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Executives

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

Daniel Paul Cartwright - President of Canadian Operations

Richard Allen Donnelly - President of Jim Walter Resources

Charles C. Stewart - President of Walter Coke Inc, President of Walter Minerals Inc, Chief Operating officer of Walter Coke, Inc. and Chief Operating Officer of Walter Minerals Inc.

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

Analysts

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

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

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

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

Brian Yu - Citigroup Inc, Research Division

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

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

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

Caleb M.J. Dorfman - Simmons & Company International, Research Division

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

David E. Beard - Iberia Capital Partners, Research Division

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

Walter Energy (WLT) Q4 2011 Earnings Call February 21, 2012 11:00 AM ET

Operator

Welcome to Walter Energy's Fourth Quarter and Year End 2011 Earnings Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Paul Blalock, Vice President of Investor Relations. Sir, please begin.

Paul Blalock

Thank you, Mary Anne. Good morning, all, and thanks for joining us today. This 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 made in today's press release and make those and other forward-looking statements on the call. For more information regarding the risks associated with forward-looking statements, please refer to the company's SEC filings. Joining me on the call today are Walter Energy's CEO, Walt Scheller; Chief Accounting Officer, Robert Kerley; and other members of the management team will be present for Q&A.

I'd now like to hand the call over to Walt.

Walter J. Scheller

Thanks, Paul. Good morning, everyone, and thank you for joining us. As we always do, I would like to start today with safety. In 2011, Walter Energy reduced its total reportable injury rate by 15% as compared with 2010 on a pro-forma basis. This reduction is the result of our commitment to improve employee health and safety and the implementation efforts of a dedicated workforce. Our aggressive commitment to safety continues into 2012 with our goal to further reduce accidents and citations by another 20%. I'm also pleased to mention that Walter recently received a reclamation award from the West Virginia Coal Association for work at 2 surface mines at Gauley Eagle and we are proud of this accomplishment. It is important to stay mindful of our culture to always operate safely and responsibly.

Turning now to our results. 2011 was a transformational year for Walter Energy. After completing a major met coal acquisition of Western on April 1, we posted record results, achieved greater global diversity and significantly broadened our portfolio of mining assets. I am very pleased with the progress we're making. The team we have in place and the plans we are executing on to significantly grow our met coal production. I've asked the senior team to join me today to help answer your questions. Rich Donnelly, Chuck Stewart and Dan Cartwright are now operationally running the company, and I'm very satisfied with their leadership. They will join the previous call participants of Paul, myself, Robert Kerley, and of course, Mike Madden.

Now onto the results. Revenue of $2.6 billion increased $1 billion or 62% as compared with 2010 revenue of $1.6 billion and set a new record. EBITDA of $822 million increased $129 million or 19% as compared with 2010's EBITDA of $693 million and set a new record. Met coal sales of 8.7 million metric tons in 2011 was also a record and that figure excludes Western's pre-acquisition first quarter sales of approximately 1 million metric tons. I'm excited about the growth prospects in Canada and believe that under Dan, we will achieve our production goals and profitably mature these operations. I'm sure Dan will be glad to speak to the status of operations in Canada and in particular, the startup nature of the Willow Creek project.

In the fourth quarter 2011, met coal sales were 2.4 million metric tons, an increase from third quarter sales of 2.2 million metric tons. Sales of hard coking coal reached 1.9 million metric tons in the fourth quarter, up 18% from 1.6 million metric tons of hard coking coal sales in the third quarter of 2011, and we are anticipating sales in 2012 to continue to show further improvement. The average net selling price for hard coking coal was $244 in the fourth quarter 2011, and average cost -- cash cost per ton were $132 per ton, making cash margins for hard coking coal $112 per ton in the fourth quarter. Sales of PCI were 523,000 metric tons in the fourth quarter, with an average net selling price of $212 and net cash cost -- I'm sorry, cash cost per ton of $165, making cash margins for PCI $47 per ton in the fourth quarter. Revenues for the fourth quarter 2011 grew 75% to $700 million, a $299 million increase over fourth quarter 2010 revenues of $401 million. Fourth quarter EBITDA was $207 million, an increase of $36 million or 21% of our fourth quarter 2010 EBITDA of $171 million. For 2012, we are targeting a met coal production range of 11.5 million to 13 million metric tons. Slightly more than 1/3 of the growth is anticipated to come from Mine No. 7. Slightly less than 1/3 of the growth is anticipated to come from our other U.S. operations in Alabama and West Virginia, including the Maple mine and the last 1/3 of the growth is anticipated to come from Canadian operations. I will stop here for Robert to further discuss the financial results and then provide some additional comments before we take your questions. Robert?

