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Walter Energy (NYSE:WLT)

Q3 2011 Earnings Call

November 03, 2011 9:00 am ET

Executives

Neil Winkelmann - President of Canada and Europe Operations

Paul Blalock - Head of Investor Relations

Walter J. Scheller - Chief Executive Officer, Member of The Board of Directors, President of Jim Walter Resources and Chief Operating Officer of Jim Walter Resources

Robert P. Kerley - Chief Accounting Officer, Vice President and Controller

Michael T. Madden - Senior Vice President of Sales & Marketing

Analysts

Wes Sconce - Morgan Stanley, Research Division

Chris Haberlin - Davenport & Company

Brian Yu - Citigroup Inc, Research Division

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Lance Ettus - Mortar Rock Capital Management

Mark A. Levin - BB&T Capital Markets, Research Division

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Navaneel Ray - TIAA-CREF Asset Management

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

David E. Beard - Iberia Capital Partners, Research Division

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Brian D. Gamble - Simmons & Company International, Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

David S. Martin - Deutsche Bank AG, Research Division

Operator

Welcome to Walter Energy's Third Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the meeting over to your host Mr. Paul Blalock, Head of Investor Relations. Sir, please begin.

Paul Blalock

Thank you, Sherry. Good morning, all, and thanks for joining us today. Today's call is being webcast live over the Internet and a recording will be made available and archived on our website for up to 30 days. On this call, we may refer to forward-looking statements in yesterday's press release and may make those and other forward-looking statements on today's call. For more information regarding risks, associated with forward-looking statements, please refer to the company's SEC filing.

Joining me on this today's call are Walter Energy's CEO, Walt Scheller; Chief Accounting Officer, Robert Kerley; and President of Canada and U.K. operations, Neil Winkelmann. I'd now like to turn it over to Walt.

Walter J. Scheller

Thanks, Paul. Good morning, everyone, and thank you for joining us. As we always do, I'd like to start today with safety. On a year-to-date basis, safety has improved across the company and in particularly, I would like -- in particular, I would like to highlight the safety record of Walter Coke, which improved 68%. In our wells project, the safety record improved 80%. We continue to work to instill the highest level of overall safety in everything that we do, and we will continue to make safety our #1 priority. We must also mine profitably and today, I will report to you on the financial progress of Walter.

Operationally, we are making progress in the 2 significant issues that have impacted production year-to-date. In the U.S., we have mined through the geological conditions that resulted in the squeezes at Mine No. 7. Additionally, we will begin operations on the East repanel in the next few days which will improve production capacity in the quarter. In Canada, utilization of the Falling Creek Connector Road continues to improve and with increased production for 6 consecutive months, and we are focused on our expansion activity.

Consolidated met coal production for the third quarter was 2.3 million metric tons. Consolidated met sales were 2.2 million metric tons. The production figure consists of 1.7 million metric tons of hard coking coal and approximately 600,000 metric tons of low vol PCI. In addition, Walter produced approximately 1.4 million metric tons of thermal coal during the quarter. The difference between sales and production was a result of 2 shifts not making the cutoff date at September 30 due to weather and port congestion issues.

Average selling prices were also near the high end of our guidance. With the consolidated average net selling price for hard coking coal at $263 per metric ton in the third quarter of 2011, up from $243 in the second quarter of 2011. On the expense side, the average cash cost per metric ton FOB vessel of hard coking coal in the U.S. was at the low end of our guidance at $126, and in Canada, the cost per metric ton of hard coking coal was $153 per metric ton due to slightly lower volume. Most importantly, on a consolidated basis, cash margins per metric ton were $131 in the third quarter for hard coking coal, $66 for per metric ton for PCI and approximately $8 per metric ton for thermal.

On the financial side, operating income, net income and EPS on a reported basis were all better than our September 21 guidance.

Now, I'll let Robert take you through the details. Robert?

Robert P. Kerley

Thank you, Walt. The highlight of results for the third quarter 2011: Consolidated revenues totaled $690 million, consisting of $467 million from the U.S. operation, $223 million from the Canadian and U.K. operation and $300,000 from our other segment. Operating income was $149 million, and net income was $76 million, resulting in diluted earnings per share of $1.21 for the quarter.

The third quarter results included 2 unusual items worthy of discussion. These were a $9 million gain on foreign exchange as the U.S. dollar strengthened against the Canadian dollar. And secondly, a $14 million loss from our noncore investments of Mandalay and Xtract. We have now fully divested our investment in Mandalay. If these items were removed from our results to reflect normalized earnings, net income would have been $80 million and diluted earnings per share would have been $1.27 or $0.06 higher than the $1.21 we reported.

EBITDA was $199 million in the third quarter. Liquidity and capital expenditures were $490 million and $157 million for the quarter, respectively. Forecasted fourth quarter results include sales of hard coking coal and PCI coal within the ranges of 2.1 million metric tons to 2.3 million metric tons and 450,000 metric tons to 530,000 metric tons, respectively. Operating income is expected to be within the range of $190 million to $230 million.

Net income and diluted earnings per share are expected to be within the ranges of $120 million to $150 million, and $1.91 to $2.39, respectively.

I'd now like to turn it over to Neil for an update on Canadian and U.K. operations.

