24-hour period at the [indiscernible] Gap Ranger Station, they recorded 7.1 inches of rain in 5 hours. And so we had a diversion ditch outside the mine. It was just over come. There was a slide. It blocked part of the ditch. And when that ditch broke, water came into the mining area from the outside. So this had nothing to do with underground. It was really from the outside. We're estimating that over 10 million gallons of water went into the coal mine. The tracking and communication system, we were able to get a hold of our 3 employees who were basically maintenance employees working between shifts. They got almost to the outside and then water had filled the low area in the mine and had roofed out and they were trapped there.

We immediately went into setting pumps, took about 14 hours to pump the water down. They actually walked out through the water of about waist deep, after we got the water pumped down. No citations were issued. We, after the following weeks, started recovery at the mine. That's a 2 section mine. One section began production in July and the second section will begin production sometime later this month.

A couple of other things that we worked on. We did start a new mine at Leeco near Jeff, Kentucky. It replaces one of our sections in the Mine 68 at Leeco. We developed several construction projects for replacement mines. We have 2 underground mines that we will be mining out, that will been starting new mines in the third and fourth quarter, and one surface mine that will be mining out that we will replace. We completed a $3.5 million upgrade of the Bledsoe BL#1 plant. That was basically to improve the circuitry and yield of that plant. As far as the acquisition of IRP, we are very pleased and confident of the original synergy estimate of $25 million both through moving shipments around, changing our coal sales agreement and just the synergies that we've seen in operations, especially on the surface mine side of the surface mines that we acquired in East Kentucky.

In the Illinois Basin at Triad, shipments were down just because of burn in the area. We adjusted our operating schedule to match shipments. As you know, that higher sell for coal and we don't want to build up large inventories there. We did complete production at our Hurricane Surface Mine and moved that equipment to Log Creek Surface Mine. We're now running Log Creek with 2 surface mine spreads. The Log Creek preparation plant is well under construction. We think it will begin producing -- or processing coal in the fourth quarter. We also started the construction of the Log Creek rail load-out. This will open up some new markets for us by being able to put that coal on the rail.

Both in CAPP and in the Illinois Basin, we're seeing cost pressures from raw material. Diesel cost has greatly -- has affected our cost on our surface mines, our explosives and even the cost of steel and just the amount of steel that we're being -- we're using. So we are still seeing the cost pressures on the raw material side.

And as Peter said, the mines are running pretty well. Costs are up just a little bit, but when you look at adding the Met mines in and the purchase coal in, I think that's where you get the big experience in our cost guidance going forward.

And with that, I'll turn it back over to Peter.

Peter Socha

Thanks, C.K. Joe?

Joseph Czul

Good morning. A few words about the Met coal market. The Met coal market continues to be quite supply challenged, especially for the good-quality coals. It's difficult to bring good-quality coal online and to meet the demand that's picking up, particularly in Asia. Our customers in India have a growing appetite for Met coal. We're seeing some of their new plants start to come online, while demand from our U.S. and European customers is stable, although below levels of couple months ago when there was supply shocks in Australia.

The price volatility that we've seen in the past few years continues to be quite evident, and we think it will continue. Reliable supply, difficult to bring on and so pricing is really sensitive to all of these shocks we've seen in the past couple of years, floods in Australia, the Upper Big Branch disaster and the problems here just recently at Oak Grove and Pinnacle. So we've seen really quite extreme price movements, basically from supply shocks, and it just shows how inelastic the supply for met coal supply is.

On the quality side, the price levels that for the best quality coals, call it plus $300 a metric ton, it's difficult for the supplier -- for some of our customers to deal with that. So some have experienced -- or experimented with different blends, maybe using some what I'll call B minus or C plus coals. And most of those, I guess, call them experiments, haven't really gone so well. So some of our customers are telling us they're going to move back to really solid B coals. In terms of moving to an A coal, those prices are so high that we really don't see movement from call it low-quality coals into an A category.

So that's sort of the kind of coal we produce, a solid B. We see some upside there, we like that. Long term, the market really looks quite good. New supply sources are having some problems, be it infrastructure development or perhaps the quality is a little bit disappointing.