Robert P. Kerley

Thank you, Walt. To highlight our results from 2011, as Walt mentioned, revenues increased approximately $1 billion to $2.6 billion against that of 2010, primarily due to the acquisition of Western Coal. From the 2011, full year revenues consisted primarily of $1.9 billion from our U.S. operations and $698 million from our Canadian and U.K. operations since the April 1, 2011 acquisition. For the full year 2011, operating income was $559 million and net income was $349 million, resulting in diluted earnings per share of $5.76 on 60.6 million in weighted average diluted shares outstanding. Fourth quarter 2011 revenues were $700 million, consisting primarily of $489 million from our U.S. operations and $210 million from our Canadian and U.K. operations. Operating income in the fourth quarter 2011 was $137 million and net income was $84 million, resulting in diluted earnings per share of $1.34 on weighted average diluted shares outstanding for the quarter of 62.7 million. Operating income and net income was detrimentally impacted by volumes, as well as increases in short-term costs, primarily around our Canadian operations. The increase in costs on hard coking coal was primarily driven by purchased coal related to the Ridley Terminal upgrade, which drove a temporary shutdown at the terminal. This drove up costs by approximately $20 per metric ton. The increase in PCI cost per metric ton was primarily driven by volumes and our expediting the migration from a contractor base to an owner base for our Willow mineworkers. Although this move will help lower overall future costs, it caused some short-term increases as we prepared for the move. This impacted the fourth quarter PCI cost by approximately $6 per metric ton. As Walt also mentioned, we achieved record EBITDA of $822 million for 2011, $207 million of which was earned in the fourth quarter. Liquidity was $422 million at the end of 2011, consisting of $128 million in cash and cash equivalents, plus $294 million available from our $375 million revolver. Capital expenditures were $415 million for the full year 2011 and $121 million for the fourth quarter, which was somewhat better than our original targets. We also repaid $104 million against our term debt in the fourth quarter.

Now I'll turn it back over to you, Walt.

Walter J. Scheller

Thanks, Robert. On the U.S. operations side of the business, I'm pleased to report that Mine 7 is doing much better. Production is ramping up and while we continue to experience some ventilation challenges associated with running 2 longwalls in close proximity to each other, we expect a significant increase in production from this operation in 2012. Mine No. 7 is one of the largest met coal mines in North America and its contribution is critical for our success. We expect it should account for just over 1/3 of our anticipated growth. And if there are questions about Mine No. 7, Rich Donnelly is here and will be glad to provide the details. Other U.S. operations, including the Surface Mining operations in Alabama and our Maple mine in West Virginia, should contribute to just under 1/3 of our anticipated met coal growth in 2012. In Canada, fourth quarter production and sales were on target despite the planned outage experienced at Ridley Terminal, which completed the first phase of expansion in December. The upgrade at Ridley will increase its total handling capacity necessary to sustain significant growth in Northeast British Columbia, both from us as well as other operators in the area. Overall in Canada, we expect production increases to account for the last 1/3 of our targeted growth. We are implementing clear plans to increase production, optimize equipment and move from contract to owner-operated mines at 2 of the mines, one in 2012 and the other in 2013.

Looking back, 2011 was one of the strongest coal export markets in the last 20 years and over the long term, we remain confident that projections for global steelmaking will continue to require increasing amounts of quality metallurgical coal. In today's market, if necessary, we will leverage the opportunity to potentially increase inventory with working levels, which could help both quality and profitability, as it may provide better opportunities for blending, as well as lower to merge costs. In conclusion, 2012 is shaping up to be another year of strong production growth for Walter. Overall, we are focused on maximizing our production of hard coking coal and fulfilling our promises. We believe our high-quality products will remain strong value in the marketplace and maintain strong profit margins.

Lastly, I'm very pleased with the management appointments made to date. Adding Dan and Rich to their new roles will help us tremendously in reaching our expansion goals and tightening our cost belt. In addition, Chuck Stewart is here. While he is not new, he is now formally helping the development process for us and can describe the new projects we have underway at Maple, Aberpergwm and the Blue Creek, which is a large project based on the Chevron leases purchased last spring. I should also mention that Earl Doppelt has joined as corporate counsel, and he will help us manage our business more efficiently and effectively. Before I open it up, I would also like to mention that I expect to add additional leaders to the team in the near future, but I'm feeling like the pieces are definitely coming into place for Walter. Our growth plans are very realistic and our production guidance is achievable. Our focus on met coal has us well positioned for profitable growth.

Operator, we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Gershuni of UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I guess my -- I've got 2 questions here that I'd love to go over with you. There's a wide degree of variance in your guidance for production for this year. I was wondering if you can give us some color as to what gets us to the low end and conversely what gets us to the high end? Is it dependent on the growth projects that you're looking at or are there some concerns out there with respect to some of the historical geology issues you've had in Alabama and the road and operational issues that you've had in Canada? If you can give us some color on that, that would be very useful.

Walter J. Scheller

Sure. And I'll start in Canada. Our growth plans in Canada are primarily dependent upon our Brule mine, which last year was fundamentally a project, but this year is really coming into full production. And it's anticipated to increase up to a level which is near the level at which Wolverine operates, which is approaching 2 million tons a year. The rest of the growth in Canada is dependent upon the development of the Willow mine and I'll let Dan talk a little bit about that.