Neil Winkelmann

Thanks, Robert. During the third quarter, the Canadian and U.K. businesses produced a total of 371,000 metric tons of hard coking coal and 587,000 metric tons of low vol PCI. We contested our operations in Northeastern British Columbia. The Wolverine production was slightly below forecast due to high stripping ratios resulting from production sequence slippage from previous periods. The key production constraint was waste drilling productivity, meaning that waste volumes could not be increased to compensate for the high stripping ratio. In late September, however, a new Hitachi EX8000 shovel was added to the fleet to replace an EX5500 which is to be relocated to Willow in quarter 4 and additional 2 of their Cat 793 of haul trucks is being added to the fleet in quarter 4 also.

Moving to Brule, material handling and run raw tons coming out of the mine is favorable to forecast. Clean coal production although below our expectations was a quarterly record for the mine. The Falling Creek Connector Road is now in operation. Production via this road was constrained by maintenance and commissioning during the quarter, as well as by the ramp up schedule for haul truck delivery and the availability of suitable drivers. These constraints, though partly offset by haulage, via the original route to Wolverine constrained clean coal production and resulted in haulage which is greater than forecast. I'm pleased to report that later in the quarter, the Falling Creek Connector Road was substantially commissioned and truck hauling rights along the road continue to increase. At Willow Creek Mine, continuing impacts of the mine permit delay in previous weather-related delays impacted third quarter production. However, activities have now progressed to the point where future weather-related schedule risks significantly reduced.

The upcoming Willow coal handling and preparation plant upgrade is now planned in 2 phases. Our roll call system tie-in in November, and the full coal farm circuit tie-in in early quarter 1 2012. This strategy minimizes the risk that the plant shut down affecting fourth quarter production results for Willow Creek and enhances production of the hard quality Willow Creek hard coking coal in quarter 1, 2012. Overall, Northeastern British Columbia continues to focus on expansion plans. The initiatives we're implement it for the business will continue to drive up our long term production rates.

The quarter 4, we have some transportation and sales risks related to the planned 21 day shutdown to upgrade the rail-car dumping system at Ridley Terminal in late November and December. This shutdown is the first major stepping the expansion of capacity at the port to 24 million tons per annum, capacity from its current 12 million tons per annum mine 9-flight [ph] capacity and is positive to industry in the region in the long term. The rail dumper shutdown does not pose a risk to our quarter 4 production and is best thought of as a risk to sales timing, potentially pushing some shipments into quarter 1.

Looking ahead to 2012, our ongoing investments and improvements will support an increase in production of at least 25% in clean coal production when compared to 2011.

Moving to our project in Wales, significant progress was made during the quarter. The first 3 to place change [ph] production equipment was assembled and commissioned underground. We are actively engaging the input of experienced personnel from our U.S. operations our interchange programs between the sites. This expertise will cross track development of the underground production system in Wales. The coal handing and preparation plant was substantially completed in the quarter, and commissioning is currently being undertaken. The project remains on budget and essentially on scheduled but difficult mining conditions in the surface access strip are a threat to the rate production ramp up in 2012. The team is working hard to identify and implement mitigation measures in order to maximize project value.

Now I'd like to hand it back to Walt.

Walter J. Scheller

Thanks, Neil. In Alabama, third quarter production and cost was reflective of the difficulties associated withdrawing the second longwall at Mine No. 7, and in line with our September guidance. As I mentioned earlier, we were 10 days of beginning operations on the new third longwall which will significantly increase fourth quarter production. This new longwall is in a thicker portion of the seam and it's expanded from 850 feet to 1,040 feet wide. Mine No. 4 performed well in the third quarter, and in the fourth quarter will have an extended longwall move. In West Virginia, we're pleased with the third quarter results, and we now have 3 units operating at the Maple mine and I expect continued progress going forward at Maple.

I'd also like to take a moment and share with you what our customers are telling us in South America, Europe and Asia. As you have heard around the industry, there are some customers currently requesting deferred shipments. At Walter, we are focused on long-term contractual market and only expect 2 shipments originally scheduled for the fourth quarter delivery to be pushed into the first quarter of 2012. Long term, the outlook for premium hard coking coal remains relatively strong despite concerns expressed around monetary issues in Europe and slow growth in the U.S. economy. Our products have been priced generally in line with market levels for the fourth quarter. $280 to $285 for hard coking coal and $208 for low vol PCI. Third quarter carryover was approximately 900,000 metric tons at $260. Fourth quarter carryover is approximately 790,000 metric tons at $263. It's important to remember that our customers continually ask for the high-quality coal we can produce. Despite some short term pushback, we continue to see robust long-term demand.

I also want to share with you some of the overall progress we're making at Walter. First, my priorities are safety, production, team development and communication. We will not take our eye off the safety issue, and we will stay focused on production. When I came to Walter about a year and a half ago, I started focusing on the improvements necessary to help the U.S. mines deliver their potential. Since that time, we've increased the efficiencies of the continuous mining process by over 40%, and we've improved the maintenance process within capacity of the systems necessary to get the U.S. operations up to its production potential.

In Canada, as we begin to see an increase in production, we will meet the benefits of the investment we have made. The operations in Canada continue to focus on expansion projects and initiatives for the business in Northeast British Columbia. Going forward, we intend to ramp up production from 4 million to greater than 5 million in 2012. We are in our budgeting process and currently expects 2012 met coal production to be between 13 and 14 million metric tons. Switching topics, we're working hard to complete the senior management leadership team, and I can report that we're making progress on new candidates for key positions and hope to have some reportable events in the near future.