On the next slide, we've sort of recap where L&K exports have been over the past few years. And in the first half of 2011, we've really shipped more overseas export coal than in any have of recent -- well, since 2008. Peter?

Peter Socha

Yes. Thanks, Joe. The next slide, on Slide 12. I was just catching up on my reading the other day, and in about the first 5 minutes, I came across these 4 or 5 things when people ask about what's happening in the domestic thermal market. I think it's pretty clear in that production is flat, coal fire generation is flat but down a little, although this summer, I was out with one of the operating guys from one our customers a couple of weeks ago and he said, everything in their systems is just burning flat out right now. And so their inventory piles are actually coming down a little bit. I thought it was interesting that the utility shipments were down, the export shipments were up. Production's flat and generation is flat. So I think the makings are there, the ingredients are there for a better market, a better thermal market going forward. They just haven't shown up in pricing yet.

On Slide 13, nothing really of note there. As I said, there are more RFPs out in the street right now than we have seen in quite a while. Triad coal, we are engaged in conversations on Triad coal, both with existing customers in the existing footprint, and then also with new customers in new destinations by way of the rail load-out that's under construction.

The guidance numbers are pretty clear and pretty self-evident. The CapEx, I guess, the only thing I will draw attention to is 2 things really, the tax rate of 15%. Those are deferred taxes, not cash taxes. We are still in a no cash tax base so it's a no cash tax area. And then the CapEx, we are -- as C.K. said, we are developing several new projects. And then we have some catch-up maintenance, particularly on the surface mining equipment at IRP.

And with that, Kevin, we will open it up to questions.

Question-and-Answer Session

Operator

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

James Rollyson - Raymond James & Associates, Inc.

Going to cost, since you've talked about that first. Volumes have been probably one of your biggest impacts among other things just keeping production pared back, just given the market...

Peter Socha

Yes, without a doubt.

James Rollyson - Raymond James & Associates, Inc.

As you think about this heading into next year and given what you're seeing in the market, are things getting to the point, where they're firm enough for you to start thinking about bumping up volumes a little bit, which would help obviously, impart lower costs?

Peter Socha

Yes, I think that we're seeing enough RFPs that if I had to guess right now, I would say by midyear next year, maybe by second quarter next year, we'll start to take things up a little bit. We'll stay at the current run rate where we are, probably through first quarter and maybe in the second quarter.

James Rollyson - Raymond James & Associates, Inc.

And then hopefully, see that step down.

Peter Socha

And then see the cost -- yes, and see the actual operating mine cost step down. And that's why, I mean, we really struggle on how we present these numbers to you. And I'm sympathetic to you and to Jeremy and to do this and everybody else on how you model it because of the cost of the purchase coal. And obviously we made a margin on that coal. We make a good margin on that coal. But how do we break that out that allows you to model it appropriately?

James Rollyson - Raymond James & Associates, Inc.

Maybe you could give us purchase coal volumes every quarter. That is helpful going forward.

Peter Socha

Yes, this will be an evolving process, Jim.

James Rollyson - Raymond James & Associates, Inc.

Okay. And C.K. talked about all the different things going on in complying with some of the new regulations. How much of that is kind of a permanent step up in your cost versus dealing with it right now that there's some 1-time things that eventually would once you're caught up -- aren't part of the equation?

Peter Socha

C.K.?

Coy Lane

Well, some of the things that we're doing now are definitely 1-time things. The problem is we have seen regulations continue to come down with new items all the time. I think, there's going to be new regulations on that. So what we are doing is probably 1-time. The costs to comply with MSHA, I think, is going to stay about the level that it is now, because we are continually getting new policies out on things that we have to do.

James Rollyson - Raymond James & Associates, Inc.

The old recurring, nonrecurring items?

Coy Lane

Yes, that's a good way to say it.

James Rollyson - Raymond James & Associates, Inc.

Okay. Peter, you mentioned interest and just picking up interest in coal sales kind of looking at what you added during the quarter, upper 70s for '12 actually pushing 80 for '13. Is that indicative of where the market is today? Or do you think we're setting up to see higher prices in that as we go forward?