Daniel Paul Cartwright

Let me give a little bit of context for my comments, if I could please, because a little over 5.5 weeks ago when I got this job, the first thing that I wanted to do was head up there and go to the mines. I found from my past assignments that to see something through new eyes doesn't last very long, and I wanted to start at the mines. And so, I started up there, I stayed in the manned camps. I happened to pick a week that the temperature got to a minus 30 degrees, but it's a good thing because it allowed me to see what we had there. I went to startup meetings. I visited all the mines, the plants, the shops, talked to all kinds of people. Unless somebody pinned me down, I didn't tell them what my job was or anything and I came away with some really strong impressions. First of all, I was surprised being new to that area of how young of a company that we are in Canada. I mean, the Wolverine mine is very -- it's up and running and it's very solid. You can see investments that we've made in equipment last year that's going to come to bear this year. Brule, as Walt just said, is completing its development phase, and you can see there again with equipment with the new shop, the Falling Creek Connector Road coming online, which I drove the length of that at that time. You can see that's coming on and getting ready to bear fruit for us. And then Willow creek, as Walt said, was very much a development project, much more than I thought. There's construction going on there, both in the mine, we're opening pits, we're developing the haul road, a major pond, shops, office facilities, warehouses. So it's going to be a development project for the bulk of this year, but the construction is shaping up very well. And it strikes me as something we're going to be very, very, very productive with. The best thing that I saw when I was there was people's attitudes. Even though the weather was bad, I saw people were positive and the thing I was looking for is what status are we in our business processes and how willing are we to change? And I saw willingness there that I don't typically see when I go in new to an operation. People welcome support and it was apparent to me that in all the major fronts, there's opportunities for us to improve in mine planning, process management, maintenance, all those areas we have in place. But they can get a lot better and I think they'll make it. So I was very glad to see what I saw, and I'm glad to be in the job and I'm optimistic to see what I'm looking out to for next year.

Walter J. Scheller

Moving onto the U.S. operations, at Mine No. 4, we are still in the process of what we've talked about for the last year and a half, which was 2 years of relatively short longwall panels in which that mine would produce at a flat rate of about 2 million tons a year. And it produced at about that rate in 2011 and it's expected to be at about that same rate in 2012 with relatively low risk. At Mine 7, I'll let Rich Donnelly talk about that, but we're looking at growing that from what was in 2011 3.3 million tons and growing that to achieve about 1/3 of the growth we've talked about. And a lot of that is simply that we do not anticipate having a squeeze this year, which we had 2 of those last year which really crippled the operation. Rich?

Richard Allen Donnelly

Just looking at the prospects of the mine, the first half of the year, we'll be operating the mine with 3 longwalls running. We started up the second longwall in the east to try and help out with some of the shortfall from E2. The E2 panel, which as most of you know, is the predominant reason we fell short of our tons last year, the E2 panel now is performing quite well. We're achieving run rates over 40 feet a day pretty regularly now. So we're back up to fairly normal production. They should continue operating through the first half of the year. The E3 panel is performing up to potential, and we're currently moving the longwall in the north. Within a couple of weeks, we'll have it back running. We should have it for the whole year. So from the longwall side of things, I think the productivity's looking real well and we should be able to hit these targets.

Walter J. Scheller

For the last part, just answer the other 1/3 of the growth is happening in our other U.S. operations in Alabama and West Virginia and I'll ask Chuck to comment on those, but I'll start by saying that we've mined about close to 2 million tons total from all those operations last year and this year, part of the growth is due to the fact that we've been able to start a new operation, which is operating in some met coal as opposed to what was last year thermal coal. So Chuck?

Charles C. Stewart

Let me start with West Virginia. One of the things we have going in West Virginia is the expansion of our Eagle mine, which will be the new Eagle east mine as our metallurgical mine. The 2 surface mines have been running quite well and on target, but Dan has done a great job up there bringing along the Eagle east development this past year. He's grown it to 3 operating units. We've got the opportunity to expand to the adjacent reserve and increase production even further going forward. So we've started site preparation up there. We hope to be into coal later on this year with full operating results in 2013. This will give us 2 things: Allow us to increase production up there, but to also extend the life of the existing Eagle mine by sharing the resources between the 2 mines. So good growth, good coal is accepted well in the marketplace. In Alabama, the Walter Minerals surface mine, we recently moved our surface mine in Brookwood area to a new reserve location, which is a higher quality than what we've been operating in the past. Allows us to put that coal into the metallurgical market. We've always sold some coal from those mines to Walter Coke. This new reserve block is pretty well allowing us to put that whole production into the metallurgical market if we desire to do that. So that's the goal this year.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay, great. Thank you for all that color. As a follow-up question, I guess, focusing on Canada. I guess it would be great if we had some cost guidance as to how you're thinking about things but in that context, you gave some color in your opening remarks about a $20 cost for purchased coal with the hard coking coal and the $6 change with PCI and so forth, but those costs are still relatively high when you consider that low vol PCI prices have actually been falling as of late. Can you give us a sense as to where costs should end up on an annualized basis? Let's say by the fourth quarter and/or does it make sense for you to potentially shut in production if low vol PCI pricing continues to fall? Or do you think costs will get below and catch up to the decline that we've seen on the revenue side and get below that? If you can give us some color there, that would be great.