Overall, Walter's third quarter results were solid. Operating results were generally as we had indicated and in some respect, the financial results were slightly better than expected. I believe we're making the right choices to safely and profitably operate and optimize our current portfolio of the 5 mines which is a primary contributors for our cash flow. I'm excited about the growth we envisioned over the next few years, and we are well positioned to expand production in both Northeast British Columbia and in the U.S.

Lastly, the global long-term demand for high-quality coal remains positive, and Walter Energy is focused on being a global seaborne source of premium met coal, providing true diversification for our global fuel industry customer. Thanks for listening. And, operator, we will now take questions.

Question-and-Answer Session

Operator

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

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Walt, just circling back to the shipments versus production both in 3Q and the guidance for 4Q, you've had production actually running a bit above shipments and I think you alluded to a couple of shipments for 4Q that get pushed into next year, did you have some of that kind of going on in the third quarter as well? And then just maybe, is that the biggest delta if you look at the guidance today from a bottom-line perspective for 4Q versus where you were in your last update?

Walter J. Scheller

Well, Jim, I'll let Mike Madden answer that question.

Michael T. Madden

In Q3, we had 2 boats that didn't make the quarterly deadline and both of them were caught -- one was with port congestion, the other was a weather delay in getting to the terminal. In Q4, the 2 cargoes that have been pushed out our built-in. What we've done in Q4 is we've taken a conservative look at what will be loaded, taking into consideration vessels that have end of December lay days, whether they'll make it in time. Also the Ridley expansion, we've built in a little bit protection there in case there's a delay on that. We've also taken in consideration holidays. We've got Thanksgiving and Christmas and a lot of times, we have issues with workers showing up. So that's all been built-in to the Q4.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And, Walter, or whoever, would you think about all these stuff starting to catch back up? When you get into next year and kind of the preliminary 13 to 14 million tons you've mentioned for met, and I realized you're still working on the budget. But kind of walk us through how you see this taking your cash cost as you go through from this year into next.

Walter J. Scheller

Well, we think the biggest impact on cash cost is volumes especially in the U.S., and as we begin to get our volumes back in line with where we would expect, then we expect costs to come in line accordingly. I'm hesitant to give a specific number at this point, because we are still going through the information as we develop our budget. And I'll let Neil answer the question as to Canada.

Neil Winkelmann

Yes, just stepping through the 3 mines is that the production volumes out of Wolverine looking on year-on-year basis is essentially that Wolverine is a material mine. The areas that are worth discussing. Now, Brule where production continues to ramp up, we currently have significant stocks around 300,000 tons of coal stockpiled at the mine waiting to haul off as we clear the volumes in Brule will come up in a unit cost should come down. Willow Creek is a mine essentially still in development. Cash cost at the moment and cash cost through part of next year will not be indicative of the long term for that mine, but the volumes there are forecast to increase through 2012 and you will see that volume affect on a unit cost over the course of the year.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

We'll look for the details, I guess, when you get through budgeting. And last question and you may or may not want to answer this, but I'm going to ask it anyway. Given all the speculation going on in the last few months on Walter being a takeout target, just kind of curious your philosophy in the event that someone did make an offer for you guys?

Walter J. Scheller

Well, Jim, I'm going to have to give you a kind of our boiler plate answer there and that's -- we're not going to comment on rumors and speculations. We know what our reporting obligations are, and we'll comment publicly as necessary. Our board is focused on producing the maximum long-term shareholder value and if there's need to comment further, we'll do so at that time.

Operator

Our next question comes from Andre Benjamin from Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

The first question, I was wondering, Walt, now that you are head of the company, if there was any shift in your corporate strategy with respect to how you're thinking about maybe organic versus external growth, greenfield project, et cetera?

Walter J. Scheller

Well, Andre, looking at what our strategy is, I think our strategy remains largely the same. We have an enormous number of a very good internal growth opportunities, and we're going to remain focused on those internal growth opportunities and continue to move those down the pipeline. However, we're not going to take our eye off what's available externally, and we'll evaluate those opportunities as they present themselves as well.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

I believe in the past and even in some of your slides, you've highlighted some additional projects that have not necessarily been the focus of what you've promoted in terms of your Canada operations, is there any evolution there in terms of additional things we should expect from you coming forward?

Walter J. Scheller

Well, as we -- we've talked publicly about, well, first in Alabama, the Yellow Creek project, and we will continue to move forward with that. That would be the development of a greenfield project in Alabama. And up in Northeast BC, we have several of the smaller expansion projects and continuing projects, but we also have the Belcourt-Sax project which is the joint venture between ourselves and Anglo. And we'll continue to look at that project as we move forward as well.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

And I guess lastly, in U.K., I know that you've said that you hoped to sell most of that is PCI. Have you done anymore marketing for that mine and figured out how much of it you'll actually be able to sell as PCI versus I believe it was industrial coal and potentially just a thermal coal going forward?