Peter Socha

I think I -- I thought I said it on the call last time. I think, we'll see next year, we'll see coal in the coal 80s, Central App thermal coals in the 80s. I think we brushed it earlier this summer. I think it's probably backed off some now, just given the economy is really sort of hit a little bit of an air pocket here. Having said that, I mean, as I said, everything that we know is burning in the South today. Partially that is industrial load and partially that is just the heat as you're seeing certainly in Houston. But I think the pricing will be in the 80s by the end of next year, I think. I think, it will be solidly in the 80s.

James Rollyson - Raymond James & Associates, Inc.

Okay. And last question for me, guidance for met volumes 2 to 2.2 for the full year, that obviously includes a 761, sorry, it was actually 1,000 in 2Q. So you're basically talking $600,000, $700,000 a quarter. Is that a run rate we should think of for next year? Or do you think that goes up next year?

Peter Socha

Joe, do you want to take it? Or do you want me to take a stab at it?

Joseph Czul

Well, I mean, some of this year's volume is still sort of predicated on what happened in Australia where we picked up some -- we basically took market share from them. Whether we keep that or not remains to be seen.

Operator

Our next question comes from Jeremy Sussman with Brean Murray.

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

Peter, you talked a bit about the domestic market picking up. Maybe can you give us a sense on what you're seeing on the overseas thermal market? Anything new since last quarter?

Peter Socha

No, I think, overseas thermal is still going to be a Q4, Q1 issue. The European, I'll talk Europe, primarily rather than elsewhere. Europe has had pretty good renewables this year. Nuke, the nukes in France in particular, have had a good summer. And I think that's kind of kept the lid on the European thermal pricing. As we head into winter time, 2 things happen. One is the nukes in France start producing more for France and less for elsewhere, less for Germany and less other countries. The draw, just the internal draw. EDF, which is the largest producer in France, I think they have 9 units going down for extended maintenance this year. Last year, they had 5. So that will hit in the fall and in the wintertime. And then quite frankly, in the wintertime in Germany, and you and I have been there because we've been together, if the sun doesn't shine and the wind doesn't blow, I mean, quite honestly, and those are the 2 major sources of renewables. And so I think, you're going to see a tick-up in European thermal pricing in the wintertime. And we'll probably have some role to play in that. We'll probably put some coal into that market. Right now we aren't. But it's not for a shortage of inquiries because we have plenty of inquiries. But we're not putting it -- we're not pricing coal today.

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

Great. No, that's very helpful. Can you give us a sense either of maybe a breakdown of either your operating costs or margins kind of what you expect going forward for your purchased coal so we can have a, I guess, a little better sense of how to model it?

Peter Socha

Boy. Joe, do you feel comfortable going there now? Or do you want to wait another quarter?

Joseph Czul

That's all we can get it? Yes, I think -- I mean, it's difficult to model that. It does vary. And so I think, as Peter mentioned, maybe we sort of tried to share a little bit more of that with you as time goes on. But right now I'd probably not be real comfortable throwing a number out there.

Peter Socha

We'll let Bob do it, Jeremy. As I've said I'm sympathetic to the modeling issues that you have, particularly now that the met -- both met, in general, and then also the purchased met because we're a smaller company it just has a bigger impact. It has an outsized impact. So I'm very sympathetic to that issue, and we'll find a way to get you where you need to be.

Operator

Our next question comes from Shneur Gershuni with UBS.

Shneur Gershuni - UBS Investment Bank

A question for you with respect to the cost. I know that Jim and Jeremy have kind of gone over this. I was wondering if you can spend some time specifically on kind of like the legacy change over in kind of the IRP operations. You say you haven't seen much of a change in cost, so is it fair to say that you're currently running in kind of the mid-70s as you were kind of last quarter? And if you were to get volume, that number should essentially come down? And then we just need to make our own assumptions about what margins are targeting with respect to the brokerage business? Is that the kind of way to think about it?

Peter Socha

C.K., do you want to cover?

Coy Lane

I think that's pretty -- of course, we just picked up the IRP operations on the underground side for the met. They're running about where they were in our modeling that we did on the acquisition. The surface mines are about the same or maybe a little bit better that we picked up just for the -- since we moved some of the shipping around and reduced some of that cost just a little bit. The James River legacy mines in Kentucky are running about what they did the last quarter or slightly just a little bit better. So I think it's a good just a generalization on it.

