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Executives

Elizabeth M. Cook - Director of Investor Relations

Peter T. Socha - Chairman, Chief Executive Officer and President

Coy K. Lane - Chief Operating Officer and Senior Vice President

Joseph Czul - President - Logan & Kanawha

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

Analysts

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

Shneur Z. Gershuni - UBS Investment Bank, Research Division

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

Jeffrey Cramer

Justine Fisher - Goldman Sachs Group Inc., Research Division

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

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

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

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

David E. Beard - Iberia Capital Partners, Research Division

David S. Martin - Deutsche Bank AG, Research Division

Unknown Analyst

Michael Goldenberg - Luminus Management, LLC

Lance Ettus

James River Coal (JRCC) Q4 2011 Earnings Call March 1, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Company Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn your conference over to your host for today, Ms. Beth Cook. Ma'am, you may begin.

Elizabeth M. Cook

Thank you, Ben, and good morning. Welcome to James River Coal Company's Fourth Quarter Earnings Call. We released our earnings this morning and our release and presentation are on our website and were furnished to the SEC on a Form 8-K. With me on the call today are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; Joe Czul, President of Logan & Kanawha; and Jim Ketron, Vice President and General Counsel.

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

Peter T. Socha

Good morning, Beth. Thank you, everyone. Good morning to everybody. Thanks for joining us. We -- I'm just going to go through the summary. We should cover these slides in probably 10 minutes, 10 to 15 minutes.

Let me just say, from 50,000 feet, we're doing really well. I'm very, very happy with how the mines are doing. C.K. will talk about it in just a minute. The mines are functioning extremely well. I'm happy with how we are on the sales side with our closeness to our customers, we are still very close to them. We're talking with them regularly. One of our guys in our sales group just got back from a trip. Joe is getting ready to go on a trip to go see customers. So we're pretty much in contact with what the market is doing and we're pleased from that standpoint, but obviously, we're happy with the balance sheet, happy to have the position that we have right now. So from that standpoint, all the things that are within our control, I think we're very pleased with. I know I speak for the whole management team by saying we're very pleased with. The market is terrible right now. It has been terrible for a while. This is a commodity market and markets come and markets go, as one of our coal miners told me not too long ago. Coal markets go up and coal markets go down. Make sure you're there when they're up. That's kind -- that's what we're doing and that's how we're managing our company and I think we're doing a relatively good job at that.

We did reach agreements, just going through the Summary slide, the mines did -- had a great quarter. The mines had a great year. Logan & Kanawha and IRP are fully integrated to this part of James River. Very, very happy with how everything has gone there with the people and with the assets, could not be happier, actually. The balance sheet is strong, continues to be strong. We did sell some coal during the quarter. I probably should have put more detail here than I did. I thought about it late last night. Of the 2.8 million tons, about 1/2 of it was met coal and about 1/2 of it was other. Of the 1/2 that was met, about a little bit more than 1/2 of that went overseas, about 60% went overseas and about 40% was domestic. Of the 50% that was other, that's Stoker, that's PCI and it's a little bit of carryover tons on the thermal side, we are pretty well sold out. I don't know that we're going to sell any more thermal coal in this market during 2012. The met market, we'll continue to watch and see where the opportunities are on the met side but I can't imagine us selling more thermal coal this year. The entire organization is very focused on safety, on cost control. These coal miners and our superintendents and our engineers, they've been in the coal industry for a long time. They know what a soft market looks like and they have managed through this process before, so we're very focused on capital and we're very focused on costs, on our cash cost. And on staying close to the customers because things do turn fairly quickly and we want to make sure that we're aware of it early in the process. That's the way we function, we stay so close to the customers and we hear things and we pick them up and we manage our process that way. And with that, I will turn it over to C.K.

Coy K. Lane

Okay. Thanks, Peter. Good morning, everyone. Let me now turn to our first slide on safety. We graphed our NFDL rates and compared how we were doing to the national average and it's a very good trend. In 2011, we had a non-fatal days loss rate of 1.49. National average was 2.44. That's a 17% lower rate for James River in 2011 versus 2010, and so 39% lower than the national average. So we're very pleased with our safety trend and how that is looking.