Neil Winkelmann

It's Neil here, Andre. The majority of the coal is intended to be sold as PCI metallurgical coal. There are some auxiliary markets around specialty products, and we've constructed the preparation to produce that specialty products particularly sized products, for filtration usage. They are making activated carbon filters and the like. But it's reasonable to assume that the majority of the tons will be a PCI tons. The specialty products tend to attract a better price and at the market is at the moment with relatively small for that.

Operator

Our next question comes from Dave Martin from Deutsche Bank.

David S. Martin - Deutsche Bank AG, Research Division

A couple questions coming back to the comments on cargo delays and port delays. The cargoes that you referred to that will slip into the first quarter, will represent how many tons roughly? And on the Ridley Terminal upgrades, what is implied in your guidance for the fourth quarter whether it be in tons or in days of outages?

Walter J. Scheller

Well, for Q3, we missed a total of about 100,000 tons, okay. And Q4, can you repeat the Q4 question here for me please?

David S. Martin - Deutsche Bank AG, Research Division

Basically the same question about Q4.

Walter J. Scheller

Well, the only slippage we see right now are the 2 cargoes that we have been asked to defer to Q1. Actually, we don't anticipate anything more and there could be some upside. Again, we took a conservative look at it.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And are those in the U.S. or Canada for the fourth quarter?

Walter J. Scheller

The deferred cargoes?

David S. Martin - Deutsche Bank AG, Research Division

Yes.

Walter J. Scheller

They came out of Alabama, the U.S.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And then on Ridley?

Neil Winkelmann

It's Neil here, and basically, they were out 3 weeks say, late November, early December, then we have 3 weeks to actually catch it up. So they don't have congestion there that would impact that shipments. They really need to be able to come back up and run at about twice the normal rate. Which in theory, they can do, but it needs to be recognized that there is some timing risk there, if there is congestion with everybody trying to get coal in there and everybody kind of get coal out in those last 3 weeks of December. We could see some slippage of shipment in the quarter 1 there.

David S. Martin - Deutsche Bank AG, Research Division

Okay, and that's fair. And then, secondly, I just wanted to come back to your comments on 2012 met volumes. You've pointed to a range of 13 to 14 million tons. When you based on your guidance this year, you'll be at about 9, I believe, or a little less than 9, non-pro forma. Can you quantify the growth within each of the operations that you anticipate for next year?

Walter J. Scheller

I think looking at this year, we're closer to 10 million and as we look into next year, as we said specifically, we're looking at a 25% growth up in Canada from 4 to 5 million. We are looking for growth in Alabama which is probably better than 25%. And the smaller projects that we currently have in Wales, also the Maple mine up in West Virginia, as well as some of our surface operations which are moving out of the thermal coals and into some met coals, we believe that's how we get to the 13 to 14 million ton grade.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And how much does the crossover into the met market represent?

Walter J. Scheller

We really don't have any crossover coals.

David S. Martin - Deutsche Bank AG, Research Division

Right. You mentioned you're moving some thermal coal into the met market?

Walter J. Scheller

No, we're not moving thermal coal into the met market. We are -- our service margin progressing in the scenarios where there are some met coal reserves, so there's met coal reserves we mine in 2012, which will enable us to increase production.

Operator

Our next question comes from Shneur Gershuni from UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Before I get to my question, I just wanted to confirm, the boats that were deferred from the fourth quarter into the first quarter, had that not occur to your guidance would effectively be unchanged?

Walter J. Scheller

Correct.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay, great. Just a couple of question. As we talked about earlier in the call, there's been some challenges with the squeeze in the Alabama operations. You started -- you're starting up this new longwall and so forth. I was wondering if you can kind of give us the advance rate of the longwall. How it's progressing right now, feet per shift, however you want to measure it? And sort of you can contract how relative to where it was, let's say 6 months ago, you guys 30 feet, 50 feet, something that shows kind of the progress that you're talking about?

Walter J. Scheller

That before the squeeze occurred, we were operating in about 45 feet a day range, 45 to 50 feet a day. Once the squeeze occurred, and actually we had 2 separate squeezes which resulted in about 12 to 14 weeks of complete shutdown even though that's divided into 2 separate times. Coming out of the squeeze, we were limited to about 20 to 25 feet a day for several weeks. And as we progress beyond that, we continue to struggle just to the excessive amount of cutting we had to do in order to protect the phase from additional squeezes. So we were continuing the cut in the 20 to 25 put a day range. As we come out of these -- the area where we were more concerned about the squeezes, what we've seen is for the last few weeks vary inconsistent performance and that's based upon, in many ways, a lot of the maintenance issues that have resulted from the squeezes that occurred, and we've seen days as high as 50 feet, and we've seen days back in the 20s. So we're seeing definite progression, but at this point, it's lacks consistency on that longwall.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. Do you kind of have a timeframe of when you can get back to 50 feet on a consistent basis?

Walter J. Scheller

Well, the third longwall which will be starting in a few days, since we'll be running 3 longwalls at that coal mine, the bottle neck becomes the belt system, and we will be able to maximize the belt system by running those 2 longwalls to E2 and E3 panels so the expectation is that the E3 panel will be able to operate at what we consider to be normal rates. The 50 feet a day or so, and the E2 longwall will make up whatever slack is left in the belt system.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. Just a couple of quick follow ups. You've had these deferrals or questions about deferrals, can you sort of give us some commentary what your customers have been saying about their expectations for shipments for 1Q? Is everybody kind of reaffirming and waiting for pricing or has there been any talk of any further roles from 1Q to 2Q and so forth?