Shneur Gershuni - UBS Investment Bank

Okay. And then Peter, I was wondering if you could talk about access to ports? If you've end up in a situation where the international market looks great but the domestic market kind of, peters off a little bit, were you'd be able to move -- how much of all your coal could you move into the international market?

Peter Socha

We haven't had trouble in the past doing that because we usually work with people that have the port space or we take a slot that is open within a given week or within a given 2-week period if somebody's not using their space, we'll slide in there and send a ship out there. But we don't have -- other than Joe's relationship with Norfolk Southern out of Lamberts Point, we don't have the port capacity at either DTA or Pier 9.

Shneur Gershuni - UBS Investment Bank

Okay, great. And one final question, a little bit of CapEx at Bledsoe on the prep plant, how much does that change the productive capability of the operation on a go-forward basis? Can we see volumes increase by a couple hundred thousand tons?

Peter Socha

C.K.?

Coy Lane

I don't think you'll see volumes increase by a couple hundred thousand tons. That was a very old prep plant that needed just an upgrade. It actually allowed us to increase our yield a little bit of a probably 1% to 2% out of the prep plant. The basic mines that are running around that plant will stay about the same level there. So it's more of efficiency than an increase in volume.

Operator

Our next question comes from Brian Gamble with Simmons & Company.

Brian Gamble - Simmons & Company International

Maybe for Joe, first, if I could. Joe, you mentioned on the met supply side, infrastructure development issues in, I guess, expansionary markets as well as quality disappointments in those markets as well. Could you quantify which markets fall into which category or potentially both in some cases?

Joseph Czul

Well, I think, like for some of the African stuff perhaps the quality expectations are maybe a little optimistic. I have some pretty serious infrastructure questions there whether they're going to be able to hit their timelines. And then really just the others are just slower and more expensive than expected.

Brian Gamble - Simmons & Company International

Okay. Great. And then to that point, Joe, if we take worst-case scenario in the current market and we go in any sort of double-dip cession or global recession or whatever, where do you think the marginal cost of met is today? If you make the case at 129 was the bottom of the barrel last time around, any semblance of where that number could fall out given a worst-case scenario this year?

Joseph Czul

Haven't really thought about that number. But certainly rail freight's up substantially from, call it 2008, 2009 substantially meaning at least $20, I think. So certainly there's that. But otherwise, I'd really just be on the broadside of the barn and probably shouldn't throw a number out like that.

Peter Socha

No, Joe, I don't want you ever thinking 129. Ever.

Brian Gamble - Simmons & Company International

We don't want anyone thinking 129, either, Peter. On the -- like I said, you mentioned the diesel and steel pressures. Could you give us any sense for your hedges in both regards walking into next year? And also, if there's any cost number that you care to put on those 80-plus seals that you're going to be working on the back half, that would be helpful as well.

Peter Socha

C.K.?

Coy Lane

I'm sorry, go ahead and say that again, please?

Brian Gamble - Simmons & Company International

Sure. Diesel hedges, steel hedges and then any cost numbers that you might know for the additional seals you're going to be working on at the back half?

Coy Lane

Well, the seals are included in our costs going forward and you can figure somewhere in the $18,000 to $20,000 a piece for constructing one seal. So if we've got 80 to construct, that's about the range you'd be looking in. As far as steel, the price of steel, if it doesn't change a whole lot from what it is now, we're seeing more in the cost increase from really roof control because under the new MSHA regulations and policies, we're having to use more expensive type bolts and more bolts and more roof support. So we're really -- it's a change in the type material that we're using really in the roof support that's increasing the cost more than just the raw price of steel going up.

Brian Gamble - Simmons & Company International

Okay, great. And then lastly, maybe for you, Peter, the 2 and change that you signed for next year at 77 a little bit. If your opinion is that you're going to be in the mid-80s, you've been pretty aggressive with holding coal back in the past, why not pull that coal back a little longer and try to get 80 plus or more later in the year?