Walter J. Scheller

Okay, sure. This is Walt. When we look at the cost structure for the Canadian operations in 2012, it is very important that we separate the operating coal mines and the relatively mature coal mines from the Willow mine, which is a developing mine. When we look at our cost expectations for 2012, we expect the cost for Brule and Wolverine to be in the $130s for the year. So that's where we expect that cost to go. Now if we want to look at Willow by itself, because it's a developing project, the number of tons coming out of there is much smaller, while it incurs a lot of cost to develop. So its cost per ton is really not relevant. So we're looking at PCI, our cost for PCI in the -- what we expect to be in the $130s, somewhere there. So that's how we see ourselves in the market. And Dan also is aggressively looking at how to reduce cost in Canada.

Operator

Our next question is from Andre Benjamin of Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

My first question, regarding the state of demand. I was wondering if you could maybe talk a little bit about your views as you're looking to navigate the year, how that impacts your potential volume guidance? And if you're seeing any difference between what customers are saying for your Alabama coal versus West Virginia and the Canadian coal?

Michael T. Madden

Yes, this is Mike. First of all, let's take a look at what we saw in Q4. Traditionally, we see Q4 a bit of a softening because steel mills like to take their inventory under control, take some cash off the books. We saw -- in Q1, we saw a little more softening creeping in, in that some of our customers' lifting schedules were a bit softer as compared to what their pro rata quarter would've been under their contract agreement. As you know, we contract with all of our customers and we're fortunate to have a good portfolio of about 30-plus customers around the world. I would say the way we see it today is again, we see probably a little bit softening going into Q2. But we're still of the opinion as are a lot of our customers that Q3, Q4 you're going to see some improvements coming in. And then long term, we still feel very positive about the portfolio of products we have. We're not concerned at all. The new Walter in my opinion is even looked on better by our customers as offering more variety.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Thank you, that's helpful. And then I guess my follow-up would be on CapEx, thinking about spending for both 2012 and as we go into next year, given the number of projects you have going on, if you have any guidance there? And maybe a little more color as to how sensitive we should think about that being to what happens with the benchmark price?

Walter J. Scheller

Right now, we're looking at an expected capital expenditure in 2012 of about $450 million, a little more than half of which is growth capital. And we have worked through our budget and while of course we'll monitor our capital expenditures on a monthly basis and compare those to what's happening out in the market, our goal is to continue to be able to grow our operations and continue with our development plans. And as we look out beyond 2012, I think that we will end up basically on a year-to-year basis for the next several years given our aggressive growth plans for the next 6 or 7 years, wanting to spend in about that range of $450 million to $500 million range, to develop additional projects and probably $200 million of that will be maintenance capital, somewhere in that neighborhood and the rest will be growth capital.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

And you'll probably continue to move that, I guess, as long as you stay above, I think the consensus is around $200 met coal, or do you think you would move forward with that even below that level?

Walter J. Scheller

Well our goal again this year, even if the price -- one quarter doesn't a year make, and we are not going to delay our development plans at our Willow mine based on a single quarter in terms of the benchmark price. So we're going to look very carefully at what's going on. That Willow project is, while it's 50% PCI coal, it's 50% hard coking coal and it's an outstanding hard coking coal. So it's one that where we would expect to, once we get that mine developed, achieve benchmark pricing. So we will try very hard to continue with our growth plans.

Operator

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

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

That was a lot of very useful information on Canada and I appreciate that. Could you maybe just break down kind of the volumes from the different operations that you plan to produce in 2012? And then also for modeling purposes, do you have any sense of what the costs are going to be there, keeping in mind that Willow Creek of course is going to be a development project?

Walter J. Scheller

I think I had said earlier that the costs in Canada for Brule and Wolverine would be in the $130s for those 2 operations in 2012. And in terms of the volumes up there, at the high end in Canada, we're looking at 5 million and at the low end, we're probably closer to 4.5 million, somewhere in there. In the U.S., we're at the underground operations. We should be, this year, approaching, getting back into the -- our goal is to be back in the $100 a ton cost range this year. And when we look at our expectations in terms of production at the top end of that range, we are approaching 7 million tons and at the bottom end of that range, we're probably more like at 6.3 million. And you have also in the other operations, probably -- let's see, that would be another 1.5 million or so tons. And again, those are operation by operation, a little bit of a potential discount at each operation.

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

Okay. So just as a little quick follow-up on, so just for modeling purposes, if I plug in $130 for Canada for the full year, is that fair or is that a bit too low?

Walter J. Scheller

No, I said $130s and that ranges from $130 to $139.

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

Great. Very helpful. And then for...

Walter J. Scheller

And again, that does not include the Willow Creek mine.

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

Perfect. And then there were some reports that Ridley had a force majeure over the last week. Do you expect that to impact first quarter shipments or do you think that was just temporary?

Michael T. Madden

This is Mike, Lucas. The force majeure was lifted on Saturday. So they're back operating bulk loaders.