Michael T. Madden

Well, I think the events going on right now in Europe, one of the cargoes we had deferred was going to Europe and the monetary issues over there are putting big concern and production levels that they should operate at going in to Q1. The other cargo that was deferred was going into South America, Brazil in particular. And actually what's hurting there is the currency issue. The Real is being too strong. What we feel that Brazil will pick up the pace because of the World Cup and the Olympics construction that's going to have to take place, so we think that government there will put more concentration on that business and the monetary issue in Europe, I think it's high on everyone's list right now to get resolved. So until we get a clear picture on that, I would say people are still looking a little bit conservative for Q1.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay, great. Final question on Canada, can you talk about fixed cost absorption as your haulage increases? Can you kind of give us a trajectory on cost, can we expect double-digit declines in cost as we're able to ramp the haulage coal?

Neil Winkelmann

The answer varies mine to mine. Not really prepared to talk in that detail given that we're right in the middle of our budgeting crisis, and we're working on those numbers right now.

Operator

Your next question comes from Michael Dudas from Sterne Agee.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Walt, just thinking longer term as you've looked into the operation, longer-term plans despite issues we've seen in the last couple of months haven't changed much given the outlook that might has been the customer base sort of the operating gross prospects?

Walter J. Scheller

Yes, I think we're still pretty focus on what our previous plans have been, and it's just -- it's delayed us a little bit from when we expected to be able to perform at the production levels as expected.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Question for Mike, following up a little bit on the prior, Shneur's question on what the customers were thinking. Is there a thought relative to quality issues or are they concerned about productivity in the glass furnaces? Is there a real strong demand and pricing for the high-quality coal? And would expect to be largely discount to some lower quality coal as you move into the first quarter?

Michael T. Madden

Yes, that will become pretty clear as you throttle back on glass furnace. You're going to see the focus shift from blended product or crossover coals into single quality-based coals. Those will be the main focus.

Operator

Our next question comes from Brian Gamble of Simmons.

Brian D. Gamble - Simmons & Company International, Research Division

That widening that we're just talking about, the ranges, just wanted to touch a little bit more on that. 280 to 285 and 208, Walt, you noted for the last quarter. You have in your preliminary expectations for this quarter and for both markets, because I really think that one of the things that seems apparent within the market has been maybe I would hope to get some clarity from you guys, as you think you had a shipment deferred out of Alabama, which seems a little counterintuitive. I just -- get some clarification there and any classic color you want to give would be great.

Walter J. Scheller

All right, I'll let Mike answer that.

Michael T. Madden

I guess on any fresh tons that were priced out of Alabama for Q4 were a positive 280 more. We still have carry over running to Q4 which is diluting that overall price, as well as some -- we take -- included in our figure is also the West Virginia product. I'm not sure if that answers your question.

Brian D. Gamble - Simmons & Company International, Research Division

No, that helps Mike. And then, there was one vote that was noted that you said that deferred from Q4 into Q1 out of Alabama, that seems that will be a low vol product and seems like a product that would still have considerable demand in the international market, I think...

Michael T. Madden

Yes, it was actually 2 vessels that were deferred and one going into South America was a stocking issue that we were just out of room at the plant right now. So they asked to defer. The other was actually, as well as stocking issue because they throttle back a little bit on production.

Brian D. Gamble - Simmons & Company International, Research Division

Great, that is helpful. And then, just kind of a housekeeping thing. Your SG&A number for the quarter even includes the $6 million of one time seems a little low to me. Is that a good run rate, that kind of 35 to 40 million tons -- dollars a quarter for SG&A [indiscernible]?

Walter J. Scheller

Yes. Actually looking at around $40 million is a reasonable number to use.

Operator

Our next question comes from Brian Yu of Citi.

Brian Yu - Citigroup Inc, Research Division

First question is, Neil, just in terms of the Canadian cost allocates, I think last quarter you said you are expecting cost to be down 20% to 30%, is that still a realistic target, maybe not for 2012, but kind of things that you can achieve within next 1 or 2 years?

Neil Winkelmann

I think in the long run, I think that is a good target. We're a little frustrated that we're not able to draw them down quickly even in this quarter. It's certainly affected to their budgeting the next year to come up with a plan that really does achieve those sorts of reductions and we're working really hard on that at the moment. But let's say at this stage, not really prepared to comment in any detail on what we're expecting for 2012. But in the longer term, when you look at the volume projections going forward, just taking a real high level view, I think that reminds a realistic guide of course.

Brian Yu - Citigroup Inc, Research Division

Okay. And then the second one is when we look at some of the indicated spot market prices for low vol PCI, it is in the mid-150 mark, and I understand there might be some issues with those indications, but at the same time your low vol PCI cost near term are tracking not that far away from those levels, so my question is if you see a convergence or perhaps that inflect into the other side, would you guys consider throttling back your production until the market conditions improve?

Michael T. Madden

Well, first of all, its Mike. First of all, all of our products are under contract. We don't participate it the spot market. So our customers are taking, I guess, in some respects a different view on pricing. They're looking longer-term relation than short-term. I think somebody low PCI numbers you're seeing are some surplus products that's not on the contract and that's what's floating up here right now.