Peter Socha

Because, I'm not that stupid. No, I mean, we have to have a base. To run the mine, C.K. has to have a base load of business. And I'll keep sort of the top. Again, just going on the legacy James River business, if we can run them at 8 or 8 and change on the high end, and then 6 or 6 and change on the low end, I've got -- let's say that's $1.5 million a quarter, just to make it easy. I've got to go ahead and book up $1.5 million for the first quarter and the second quarter for sure. What I do in the third and the fourth quarter, and that's where you all don't necessarily see where I'm booking by quarter. I might be holding everything open on the fourth quarter next year or everything open on the third quarter. I'm not. But that's kind of how we look at it. If we've got the forward curve or we got the forward pricing view that we do, and we think the pricing will be stronger towards the second half of the year than it is the first half then it makes -- and I've got that on the one hand and on the other hand, I've got C.K. saying, look, I need this much coal on order to go ahead and run the coal mines. So I just balance out those things.

Operator

Our next question comes from Jeff Cramer with UBS.

Jeffrey Cramer

Can you just help me out with the -- from a guidance perspective, the 2011 price that you've got over 10 million tons in the Central App, the guidance is for $9 million to $9.5 million...

Peter Socha

[indiscernible] the IRP shipped prior to the acquisition. So that's the delta there, Sam was explaining that.

Jeffrey Cramer

Okay. So the guidance is not the full year IRP. It's just the [indiscernible] right?

Peter Socha

That is correct. That is correct, that's post acquisition.

Jeffrey Cramer

And if we were looking at $85 million was the year -- or the number for 2010, I think, you were looking at, well, closer to $100 million number in 2011, is that...

Peter Socha

For what?

Jeffrey Cramer

For IRP? Is that still -- I know there's -- and actually kind of with that, as far as synergies, how much do you expect to realize this year as opposed to what may be coming forward at 2012?

Peter Socha

Where's the $85 million that you're reading from?

Jeffrey Cramer

That was the IRP guidance from back in 2010.

Peter Socha

Okay. I'm sorry. Just say that question one more time?

Jeffrey Cramer

So it was $85 million last year, was it $100 million, I think, you guys we're looking at this year for IRP? And then, I guess...

Peter Socha

We never went out with any number on IRP for this year. Not that I'm aware of. Or maybe did you like feed me a six-pack of beer one night or something?

Jeffrey Cramer

Maybe I worked out that number, but...

Peter Socha

That's may be your number that you're trying to put on to me.

Jeffrey Cramer

And just as far as synergies that kind of you expect to realize this year, is there a number to use within the guidance for that?

Peter Socha

No, it's probably half. I'd say it's probably half of the 25. We're seeing it -- we're moving some PCI coal through L&K that we have not been selling before. We're moving some met coal from James River through L&K that we had not been moving before. And so we're seeing that. We're seeing -- whether we stoker or not, I think at one other facility is -- we haven't made the final call on that, but that's the likelihood. So that's a third element to it. So we'll see what happens.

Jeffrey Cramer

Okay. And just on the B quality met coal, I guess, pricing now that you're seeing today versus a few months ago, have you seen much of a change? Or...

Peter Socha

Joe?

Joseph Czul

Well, we haven't sold very much coal of late. We're really in a quite good position there certainly through the end of the year. Now on the buy side, we have seen some easing. So that's kind of where we see it as when we're buying coal to fill a void here or there, and certainly prices have eased off, I would say considerably from, call it May, but May was the peak. We didn't sell a whole lot of in coal May anyway. But -- so that's sort of the snapshot is for sure the edge has come off the market from the peak of April, May, certainly not a collapse. Not from the good coals anyway. And some of the coals are -- we really haven't seen much movement in them at all particularly, some of the coals impacted by supply shocks I'd talked about earlier, U.S. coals call it. So I mean, you read the benchmarks that some -- in particular BHP has laid out there in the near term and they're not off much. And so the coal -- we don't really produce coal at a B minus or C plus, and I think that's where some of the weakness really is probably more prevalent and where you start to get a floor price with maybe PCI or steam coal even.

Jeffrey Cramer

Okay. I mean, you've kind of -- book in, I guess, when you say it's come off from the April, May peak, just kind of what that number is? How much has come off?

Joseph Czul

I think it's off 25%, 29%.

Operator

Our next question comes from Dave Martin with Deutsche Bank.

David Martin - Deutsche Bank AG

Sort of to come back to the met business, if you would. I think earlier you made a comment about some experimentation that's being done in the steel industry with B minus and C plus coals. I'm curious -- or I was just interested in any color you can provide on that, and whether that's in the domestic steel industry or offshore? And also, I think, you noted that you can see a scenario where some coal migrates back in other thermal business. Is that the primary driver of that comment?