Operator

Our next question is from Brandon Blossman of Tudor, Pickering, Holt & Co.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Let's see, just on the incremental tons year-over-year '11 to '12 on the met side of things, can you kind of break those out into the quality buckets? Looks like we can do it going back to the mines but just -- or be explicit on the low vol versus PCI and looks like there's going to be some high vol in that mix too.

Walter J. Scheller

All right. All of the growth in the JWR assets is hard coking coal. In Canada, about 400,000 of it could potentially be hard coking coal and the other 600,000 -- and again, I'm talking about the top end of the range, would be PCI. And the surface Alabama and West Virginia would all be high vol.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Great, that's actually very helpful. And then shifting to Mine No. 7, it sounds like still some small ventilation issues running both longwalls. What's the risk? So you're kind of guiding to quite a bit of an uptick year-over-year from Mine No. 7. What's the risk that you don't deliver on that?

Richard Allen Donnelly

Let me answer that. This is Rich. The risk, I guess, would be in running the 2 longwalls in the east side by side. They do have some common elements to it, so we'd have some issues from time to time. I don't believe they'll be major going through the rest of the year, but there is at least some risk there.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Great, that's good news. I guess we will be watching that closely, obviously, a big value driver for you guys.

Operator

Our next question comes from Jim Rollyson of Raymond James.

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

Walt, could you maybe give us a little bit of color on kind of where you guys stand for met and PCI contracts? We obviously know kind of your volume range for the year. How much of that's contracted and/or priced just roughly and how are you thinking about the pricing average that's in there so far? Is it just mostly one quarter or do you have volume commitments throughout the year?

Walter J. Scheller

I'm going to let Mike Madden take that one.

Michael T. Madden

Jim, for Alabama, the hard coking coal, that is basically 75% to 80% committed and for Northeast B.C., it's about 75% on the PCI and about, I'm going to say in about the 60% to 70% range.

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

For the hard coke coal?

Michael T. Madden

For the hard coking.

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

Any indication on kind of how -- what pricing looks like there just relative to benchmarks or relative to last year, however, you want to look at it?

Michael T. Madden

Well we traditionally, for the PCI, it's probably one of the very, very top PCI products out there, and we traditionally get benchmarked for maybe $1 or $2 under. And then for the hard coking coal out of B.C., we generally, from the high benchmark number, we track anywhere from, sometimes $5 down. It depends on the market demand at the time. And then in Alabama we usually, the No. 7 tracks the high benchmark number and the No. 4 is anywhere from $5 to $10 behind, depending on the demand at the time.

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

And is there any leftover carryover tons from last year just given some of the mining difficulties you ran into down in Alabama?

Michael T. Madden

We've got, I guess for Q1 we're looking at about, for both Canada and the United States, about 580,000 tons of carryover.

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

Okay, that's very helpful. And Walt, I don't know who you want to take this one, but thoughts for tax rate and maybe depreciation and amortization for 2012?

Robert P. Kerley

Well, this is Robert Kerley. I'll take that one. So in 2012, we're expecting the effective tax rate to actually drop slightly from what it currently is. So we'll be receiving a benefit from that next year versus this year. It probably would be in the year 26%, 27% range based on what we've seen so far.

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

And depreciation, something similar starting with kind of where 4Q was and then ramping up as production goes up?

Robert P. Kerley

Similar but because have that activity around the purchase accounting, moving things around slightly, what I would look at as a go-forward basis as kind of a normalized depreciation, depletion number, around the $70 million to $75 million range per quarter is what I would expect. Depending on volume and mix of which mine produced the volume.

Operator

Our next question is from Brian Yu of Citi.

Brian Yu - Citigroup Inc, Research Division

Walt, you mentioned there's 580,000 tons of carryover. Could you provide a breakdown, U.S. versus international and what prices those are?

Walter J. Scheller

It's a little difficult to hear you, Brian. I don't know if you're -- are you in the office or...

Paul Blalock

Brian, could you ask that again? We couldn't hear you.

Brian Yu - Citigroup Inc, Research Division

My question is with the 580,000 tons of carryover, could you provide details on the split U.S. versus international and at what prices those are?

Michael T. Madden

Yes, I think your question is on the 580,000 tons of carryover in Q1, what is the breakdown and the pricing on it? For Alabama, about 280,000 tons at an average price of around $280 is the carryover. And the balance is coming out of Canada with an average price of about $254.

Brian Yu - Citigroup Inc, Research Division

Great. And then my second question, just a follow-up on the ventilation and you mentioned some challenges there and you're addressing it. Can you tell us of the revised ventilation plans then approved by MSHA? And also based on your mining plans going forward, do you see this creeping back up down the road or is this a one-off type of event?

Richard Allen Donnelly

I think the issues we've got right now, we're still in discussions with MSHA and trying to get things finalized. We're very close to having that done. I think once it is done, that should be a one-off type thing. We shouldn't see any real effect from it the rest of the year.

Operator

Our next question is from Michael Dudas of Sterne Agee.