On the next slide, we also took a look and graphed our citations. We saw about 15% drop from '10 to '11. We had 14 operations and received recognition for and under the Sentinels of Safety program for working a year without a lost-time accident. We also had 2 operations at our new IRP properties that received the Mountaineer Guardian Award that was presented by the State of West Virginia and the West Virginia Coal Association. So our operations and our employees worked very hard and improved our overall safety and regulatory compliance, and we stay very focused on that in the environment that we're in today.

Moving on over to the operations, with the CAPP, no new story here. Pretty much everyone in CAPP has announced production cuts. We're watching our production and we're continuing to reduce our overtime. We're not working any Saturday production days right now. We are taking some additional days off. We'll continue to do that through 2012 to reduce production. What we try to do is match up days with holidays to give our employees an extended weekend around the different holidays, such as Easter and Memorial Day. So we've kind of got those planned throughout the year. We have delayed some startup of some of our replacement mines to also manage our production going forward. We completed the Phase 1 dam for our new impoundment at McCoy Elkhorn. We're very pleased to get that part done for us. We also started developing the Hazard #4 Seam at Abner Branch at our Bledsoe operation. This is a lower sulfur reserve and will help us in the market going forward by reducing our overall sulfur to Bledsoe operation.

Over at Hampden, we started a new mine called Mine 6A. It replaced our Mine 3A that mined out. We also restarted our Lewis Creek surface mine, replacing our Bear Branch surface mine that mined out. And our Stacy Branch Surface Mine permit, they did get the new state DNR permit. Our core permit is still pending. This is a permit that we've been working on since 2006 located in the Hazard area.

Over in the Midwest, same story as we've had for a couple of quarters. We're running our operations at a reduced rate just to match up with our customer demand and shipments and control our inventory. As you know, that Midwest has a higher sulfur coal and so we don't build a lot of inventory there. We did get our new Log Creek Loadout in operation. We shipped our first train by rail to Kentucky Utilities on January 10. And just going echoing what Peter said, all the operations are trying to focus on safety, work safe, we've reduced our violations, produce tons efficiently right now and manage our capital. So, I mean, that's kind of going to be our story for 2012 moving forward. And with that, I'll turn it back over to you, Peter.

Peter T. Socha

Thanks, C.K. The next slide is just headlines, these are just things -- those of you who've been with us for a while, you know I picked them up, sort of, as I traveled around and read the newspaper and write them down and save them up and usually they're kind of humorous. But Joe, if you will walk us through the met coal market, please.

Joseph Czul

Sure. Thanks, Peter. We currently see a number of positive signals in the metallurgical market, tempered with some cautionary signs. In North America, our steel customers are doing well, are generally accepting contractual shipments on schedule and are enjoying the current strong Automotive segments, together with business generated from shale gas production. In Europe, our customers are doing a little better than expected just a few months ago and they are cautiously optimistic for a gradual return to higher operating levels. We would not be surprised if the outlook for European steel companies continues to improve. The economy in India is also improving, as inflation gets under control. Anecdotally, during our visits there, we noticed that business translated to the general business community where sentiment has improved. Our customers have growth projects that are coming on stream and we expect to see their growth forecast to be largely on track. U.S. suppliers gained market share in India in 2011 and we're cautiously optimistic that we can hold that position in 2012.

On the cautionary side, which tempers our optimism, our supply-side strengths. Most of our customers are being offered increased supplies from almost all basins. The Canadians have increased their production year-over-year and are offering this tonnage to the market. Australian suppliers are also offering customers additional supplies for the year. New entrants are trying to hold the market share they gained in 2011, and in some cases, are offering additional supplies. In particular, Indonesia, Mozambique and Mongolia are among suppliers we see as possible competitors. Finally, our business is closely tied to the global economic growth and that growth is still anemic and susceptible to falling off.

With that, I turn it back to Peter.

Peter T. Socha

Thank you, Joe. Just turning over to thermal coal, I think because all the other companies have already reported, I think everyone knows what's going on with thermal coal right now. The only thing I will say on CASPR is the hearing date has been set for April 13, I believe. We looked at every case that came out of the D.C. Circuit Court of Appeals over the last couple of years that it appears as though the timeline, the average timeline from a hearing date to a written opinion related to that case is about 16 weeks. So we would expect an opinion on the CASPR case sometime this summer, later this summer.