Peter Socha

Joe?

Joseph Czul

Okay. So on the experimentation side, call it. I would say it's largely, let's just call them Western world plants that are trying to reduce their coal blend cost somehow, someway, be it moved from a high vol to a B or a B plus; or from an A high vol to B minus C plus. The guys that tried to move from an A minus or a B plus to a C minus or B minus or C plus type coal in other words, make too big of a jump, I think they have been disappointed. Others that haven't sort of, I guess, call it experimented are considering that. But I mean, we'll see what they do. I guess, the experience that we're learning from our customers is that it's not as easy as it sounds. Now overseas, it's a completely different story. They're much more dependent on Australian coal and they basically have learned to live with it, would be the way to say it, and really aren't so interested in using B minus type coals. They already use a lot of what they call, semi-soft coal. So that's -- they're already using that and they're blending -- not really experimenting very much. I'm sorry, the second part of your question?

David Martin - Deutsche Bank AG

No, I was just curious if the comment about coal migrating -- met migrating back in the thermal business was driven by that dynamic or something else. Or just...

Joseph Czul

Yes, it's driven by that dynamic, particularly when there was a -- the market was really quite buoyant call it, February to June, at the height of the shortage due to the Australian floods, that's when coal companies generally did whatever they could to produce as much kind of -- any kind of coking coal as they could. And that incentive's probably not there right now.

David Martin - Deutsche Bank AG

Okay. And then just -- I had a question on some of the guidance items, in particular, DD&A and interest expense. I'm just curious if the items you include in your release, also includes some of the adjustment items that you've utilized as to back end of an adjusted EBITDA, for example?

Peter Socha

Sam, you there?

Samuel Hopkins

Yes, I'm here. We have on the back page of the release there, we have the reconciliation of the items that we did to get back to those numbers that will show you the detail of them.

David Martin - Deutsche Bank AG

Yes but I'm just curious for the full year guidance whether they exclude those items or not.

Samuel Hopkins

Well, no, they're included in the guidance numbers.

Operator

Our next question comes from Brett Levy with Jefferies & Company.

Brett Levy

First off, it looks as if you guys have a view that, and I think you used the word air pocket, that our economy has hit an air pocket. It looks like the way the coal equities are reacting, there's more of a belief that perhaps we're double dipping. If that's the case, are you guys now sort of more active in looking for M&A candidates? Thinking about buying back your own shares? And you'll love this one because I haven't asked it in a couple of quarters, if you are thinking about looking in the bond market? You knew it was coming.

Peter Socha

I did know it was coming. That and quarterly guidance, 2 things I can count on you for, Brett. M&A at any given time, we're looking at a couple of things. And right now is no different than any given time. What was the second question, Brett?

Brett Levy

Would you buy back your own shares? Basically what I'm saying is it looks like a double dip is built in to coal equities and how they've just gotten tanked in the last...

Peter Socha

Yes, I mean the last week or so has really been very bad, I call it an animal-house market. It's thank you, sir, may I have another? And markets go up and markets go down, so we'll see. But no, I'm comfortable with our balance sheet where it is right now. And we have not traditionally bought back in stock or bond -- or bonds, for that matter. So I like the balance sheet we have. Our goal right now, quite honestly, our goal right now is I think 2013 and 2014 will be extraordinarily good years in the coal business. And so what I want to make sure of is that we're set up properly for those years, rather than trying to hit a particular timing on a market in any given week or in any given month. I think, 2013 and 2014 will be very, very good years.

Brett Levy

So M&A would be the biggest priority with liquidity and excess accounting?

Peter Socha

No, not really. I mean, well from a liquidity and from a managing of the balance sheet standpoint probably, yes. From a managing the company standpoint, it's making sure that the acquisitions that we've just done are properly integrated and are -- we're functioning as a single company, which right now, from an operations standpoint, we are. As I said, we have the accounting standpoint still to go. But we have a lot more upside just in the properties that we just added to James River. My job is to make sure that we realize that upside.

Operator

Our next question comes from Bill Burns with Johnson Rice.