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

Walt, maybe this one for Mike. Following on your comments about your customer's willingness to take or use the coal, is there a regional difference relative to maybe what the trade press is seeing? Is Europe less interested? Is Latin America more interested? Is there like a breakdown from that? And are you seeing any gravitation towards your qualities versus customers wanting to maybe upgrade the quality as opposed to using some of the lower quality stuff in the past?

Michael T. Madden

I guess to answer the first part, we're seeing a customer or a few customers in each region. So it's not one particular region. Europe, I think, most of our coal going into Europe is going into, let's say Germany, better economic conditions. So we've not seen effects of the financial, really, in that area. South America, it depends on the mill at the time and Asia's a similar thing. But the operating level at Asia is probably better than let's say South America or Europe right now, Michael. But traditionally, when you see the mills throttling back, their focus is going to shift to the higher-quality coals that we have. And that's why I think you're seeing out there today the delta between good coal and B or C coal is widening.

Operator

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

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

I was wondering if maybe you could just give us a little bit more color as to what the impact of Willow will be on the Canada cost structure. You've said that around -- in the $130s for the PCI, but how should we think about Willow on top of that and I guess to kind of get to where the full segment should come out?

Walter J. Scheller

That was a little more difficult to quantify and the reason for that is, as we're developing this mine and figuring out exactly how we want to have things set up, the number of tons that come out of there are variable, and depending on exactly how we do that and how we move that dirt around, if you will, again the number of PCI tons versus the number of hard coking coal tons varies. And that mine is particularly difficult to quantify what the cost per ton range will be in 2012. If we look at last year, they were probably in the $180s. Directionally, I think that for the year, that's probably not going to be terribly different for this year as they develop that coal mine.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay. So I guess maybe kind of ask this a little bit another way. If we look at Q4 at $166 a ton, as we move through 2012 and keeping in mind that Willow can be a huge variable, should we expect to see that $166 number kind of come down? And I know that you all had previously talked about 20% to 30% declines and obviously that won't happen this year, but can we kind of start from that $166 number and then kind of work down from there over time?

Walter J. Scheller

If we look at the full year, not looking quarter by quarter, if we look at the full year directionally, the total cost in Canada will be coming down and will be coming down over $10 a ton, based upon what we know and what we're expecting right now at Willow. So we expect definitely directionally, total costs coming down because we expect both Brule and Wolverine's costs to be coming down and Willow's to be staying relatively flat.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

All right, great. I really appreciate the color there. And then kind of last question here. On interest expense, we saw your debt levels come down in Q4, but your interest expense moved higher and I guess interest rates probably came down some in the quarter. Can you just talk about that and what we kind of, should expect from an interest expense standpoint?

Robert P. Kerley

Sure. This is Robert Kerley. The main driver of the increase is actually we prepaid a fair amount of that debt, about -- of up to $92 million worth. And as we prepay, we have better origination costs that we put up on the balance sheet capitalized. As you prepay it, you have to basically accelerate that depreciation of that cost. And that's what spiked up the interest expense for the quarter. If we prepay in the future, again depending on our balance sheet, you'll see that spike again. That's a noncash element related to that expense though, the interest expense.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay. So would it be fair to assume something going forward kind of in the range of what we saw in Q3, which was around $27 million, $28 million?

Robert P. Kerley

Yes, that would be a good assumption.

Operator

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

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

Most of my questions have been asked and answered, but just a couple of quick -- one quick accounting one. So SG&A expense looks like it's come down fairly significantly over the last couple of quarters. Again, as we think about modeling next year, how shall we think about the quarterly run rate for SG&A?

Robert P. Kerley

This is Robert Kerley again. You see Q4 roughly in the $33 million range. I'd expect it to be in the mid-30s and the reason being possibly a little higher is we got salary increases, et cetera, that will go in for this next year, for inflation. But it should be around the 30 -- mid-30 range.

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

Okay. And then second question, just as it pertains to sort of modeling volumes Q1 through the course of the year, should we just sort of -- I mean, should we model sort of an expected, sort of stair step through the course of the year? Is there any reason why Q1 volumes might be abnormally low or high or anything? How should we think about the volume ramp over the course of the year?

Walter J. Scheller

The year's guidance is 11.5 million to 13 million metric tons, and we are on track in Q1 to stay within that guidance.

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

Okay. And last question is sort of a, more of a big picture question, Walt. As you kind of think about your long-term production goals for both the Alabama operations and then also the Canadian operations and if you had your sort of crystal ball and you look out a couple of years and assume the assets, both assets are running reasonably well, what do you think is a realistic cash cost type number, assuming you're kind of maximizing production out of both those assets?

Walter J. Scheller

I would look at, in Alabama, cash costs probably in the $90 range, somewhere in there. And in Canada, that was a little more difficult. Again, as we develop that Willow mine. But we're going to be in the $130s this year at the 2 developed mines, and I expect them to be improving on that. So somewhere south of $130 a ton.

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

And to get back to the Alabama one, to get to that sort of $90 number, what type of production run rate, annual production would you need out of the Alabama mines?

Walter J. Scheller

Really, the primary driver there is volume and the primary driver on the volume after this year is really getting Mine 4 out of those short and longwall panels and back to its historical run rate of about 2.6 million or 2.7 million metric tons per year. And once we get it where it's not moving a longwall every 3 months, its cost will come back in line and will get us down to that rate.