The -- on the -- let's turn it to the next slide. The economy, as much as we talked about the warm weather, and it's definitely a factor, I mean, today in Richmond will be about 76 degrees on March 1. So very, very unusual warm weather and we talk about natural gas. I still think the biggest single factor is a weak economy. I think that's true here. I think that's true in Europe and it's certainly been true in India. I think India is a great untold story on the impact that it had on thermal coal this winter on API #2, in particular -- API #4 and API #2, India crashed in the second half of last year and now appears to be coming back around. But what's unusual about it right now is you have the Fed, which is obviously priming the pump or putting money into the economy but the Central Bank of China has just started, really for the first time since 2006, they started out as an 8% reserve rate in 2006 and took it all the way up to 21.5%. Today, they've started the easing cycle there. The Reserve Bank of India has started easing, Russia has started easing, Brazil has started easing. So you have these monetary easing that is going on around the world and I think we'll start to see that flow through into the commodity market later this year.

On the Guidance slide, just sliding over to guidance, it's in pretty much the same format that we have used in the past. We did try to be -- have a little bit more clarity for you between the thermal, stoker, PCI and the met side. We did not include here any -- on shipments, we do include the broker coal or the traded coal on cost guidance. We did not -- we don't know, obviously, what Joe and L&K do on the brokerage side. It depends on where the market is at that particular time. No surprises on CapEx or on tax rate. So all of those things are done.

On the Miscellaneous slide, is we do have in a footnote or a miscellaneous note in the press release on 3 items; the deferred tax assets, which is a reversal from a year ago, the worker's compensation and then the pension and blacklung. We are on the road a little bit this month. I'm in Orlando with Jim Rollyson next week, and then Sam, I think, Steve -- Sam and Steve and Beth will be with Holly at the Howard Weil Conference in New Orleans. And then with that, we will be happy to take questions. Ben?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from the line of Michael Dudas from Sterne Agee.

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

Peter, your closeness with the customers has been a trademark with you and the company. Maybe a little more light on how the customer base on the domestic thermal side has been reacting to the pretty wild swings in the market and for generation. And is there a sense that this is just a cyclical economic impact or is there more structural issues that are starting to creep into the thought process from [indiscernible]?

Peter T. Socha

Well on the thermal side, or domestic thermal, at least our customers in the Southeast, and I know this has gotten, a lot of play on the various conference calls, how much switching is there going to be and things like that. But in talking to our customers in the Southeast, their coal burn is not really going down a whole lot between '11 and '12, but really between '10, '11 and '12. It was already at a low level. Gas prices were already in the money in the Southeast for the last several years. And so whatever could switch has switched. Yes, there may be some switching going on in mid-Atlantic. I've read about in the eastern side, the Midwest, of the industrial Midwest, there may be some -- their stockpiles are big. They're by and large, they're on the healthy side. Some of them would be coming out for coal solicitations, we believe, late this year, early next year. But by and large, they're doing okay on their coal burn. I read a comment from a -- this was a sell side conference, where one of our CFOs attended. He said his coal burn is going to be flat, pretty much flat year-over-year. They're not going to be switching. And based on what we're hearing, that seems to be the case anecdotally. What happens going forward? I don't know. What happens in '13 and '14? I just -- I don't know. Right now, we're trying to work with them on '12 and make sure that what we have under contract and what they need match up. That's the biggest -- that's our focus right now and finding out what they're doing. Joe, do you want to comment on the met side, domestically first?

Joseph Czul

Domestically, it's sort of like we said in our prepared remarks. The North American steel companies are doing pretty well. Automotive is very strong. The coal plants are all more or less running full tilt. So that's all really going pretty well.

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

Joe, maybe to follow up a little bit on your comments about India. It seems some estimates where I've seen 10% to 15% increase in met coal imports into the country for 2012. Is that like a reasonable number? And is quality an issue, given where benchmark pricing seems to be settling here for Q2 and the expectations for second half.