Brian Yu - Citigroup Inc, Research Division

Okay. You're thinking that the contracts will come in above spot, because they're not locked under long-term contracts. It's quarterly basis?

Michael T. Madden

Yes, I would say that based on people's cost structure right now, 150 number is a pretty tough number to absorb.

Operator

Our next question comes from Mark Levin with BB&T Capital Markets.

Mark A. Levin - BB&T Capital Markets, Research Division

I think you'd probably going to -- probably not prepared to answer this yet, but I was just trying to think about what CapEx might look like in years going forward relative to your growth plans? Maybe how to think about it from a maintenance CapEx perspective, maintenance CapEx per ton perspective and then what incremental growth CapEx could look like?

Walter J. Scheller

Well I would agree with you, because we're in the budgeting process, I'm not really prepared to answer that question right now. We do have very aggressive growth plans. So there's going to be considerable amount of growth capital that's going to continue to be in our budgeting process for the next several years. So I guess that's about as detailed as I can get at this point.

Mark A. Levin - BB&T Capital Markets, Research Division

Okay, great. and then the second question, are there any opportunities to rationalize any asset or divest any asset to raise cash?

Walter J. Scheller

I mean, that is kind of the same question as looking acquisitions. We constantly evaluate the properties that we own for their strategic value and whether they would best fit our portfolio or whether they would best fit someone else's portfolio so we are -- we constantly evaluate our properties.

Operator

Our next question comes from Lucas Pipes of Brean Murray, Carret.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

I appreciate the color in terms of 2012 met coal guidance, 13 to 14 million metric tons on the met coal side. Could you maybe break that down by your various mines in North America?

Walter J. Scheller

Well, at this point, I really am hesitant to do that because we are in the budgeting process, and we've got a lot of moving parts. I'll tell you a couple of things we had discussed previously that Mine 4 has another year or so of very short longwall panel so Mine 4 will not -- I don't view Mine 4 as growing significantly next year. Some of the smaller projects such as Maple, I think, will have considerable growth. Talking a little bit about the Surface Mining moving into some metallurgical coals. So that will be nice growth. In Mine 7, we expect to be operating, getting much closer to its potential for next year. So both longwalls running. I guess what I'll say there is that mine should begin to approach the 5 million ton mark. It will be a little below that, but it'll start to approach that number.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

Great. And do you have a specific timeframe for when it's going to approach that mark, is that going to be first-half 2012 or how do you look at that?

Walter J. Scheller

Our expectation is that Mine 7 is that will be that run rate from the beginning of the year.

Operator

Our next question comes from Mitesh Thakkar of FBR.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

So one quick question related to the deferment of sales volume. When a customer defers some tonnage by 2 quarters or say one quarter, outside of it, it's just a timing issue from December to 1st January but in general, can you sell the tonnage in the spot market given the quality of your coal, one. And second, and then later substitute that tonnage from that customer from production which comes out later? Is it possible or do you have some sort of clause in contracts which would, A, not allow customer to defer or B, if it differs, you can substitute to other customer?

Michael T. Madden

We're not restricted if the request for deferment, we could place or tend to place that coal into the spot market. And we are -- that's beginning of possibilities of where we may be able to still place that coal in the quarter. So there could be some strong possibility on that, but right now, I can't say for sure.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Great. And just following up on a previous question on the low vol PCI coal. I mean, you saw prices come down from 208 to almost 160 -- 160 to 150. If we assume that we are in this new normal PCI coal prices are 150 to 160, how would you view your growth projects in Canadian operations for lower PCI?

Neil Winkelmann

I think given the money we've invested there, we would still see cash margins at those prices, and the production for coal essentially remain unchanged is my first respond for that.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Okay. And how much on a steady-state basis assuming things are all normal, no rains, no monsoons, anything like that, how we think about margins at that point? I mean, basically the question is where will the cash cost stabilize?

Michael T. Madden

Well, I think -- let me just say, this is Mike again, if we don't have any weather issues coming and we see a drop in the international hard coking coal price in Q1, depending on level of the drop will dictate whether China comes back into the market pretty strong. They'll come in and preserve their resources as long as it makes economic sense to them, in which case, [indiscernible] supplied get pulled off fairly quick.

Walter J. Scheller

And I think the other thing we need to just hit once more, is in Q3 when we look at our margins for hard coking coal, it was over $130 a ton, and for PCI, it was $66 a ton for a PCI product, so that was a substantial contributor in Q3.

Operator

Our next question comes from David Beard from Iberia.

David E. Beard - Iberia Capital Partners, Research Division

A big picture question about the boats being deferred. I think everyone is saying, look, has there been a time throughout history when you see a deferral that doesn't grow to more deferrals, then you guys have seen a lot of cycles. What's your view there?

Michael T. Madden

Well, the last downturn cycle we saw was fairly catastrophic one back in 2009 and during that period, we experienced, I guess, a strong deferral for 2 months, but then we came back pretty strong. Our coal generally is looked as a base product so deferral exposure is more limited than say, some other coal out there.

David E. Beard - Iberia Capital Partners, Research Division

Right. I think everyone's concerned about the most recent cycle where things start to cascade and then customers shift their mix; then that production drops, can you go back earlier cycles and give us some color there?

Michael T. Madden

Let's see. Not that I can recall, really, right now. I haven't -- I've been here 15 years then we've only have that down cycle once since I've been here, David.