Operator

Our next question is from Brian Gamble of Simmons and Company.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

This is Caleb Dorfman calling in for Brian. First question, it was good to see some executive appointments over the past quarter. Do you have any update on the search for a new CFO?

Walter J. Scheller

Yes, we've narrowed it down to a few candidates, which we are currently vetting and hopefully we'll move forward in that process relatively quickly.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Great. And next, going onto the thermal side of the business, still pretty small, but it seems looking at the cost side, costs are approaching the ASP level. Are you thinking about doing any thermal production cutbacks or have there been any deferrals by any of your customers?

Walter J. Scheller

Well, I'll let Chuck or Mike answer this, but I guess first I'll say that most of our thermal tons are contracted longer term, so we're not at risk given the spot price of thermal. But this I'll turn it over to Mike and Chuck.

Michael T. Madden

This is Mike. I guess to answer your question, all of our thermal contracts are with contracted numbers and escalators. So we're not in the spot market. And all of them, except one small contract in Alabama, is above water. So we don't anticipate any significant effects going forward.

Walter J. Scheller

The other anomaly I'll put out there for our thermal cost in Q4 was that we had a longwall move at the North River mine. And the North River mine is a big enough operation that when it doesn't produce for a month or so, it has a large impact on the relative cost structure of all thermal.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

So what type of cost number do you think we should be looking at going into Q1?

Walter J. Scheller

In the $60s. Low $60s.

Operator

Our next question is from Mitesh Thakkar of FBR.

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

I have to ask one more question on the Canadian cost. You mentioned about your Canadian cost for the 2 mines, which is about $130s and then you have Willow mine. Can you just kind of assume that Willow mine is in steady state and everything, what is the long-term cost structure for the Canadian ops if you take into account that probably inflation is going to be -- particularly on the labor side, is going to be high in Canada? And then just other variables including ramp up of volumes?

Walter J. Scheller

I think it's going to be in the $120s, once everything's up and running.

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

Okay. So cost will trend down to $120s longer term, assuming all operations are running fine, right?

Walter J. Scheller

Yes, yes.

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

Great. And second thing is on the U.S. side, we just talked about steam coal business and what kind of margins there are. Is there an opportunity here to kind to shutter up some steam coal mines and more resources are focused more on the met coal side where the margins are better, and you don't have to worry about retirements and those kinds of things for power plants and kind of help on the margin side a little bit?

Walter J. Scheller

Well, I guess there's a few things I ought to mention there. The dominant portion of our thermal coal is coming out of our North River mine. And if you'll recall last spring, when we did the Chevron acquisition, the acquisition of Chevron assets, we acquired a mine that had a very limited life and all of the coal at that mine was already contracted at a set price. So those tons, those thermal tons need to be mined and that mine will shut down, I believe, right now we're saying 2015 is when that mine -- or '14 or early '15 is when that mine will complete its operation. In terms of the other operations, the operations up in West Virginia also have existing contracts that we need to continue to mine to fulfill. And the Alabama operations, especially as we move more and more into the high vol met products, those operations become more and more profitable.

Richard Allen Donnelly

And Walter's made a -- here's a part about the Alabama operations is we mine multiple seams here. So you're going to get a mixture of thermal and hard coking coal. So there's always going to be a component of thermal in some of our operations.

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

Great. And can you also tell me what is the inventory at the end of the quarter on the met coal side and how much tons are you planning to purchase for 2012?

Walter J. Scheller

You are asking for the inventory at the end of Q4?

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

Yes.

Walter J. Scheller

About 400,000 in Alabama and less than that, considerably less than that in Canada. And Mike, on the purchased coal for 2012?

Michael T. Madden

Purchased coal in '12 was probably only about one cargo's worth, 60,000, 70,000 tons.

Operator

Our next question is from David Beard of Iberia.

David E. Beard - Iberia Capital Partners, Research Division

My question relates to development costs because you've obviously had a considerable amount for Willow, but also other projects. Can you give us a sense of how much cost was expensed, either in the fourth quarter or for 2011 on development?

Robert P. Kerley

This is Robert Kerley. So some of the development gets capitalized as we develop a mine, say for instance, Aberpergwm, we developed a large plant. In Willow, we're developing several things. I think Dan discussed most of that development that's been going on. That all gets capitalized. And in general, in 2012, I think as Walt alluded to, the development piece of our CapEx forecast is around $300 million, somewhere in that nature. And then the remainder or actually $275 million, $250 million, somewhere in that nature. And then the remainder was in the maintenance CapEx that we spent. The rest of it does go into cost of sales. Accounting in the U.S., once you produce more than a de minimis amount of coal, you have to start expensing that to cost of sales. So that's a fairly small number as you can expect. And as a result, Willow is trending up in the $180s range as Walt has already discussed on the overall term for the 2012. So the differential there between the $135 per ton or $130s to the $180 is where you get the expensed amount. Brule has a little bit of that, but Brule is very close to maturing and reaching full production rates.