Joseph Czul

Yes, I mean, I don't know whether it -- whether imports will be up 10%. We expect them to be up. And I don't know that we have really a slide rule on exactly how much, but we do see year-over-year growth. And I guess -- so maybe you can restate your question on the quality. I'm not quite understanding what you're asking.

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

Is the demand or the interest that you're seeing for your coals different because of where pricing is? Is there -- your coals relative to better quality, larger discounts and narrowed discount or is there any pushback from the international steel companies from that front?

Joseph Czul

Mostly -- I mean, generally speaking, the coal -- the blends haven't really changed. They still want good quality coal. We sell them very good quality coal. So we don't see a lot of change in the kind of quality that you're asking for.

Peter T. Socha

Mike, I think that higher number might be on back half of '11. I don't know if that would be on the full year of '11 but the back half, if you really want to look at an interesting chart, there is a foreign exchange chart on the Indian rupee versus the U.S. dollar and go back one year, starting in August of last year, the Indian currencies have collapsed really through about the first part of January and then it just started to pick back up since then. It actually improved quite a bit since then. But I think it was one of the 2 or 3 worst-performing currencies in the world. So if you were to look at imports of met coal or thermal coal for that matter, into India in the back half of '11, I think you'll probably see material growth in '12 over that run rate.

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

One final quick question, Peter. Any opportunity to shift James River thermal coal to Europe, maybe mid to second half of this year?

Peter T. Socha

I think so. I think so, but I have -- Joe is going there next week and unfortunately, I've got a conflict with Jim's conference. Otherwise, I'd be going with him. So I'll know much more. I'll probably go over there in April or May, I know how to better handle at that time. I think the softness in the European market, as I talked about a little bit earlier and just a minute ago, I think part of the softness in the API #2 and the API #4, can be traced back to what happened with India in the back half of '11. I think that pushed some coal onto the available chart that maybe wouldn't have otherwise been available. And so hopefully, India -- the thing going on in India right now, where Coal India and the generating companies in India, they're supposed to be the fuel supply agreement and Coal India has resisted signing these fuel supply agreements. It basically amounts to about 60 million tons that Coal India may have to import and the government has told them to sign the contract by March 31 of this year. So there's some things going on that should be bullish or should be supportive of the European market. Coal burn in Europe and in Germany is not down that much. Renewables have been out there pretty much but they're finding out that renewables are incredibly expensive. So when you look at the clean dark spreads versus the clean start spreads coal versus gas, coal's been pretty much winning the money for the past quite a while. So we may sell some. I'll know much more by the time we get to the to the Q1 call. And then...

Operator

Our next question comes from the line of Shneur Gershuni from UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Just a housekeeping question first. I just wanted to clarify, the contract book that you've presented in the guidance, that's a combination of both your OPCO tonnage sold, as well as the training company or the ...

Peter T. Socha

What kind of shift? The guidance un-shift, includes everything. Tons shipped Includes everything.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

But the costs are specific to the ...

Peter T. Socha

Costs are specific to the operating costs.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. I was just I wondering if you could go through your cost guidance a little bit. You'd mentioned on the last quarter's conference call that your operational costs were kind of in line 3D the L&K purchase and so forth early last year. The change, that's a couple of dollars higher, is it related specifically fixed cost absorption .

Peter T. Socha

Yes. Without a doubt.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Are any other items out there at all?

Peter T. Socha

No. I think when you run, when you take a high fixed cost operation like coal mining is and you run at less than optimal capacity, you're just going to have higher fixed cost absorption. C.K., do you have any thoughts?

Coy K. Lane

I agree with that, plus we're still seeing some regulatory issues coming down the pipe from MSHA. I think they will probably affect costs a little bit. And we're just scaling back on the amount of days worked and overtime I think probably has the -- probably the biggest effect on it.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I've got kind of a strategic big picture question. I've got to assume that there are a lot of operators in Central App right now, with costs in excess of $75 a ton, looking at the thermal market that's looking like it may be challenged for the next several years. Are there any strategic opportunities where you could merge with a similar sized company or pick up some smaller companies where you can actually see some real strategic benefits on the cost side, where you can help absorb fixed costs better and so forth? Is that something that you're thinking about?