David E. Beard - Iberia Capital Partners, Research Division

Okay. Just shifting to cost because everyone here is trying to get a sense of where 2012 costs are going. What I just look at 3Q to 4Q guidance when we look at increased production and decreased cost, can we use that as a blueprint next year or would there be something unique between the third quarter and fourth quarter?

Walter J. Scheller

Well, I think the fourth quarter is probably a better indication for a starting point for 2012.

David E. Beard - Iberia Capital Partners, Research Division

Okay. So 35% costs come down about 13%, that's the kind of the metric we're looking at between third and fourth, and that would be good to use going forward.

Walter J. Scheller

I think that's going to be our starting point as we move into next year.

Operator

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

Chris Haberlin - Davenport & Company

In your August investor presentation, you have guided 2012 met coal sales volume of 14 million tons, and now you're saying 13 to 14, did that change due to more of a slowing economic environment or is that due to a refinement of your production plans? Or what's kind of driving that change there?

Walter J. Scheller

It's driven by a requirement of our production plans and we are not, at this point, ready to commit to an actual number for 2012, because we're in a budgeting process. We're still very bullish on our growth plans and as we look beyond 2012, we had also said in that presentation that we intended to grow the 16 million tons in 2013, and we still have that as a target.

Chris Haberlin - Davenport & Company

And then, Neil had said that it is theoretically possible for Ridley [indiscernible] to make up the lost time in December, and I just wanted to see, to what extent have you all baked in that timing risk there into your volumes in Q4?

Neil Winkelmann

We believe that each by [indiscernible] central estimate. What you need to recognize as the upside on that is reasonably the limit. They couldn't really get the things unless quicker than they're planning and the assumptions regarding there, it seem pretty reasonable production through the port in those last 3 weeks. The downside, well, the probability may not be great. You got to recognize that a number of things could go wrong. It could be a significant delay [indiscernible] to the actual engineering works themselves. We could have a confluence of a whole bunch of coal produces trying to get [indiscernible] coal through there. The weather, that can be unpredictable and certainly last year around that December, January the weather contributed to some congestion at the port. So all I think if you sort of think perfect storm about things, it's just what keeping in mind maybe some shipment deferrals that's really what we're saying. The sales plan and what we really call in our guidance consider these factors as best as we can estimate them, but the downside on these things can be considerable particularly by also the cost side.

Chris Haberlin - Davenport & Company

Okay. And then last question. And I hate to beat a dead horse here on cost, but as it relates to Canada, in the U.K., if I recall it correctly, last quarter you all had talked about a 30% decline in cost over the next several quarters as the mines there ramp up to their full potential, is that still good guiding kind of going forward as we look out to '12 and '13?

Neil Winkelmann

In a shorter term, the quarters, that's really more problematic to deliver than we anticipated. That's fair, I think, for longer term to again to 2012 and beyond. Those are still reasonable numbers look around 20%, 30% overall improvement cost for those operations.

Operator

Next question comes from Navaneel Ray from TIAA-CREF.

Navaneel Ray - TIAA-CREF Asset Management

One quick question, can you talk a little bit about the reserves that you acquired from Chevron, and you had some time to probably look at them and when do you propose to develop them?

Walter J. Scheller

Sure, Navaneel. We're very familiar with those reserves. Those are Blue Creek reserves. In terms of their quality, they're close to a -- they'll be close to a 4 mine quality. And as we look at developing those reserves, we're currently putting together -- doing our permitting plans and beginning the process of developing that, the plans for that coal mine. We're also at the same time looking at the acquisition of the other reserves, the other leases that are in that area. We're doing the environmental work necessary to nominate the federal coal that's in that area. So we're moving forward as quickly as we think we can. We want to get that mine up in production at the earliest point.

Navaneel Ray - TIAA-CREF Asset Management

And just a quick follow-up, can you remind us again in terms of the actual quantity of the reserve?

Walter J. Scheller

Sure. The total reserve block is 170 million tons. We don't control the entire 170 million yet, but we control what we consider to be the most critical part of that and we're aggressively going after the rest of those reserves and intend to have that 170 million ton block tied up.

Operator

Our next question comes from Phil Gibbs of KeyBanc Capital Markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Walt, I have a question on Mine No. 7, the new longwall. Which -- can you clarify which panel that is and what you're expected advance rates are going to be? I know you talked about that earlier. I just wanted to confirm that.

Walter J. Scheller

Sure. It's the E3 panel, and I don't know how familiar you are with our mine maps, but it is correctly adjacent to the E2 panel. It's the next panel in the sequence. And as we progressed to the east with these series of panels, the coal gets thicker each panel. So we are moving into -- we continue to move into a thicker part of [audio gap] the scene, will be adjacent to the E2 panel, the shields we are utilizing in this panel will be 50% stronger, perhaps 50% increased capacity beyond the shields in the E2 panel. The extraction rates are expected to be in about the 50-foot a day range as we look into next year, which is consistent with where we've been in the past.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

You're saying right now the current longwall you have on the E2 panels, the one that's been inconsistent between 20 and 50?