David E. Beard - Iberia Capital Partners, Research Division

Okay, great and then...

Robert P. Kerley

I hope that helped.

David E. Beard - Iberia Capital Partners, Research Division

Yes, that is helpful. Thank you. And then just moving on, because I know last year was difficult with 2 squeezes in Alabama and you're obviously not planning any this year. But if you look back long term, can you give us how many squeezes per year you get on average?

Walter J. Scheller

I'll try and answer that. Typically, I mean in a normal year, you won't get any squeezes. It's a fairly uncommon event. It generally deals with the equipment that you've got and the conditions and maybe some mismatch. But I think on an ongoing basis, we'd have several years where you have no squeezes or no activities such as that. We've had a couple of squeezes at our No. 4 Mine prior to getting a proper set of shields that can handle the conditions. And then roughly 10 years ago, we had a couple squeezes at our No. 7 Mine in the north. And again once we got the right shields in place, it stopped it. In the east, where E2 suffered this past year, we've replaced those shields on E3 with a brand-new set that are designed to handle the conditions. And we really don't anticipate all 3 of our ongoing longwalls now have the proper shield densities, and we don't really think we'll have an issue with that going forward.

David E. Beard - Iberia Capital Partners, Research Division

And one more, if I could, maybe for Rob. I noticed a significant dollar amount moved into goodwill. Could you just talk about how those assets moved around on the balance sheet?

Robert P. Kerley

Yes, that's part of the refinement around the purchase accounting for Western Coal. What we did is we refined both the cost assumptions and the timing of production. And what that does, as you discount everything for the life of mine, it ends up moving numbers around and that's the result of that exercise. We do see a lot of opportunity in what Western has brought to us. It provided us diversification in what market we can reach. It provided us diversification in where we produce. A lot of benefits where we can then expand on those operations in the future and we see some very positive aspects in the long term for that investment. But in the short term, which you have to base your purchase accounting based off of, that's what moved those numbers.

Operator

Your final question comes from Paul Forward of Stifel Nicholas.

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

I've got a PCI market question, which is we've seen, at least in some of the spot markets down in the low $150s for quoted PCI, low vol PCI prices. I'm just curious, if low $150s is going to be the price for a while, can you characterize what you think the export supply response is going to be to a price like that? Is that low enough to chase significant volumes from the market?

Michael T. Madden

This is Mike speaking, Paul. First of all, I think the $150s that you've seen or purported to be from tonnage settlement that our analysis is showing that that's not what we consider our high-grade PCI. And to answer the second part of your question, I would say if that $150 number lingered for a long time yes, you would probably see some production go off the market.

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

Okay. And you gave a range, let's see, of Canadian output of 4.5 million to 5 million tons in 2012. As Willow matures, where do you see the Canadian output number look like in 2013?

Daniel Paul Cartwright

This is Dan. It's going to be up, approaching the 6 million level.

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

All right, and I think Dan, you had mentioned buying out the contractors and looking around and seeing some opportunities for efficiencies. You've only been there for a few weeks, but is there anything that stands out as opportunities, efficiencies or so on being able to pull numbers higher than that?

Daniel Paul Cartwright

Well yes, I think it can be. What I've done in my past is I've really focused on mine planning, particularly for reserves like these that you see in Northeast, British Columbia. So that you really make sure you know what you're going to get before you get there and reliability-centered maintenance efforts that we're in the process of initiating now. We've got a lot of opportunity on the supply chain that can reduce the downtime that we have. So it's a lot of what some people would consider blocking and tackling. But I think those kinds of things are going to have significant impacts on both production and cost. And that's really why I'm excited about what I've described that I saw up there.

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

Great. And maybe just lastly, I think just under 1/3 of the met coal growth in 2012 is going to be in the high vol category. I was just curious if you could talk a little bit about that, the market for high vol today in West Virginia? And is that still -- is there still a decent enough demand for that coal at a decent enough price to justify your expansion plans that maybe you would've thought 6 months ago would've been just fine? As you look at the market today, do you consider backing off on any of those plans or is the market for the high vol still good enough to press forward?

Michael T. Madden

Paul, this is Mike. Paul, let's take a look first of the Alabama high vol. What we've been doing with that product is, it is a pretty good high-grade, high vol, which allows us to blend with some lower grade coals and sell some off spec, which is going fairly well. In West Virginia, the Maple is really an A high vol and most of that coal is currently into the domestic market. We believe that the domestic market, when the purchases were made, they were not anticipating operating at a level they are today. So we're of the opinion that you may see some more steel mills in the U.S. go back into the market to purchase. And we're also exploring and had some good initial for moving that West Virginia coal through Mobile in combination with our other coals out of Alabama, offering a customer basket cargoes. So we see opportunities out there. We don't see negative out there right now.

Operator

I'll now turn the call back to Paul Blalock for closing remarks.

Paul Blalock

Thank you, all. We appreciate your attention. We're available for questions and follow-up, if we need be. Thanks for your time.

Walter J. Scheller

Thank you.

Operator

This does conclude today's conference call. You may disconnect your phones at this time.

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