Peter T. Socha

I think, yes -- I think the answer to the question is yes, there are opportunities like that. To be honest with you, right now, we've got our heads down. We are focused on James River operations, James River people, James River customers. There are -- we got a lot of calls from a lot of areas, different factories and principals, when we the all take the calls and we listen but right now, I'm trying to run what we have and run it as well as we can. And I think we're doing okay. But until we get a little bit more visibility on what the market is going to be, back half of '12 and into '13, I think that were doing the prudent thing by just focusing on the stuff within our box right now.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. And a final question, if I may. Last year, we saw I guess we'll call it a modern-day record in terms of exports leaving the country. I know that last decade we saw higher, but basically, I mean, we pretty much came close to using maximum capacity of the available porch that we've got out there or where we're going to find out what it is but we're pretty close. I kind of have to assume that it's starting to get competitive for space and so forth. Have you been having any issues securing the export market you've talked about India and the API #2 as being a driver of something that you're paying attention to, which is the signal that you want to export more. If you could sort of talk about the access that you have and where you can pick up some to move more tonnage?

Joseph Czul

Yes, sure. I mean, the short answer is with exports falling off and capacity is opened up and we're in some dialogue with that right now. We have some options available to us right now and we're working through what makes sense for us.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

So essentially, you feel that this space will be there to achieve what you'd like to achieve?

Peter T. Socha

Yes. we haven't -- I don't we've run into any capacity constraints on terminal or rail in anything we've been involved with. Obviously, we're a small player so it doesn't, it's not like Alpha or some of the other larger players. We're just a small player. We pick and choose our other opportunities. On the met side, has it ever been an issue, Joe?

Joseph Czul

Well the queues got pretty long at the peak last year on the met side and those are backed way off. [indiscernible] queues, spreading a load. And so I guess that's a form of capacity issue.

Operator

Our next question comes from the line of Jim Rollyson from Raymond James.

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

On the guidance on your slide, basically if you go to your 6.7 million of thermal, PCI, Stoker, other and your comments that you're pretty unlikely to price any additional thermal, I presume that the rest of what's open, about 550,000 tons, is either Stoker or PCI? And the met side...

Peter T. Socha

That is correct. [indiscernible] just a qualitative comment, the Stoker market, we think, has held up okay. The PCI, with the current low met prices, and Joe correct me if I'm wrong, the PCI market is a -- maybe little bit more accurate.

Jeffrey Cramer

Okay. And any color on the -- maybe the quality of what's open on the met side versus what you have sold? Just so we can kind of gauge what [indiscernible] something.

Peter T. Socha

Pretty standard stuff, comparable to what we've always told. Joe, jump in, if you want, feel free.

Joseph Czul

That's exactly right.

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

On the cost guidance, you gave us this nice breakout between Central App, thermal, PCI, Stoker versus met. Any way you can give us a little bit of color on what that would've compared to for 2011 actual?

Peter T. Socha

C.K.?

Coy K. Lane

We're seeing about the same numbers there. I think on the met side, we're probably down just a little bit. As prices come down, of course your royalty rates come down. So I think that would trend a little bit lower on the met and about the same trending on the thermal side on the Kentucky operation.

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

That's helpful. And lastly, Peter, a pretty strong cash/liquidity position right now to the end of the year. Given what you've got contracted and kind of what you see for the rest of that and your CapEx, do you expect to generate free cash flow this year?

Peter T. Socha

We didn't. I don't think we went out with that level of detail on modeling.

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

I realized that.

Peter T. Socha

Everyone needs to do their own model.

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

I'm just curious why, if that is your expectation.

Peter T. Socha

We're watching cash very, very closely, Rolly. We recognize that, that's a big issue. Cash cost and cash. And that's where our focus is. Okay?

Operator

Our next question comes from the line of Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

So first, just to clarify. The -- in the guidance where you include thermal, Stoker and PCI and the one-line item, when you give the historical results and say CAPP steam, does that include PCI as well? I know it's always included Stoker but does that include PCI as well?

Peter T. Socha

In the historical or the legacy James River operations, we had that quality of coal. We just didn't sell it as PCI. So it was neither -- it wasn't sold as PCI. Lately, we've been selling, and certainly, since the L&K transaction, we've been selling it as PCI. So the tonnage would've been in the thermal category before.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. So those are apples-to-apples comparison in terms of the historical numbers in the guidance?