Walter J. Scheller

Yes, and that's really just over that last few weeks. They've gotten to the point where they're able to start to push a little harder after we got out from the thicker sand stone. And just having mine through all that tough geology, it beats the equipment up pretty significant and it's given us some problems.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

And, Mike, I just wanted to ask a question about, you said the South American stocking issue meaning that they had too much inventory, was that the deferred fourth quarter expectations into the first quarter, or was that the 3Q carried over into the fourth?

Michael T. Madden

That's fourth quarter.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay, so you're saying you are priorly expecting these shipments to be expected -- excuse me, priorly expecting them to be shipped in the fourth quarter, now expecting them to be shipped in the first.

Michael T. Madden

That's correct, yes.

Operator

Our next question comes from Lance Ettus from Tuohy Brothers.

Lance Ettus - Mortar Rock Capital Management

Earlier in the call, you said that you announced some service mining that was, I guess, start producing some met, I was just wondering how big the contribution of be in terms of annual production and how big the reserve life there is, once you get into that.

Walter J. Scheller

I don't know of the exact reserve life on it. These are fairly small reserves. Incrementally, we're looking at couple of hundred extra thousand tons of met coal next year from our Surface Mining operations. Currently, one of the Alabama surface mines is operating in met coal, that's our Reid School operation and our [indiscernible] mine will now be mining 1 or 2 scenes which are also a met product.

Operator

Our next question comes from Brian Yu of Citi.

Brian Yu - Citigroup Inc, Research Division

First question is with regards to the contract deferrals again, another market like iron ore, we're seeing contract prices being renegotiated. Even in met, I think, one of your neighbors have similar issue. Have your discussions escalate to that next level was no longer volumes and maybe you're sort of entering to the price side?

Michael T. Madden

No we have not. We've have not seen any of that.

Brian Yu - Citigroup Inc, Research Division

Okay, great. And then secondly, with the incremental tons that you're producing for next year, which geographic market do you anticipate placing those incremental product?

Walter J. Scheller

Actually, they'll be spread across all 3 markets.

Brian Yu - Citigroup Inc, Research Division

Europe, Brazil and U.S.?

Walter J. Scheller

Yes, Europe, South America and Asia, I'm sorry, not U.S.

Brian Yu - Citigroup Inc, Research Division

Okay. How much of it would be gone, you said not equal through Asia. Now, as you place those in Asia, would you be absorbing those incremental freight differentials or your customers taking that up?

Michael T. Madden

Well, we've had very strong request out of Asian market for Alabama coal to come back into Asia. The Asian customers are extremely focused on further diversity. We've told them that we would have a willingness to consider that, but we would not want to subsidize the freight.

Operator

Our next question comes from Wes Sconce from Morgan Stanley.

Wes Sconce - Morgan Stanley, Research Division

You've previously provided a medium-term met coal target of about 16 million tons, but wondering if you could provide kind of a higher level outlook on your longer-term potential out of Canada and Alabama?

Walter J. Scheller

I think as we look several years out, we're probably looking at growing to 20 million tons.

Wes Sconce - Morgan Stanley, Research Division

And how's that's split between Alabama and Canada, roughly?

Walter J. Scheller

I guess I would say that, in Canada I would say that, that number moves North of -- probably North of 8 million tons. In the U.S., the number gets up to 12 million tons or so. Those are just -- I mean, that's a very generalized comments, so we're not exactly sure exactly where all those tons will come from, but that's our growth rate.

Wes Sconce - Morgan Stanley, Research Division

Sure. That's helpful. And as a follow-up, can you update us on the expansion on the Port of Mobile and how critical that is to achieving your plus 25% growth in Alabama for next year?

Walter J. Scheller

For next year, it is not critical at all. There is excess capacity for us where there's reasonable amount of capacity for us to achieve our 2012 production targets. There's 2 things going on at the Port of Mobile. One is that the conversion of one of the births, in board and out board birth which will add an incremental 1.5 million or so tons per year of capacity and the other -- the growth projects, our Blue Creek coal terminal which we will construct will be necessary for us when we bring the Yellow Creek reserve online at full production, so that reserve or that project will be developed over the next couple of years.

Operator

Our next question comes from Paul Forward of Stifel, Nicolaus.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

You talked about I think 3 sections running at Maple, I was just wondering if you could give us kind of approximate breakdown of how much of the output Maple is --goes to coking markets versus thermal markets?

Walter J. Scheller

The Maple mine is primarily all met coal, it's all high vol met coal.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's good. And the other --

[Technical Difficulty]

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

-- your recent experience in the development, can you step us through what the timing looks like for getting to a whole run rate?

Walter J. Scheller

I'm sorry, I missed part of your question. Could you -- what's the question again?

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Just looking at the Wales operations, can you step us through how soon do we get to a whole run rate and what is a whole run rate that you're expecting there?

Neil Winkelmann

The phase one of the project takes us to 1 million tons a year, and we'll achieve that in 2013, that run rate.

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

And do we get there -- kind of linearly is 2012 goes along?

Michael T. Madden

Yes, more or less, that's the reasonable way to think of it. It's 3 panels coming on line, 3 production panels, and each of those will have conditioning and ramp up [indiscernible] period just from a modeling perspective, a linear ramp up to that would be a useful model.

Operator

I have no further questions in queue.

Paul Blalock

That concludes our call today. Thank you for joining us, and we're always available to help you if you need us. Take care.

Operator

This concludes today's conference. You may disconnect at this time. Thank you for participating.

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