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

In light of this comment about the domestic thermal market, seeing some increased activity there, I was looking at the guidance, second half of the year shipment guidance out of the Midwest, and it just looks a little light to me.

Peter Socha

The Midwest is a -- yes, that's a good comment. Midwest is a different animal. Southeast, as you know, you live there. Southeast is doing better than the Midwest. The whole Ohio, Michigan, Pennsylvania, Wisconsin, Illinois, Indiana, that whole area is not seeing much in the way of economic activity at all. And that reflects itself in coal burn. It's higher sell for coal so we don't keep much on the ground. And so we have to adjust -- C.K. has to adjust the mine production to the shipments that the customers need.

Operator

Our next question comes from Chris Haberlin with Davenport.

J. Haberlin - Davenport & Company, LLC

Looking at what you have contracted for 2012, is there any met coal in there? Or is it safe to assume that that's all thermal coal?

Peter Socha

Joe, I don't think that there's any met, is there?

Joseph Czul

There's a little bit of met. There's fair amount of unpriced met in 2012.

Peter Socha

But Chris, that would not show up as committed and priced.

J. Haberlin - Davenport & Company, LLC

Okay. And then looking at your synergy target for $25 million, can you give us an idea of what, if any, synergies you generated in Q2?

Peter Socha

Probably not. I might be able to come back to you on that one. I mean Sam and I will talk about it later. But to be honest with you, just pulling together the numbers and getting the Q ready for today is -- was just a Herculean task that Sam and Steve and Lex out in Charleston and everybody have been focused totally on that.

J. Haberlin - Davenport & Company, LLC

And then looking at your -- where you priced business for next year at about $77 a ton, is it fair to say that, that kind of $5 to $7 delta versus the strip pricing during the quarter, is that indicative of what's going on in the market right now?

Peter Socha

No, it's always a timing issue, Chris, in that you might look at an average price for the strip during the past quarter and say well, you priced at the average. Well, we might have priced at the beginning. And in this particular case, we did price in the beginning. People tend to always look at where the strip is today, usually not even the average and they say, well, you priced at a discount or you priced at a premium. But it all depends on the timing of when you put that price out to the customer.

J. Haberlin - Davenport & Company, LLC

All right. And then last question here on just kind of housekeeping, what was the share count at the end of the quarter?

Peter Socha

Sam? Actually, you know what? We'll call you back on that, Chris.

Operator

Our next question comes from David Beard with Iberia.

David Beard - Iberia Capital Partners

Just a follow-up to the tons that were priced in '12 and '13, how should we think about the profitability on those tons just given cost increases and maybe cash cost...

Peter Socha

Lower than desired, but enough to make sure that we run the mines and we still make a little bit of money. That's the trade-off. I mean, we talked about that on the last call a little bit. That's the trade-off in that you want -- I want to keep that extra 2 million tons or 2.5 million tons, I want to keep that open, because that is -- those are my market coal tons.

David Beard - Iberia Capital Partners

Right. Right. No, understood. And just relative to your second half EBITDA guidance. It seems to imply a cap ASP coming in, a few dollars. Would you care to comment, is that more on the steam side, or the coking coal side?

Peter Socha

A few dollars, which way? What are you saying?

David Beard - Iberia Capital Partners

Just sequentially, coming in a few dollars from the $115 reported.

Peter Socha

Yes, I think, that's purely a -- that's a product mix question.

David Beard - Iberia Capital Partners

It's a mix, yes. Okay.

Peter Socha

I will say this, and I didn't point it out earlier. Ordinarily from us, you never hear issues on trains. We did miss about 10 trains at the end of the quarter or in June. That's about $1.5 million almost $2 million in EBITDA. And we love the trains. We love the railroads in several -- in a couple of cases, this was due to utilities, cycling and flooding and things like that. So it's outside the control of the railroads. But that did ding us for a couple million dollars. Now we make all that up, we catch all that up, but it's a timing thing. So I did want to point that out. Kevin, I believe that was the last caller?

Operator

Yes, I saw it. I saw the same thing, that was our last question.

Peter Socha

Okay, great. Thank you, everyone. We're here all day. We can answer any of your questions. And if not, we will talk to you in, I think, the first week of November for our Q3 call. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.

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