Peter T. Socha

Yes.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And where did you sell your thermal coal that you priced during the quarter? I mean it's hard to tell given that it's a blended number?

Peter T. Socha

Yes. It was a small amount of rollover ton, carryover tons from [indiscernible] as well.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Were -- was that -- were those sales in kind of the high 60s or low 70s?

Peter T. Socha

I'm not going to go there. I don't want to go there. They were -- it was thermal coal. It was thermal coal that was priced a little while ago and the customer just didn't take it, the trains ran a little bit slower during the course of the year. We knew -- I thought we talked about it on the Q3 call, that we might have some. But we usually have some every year.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then you seem to have cut -- if I just look at how much thermal in Central App that you produced in 2011, it was a little over 7 million tons and then the guidance for next year is 6.7. So that's clearly a cut and I was just wondering whether the cut was a result of an uncommitted tons that weren't booked that you saw it, we're just not going to produce those, if there's no market for it? Or if it were -- with utilities that canceled contracts and so you guys decided to cut the traction?

Peter T. Socha

We did have not had any utilities, since I've been at James River, we have not had any utilities cancel a contract.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then obviously, so we're all building our own cash flow model forecasts, and I think with a high cash balance 2012, it's certainly fine, but if by the end of 2013, obviously if the market improves, it's not an issue but if the market doesn't improve and cash gets to kind of lower levels, let's say $50 million or below, the first question is what does...

Peter T. Socha

I'm not going to go there, Justin. I'm not even to going to what things are going to look like in the market at the end of 2013. That's just -- that's hypothetical and cost speculative.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay, well then, I guess I'll try and phrase it a different way.

Peter T. Socha

Ask the question again in March or February of 2013.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Would the company think about raising secured debt? If it needed too? And how much is your ability to do so at this point, under your covenant?

Peter T. Socha

It is just way too hypothetical -- like I said, it's a hypothetical and cost speculative. And I'm not going there. I don't know what the market's going to look like at the end of 2012. I certainly don't know what is going to look like again in 2013 and what impact that's going to have on the cash balance and what capital -- what the capital markets will look like. I mean, we think all the fact. But the markets are where they are right now. How many people within Goldman Sachs predicted that 2 years ago?

Justine Fisher - Goldman Sachs Group Inc., Research Division

Sure. Sure. This is more a question of capital structure management than what the market's going to look like. So...

Peter T. Socha

Well, no. No, no. You'd -- I don't think you can say that at all. It's absolutely dependent on what the markets look like, both the capital market and the coal market. I think it's -- it's 100% dependent on that.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Right. I thought maybe investors just want to know where -- what the company's strategies might be, but you're right, it is a long way from now. And then just, sorry, one last question. What's your maintenance CapEx number again as a reminder?

Coy K. Lane

We're pretty much running at the maintenance CapEx level. I think if you looked at the guidance there, we've got some completing, some ongoing projects. That's kind of about the run rate we need that we kind of looked at not doing a whole lot of things this year and just maintaining what we have.

Operator

Our next question comes from the line of Lucas Pipes from Brean Murray.

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

Really quickly, on your met coal guidance of 2.8 million tons, what is the met coal kind of production capacity that you currently have and how much of that do you expect to utilize this year?

Peter T. Socha

C.K.?

Coy K. Lane

When we look at what we're producing on the met coal, we're in the 1.3 range, kind of consistent with the Hampden operations and then the balance of that's made up with the purchase and brokered coal through L&K.

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

Great. So if I -- so, maybe a follow-up question on your contracts then on the met coal side, is that -- are those contracts primarily for your company-produced tonnage? Do you break it out like that? Or is it...

Peter T. Socha

No, we don't -- we have never broken it out like that. I don't think we will. And everything's blended, everything -- pretty much everything we sell is a blended product.

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

And then -- so when you -- so when it's blended, it essentially assumes that you have some purchased coal under contract for 2012, is that correct?

Peter T. Socha

Correct.

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

And have you already kind of locked up those volumes on the other side, on the brokered side or is that open [indiscernible].

Peter T. Socha

I'll discuss what we do on the L&K side, then I'll kick it to Joe, most of what we do is back-to-back trading, is that once Joe confirms on the buy side -- he confirms on -- on the sell side, he confirms on the buy side the coals that we need for that particular blend.

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

Joe, essentially, you've locked in those margins as you go along?

Peter T. Socha

Yes, exactly. Joe?

Joseph Czul

Yes, I mean you said it well, Peter.

Operator

Our next question comes from the line of Brian Gamble from Simmons & Company.

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

Back to the exports for a minute, if you would. You're obviously trying to take advantage of the destination that you can. I was hoping you might really comment more generally about the export market in the U.S., 107 last year, I think it was 70 met, 37 steam. Expectation for this year, in your opinion?

Peter T. Socha

The met coal is still in the money in Europe, API #2 prices are pretty soft right now but our coal gen is still there. I don't know if we reached the 107 or not. I haven't been there in a while. To be perfectly honest with you, I haven't been there in quite a long period of time, actually. And I'll have a better answer by the time we get to the Q1 call, assuming I go over there and spend like 10 days [indiscernible].

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

The cost guidance, I think was -- I was actually puzzled and surprised to see the volume number where it was and the cost, the respective costs you're able to give. Can you talk about -- you have a couple of replacement mines. Obviously, you've been trying to make things as efficient as you can. What's -- I guess what drives you towards the top end, towards the bottom end or potentially out of either side of that cost range this year?

Peter T. Socha

Absorption. It's going to be and we have to on the met side, for instance, if met prices fall so much, that we decide just to not sell it. You're not going to sell it at that price. And obviously, you always have to weigh the same thing we do on the thermal side, you have to weigh the customer relationship and how long it's taken to build it up and things like that. But that would drive the cost side on produced met. On the thermal side, I think our guys recently, we've been running pretty much at the run rate that we're at, maybe a tick above or a notch above. But we've been running those costs. We've been running at that production level. So I think we feel okay. Diesel, obviously, on the surface mine, diesel and oil and what's going on recently on that market may have an impact. But at least within the recent past, we've been very, very happy with how the guys have managed production and costs.

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

And then finally, on the, I guess, Colby gas side of things, when you look at the generation numbers, you look at the percentage of coal has been able to hold kind of last quarter of 2011. It doesn't speak too favorably just because of where the gas prices are and the fact that you went over. But it seemed like your commentary with regard to your customers specifically didn't necessarily tie up with the numbers at large. Do you think those are different?

Peter T. Socha

Yes, it's not at least -- no, I think that's accurate. It's not at these 30 and 50 million tons of switching. There may be 30 or 50 million tons of switching still to come. All right? I don't know because it's not, at our customers in the southeast, whatever they could switch, they switch. I think we've had this conversation, I don't know if on a conference call or not. To me, switching is more like it's binary or it's like a light switch. Once you get sort of sub-$4, your switched. If your brake line between switching and not switching is $4, and gas is at $3.25 or $3.50. You've already switched. It doesn't really matter if gas hits $2.50. You're not going to switch anymore. It's not a dimmer. It's more like a light switch. And for our guys in our service territories, they pretty well switched. The Midwest, Texas, some of the other areas, they may not have hit that point yet. Gas may not have been economic yet. I'm not in to see those customers as much. We just -- we don't ship them as much. So I just don't know. So I'm probably at the lower end of the range. I'm more in the Joe Craft area than I am at some of the other people that I just don't know. I know what I read and what I hear from our customers, which is their coal burn is not going to change by a huge amount.

Operator

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

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

I wanted to see, one of your peers yesterday made an announcement that they were cutting some thermal production. It sounds like customers were pushing back. I know you haven't had any customers in the past, canceled contracts, but what's the risk there that given the economic situation and whether gas prices, that you might have some customers maybe try to push out some of their thermal volumes that are contracted for this year?

Peter T. Socha

Yes, I mean -- I think it confirms that working with the customers, we've done that in the past. It wouldn't surprise me if we do it in the future. So far, we've had more, it more -- I would describe them as inquiries, like we have a lot of coal on stockpile. We have a lot of coal bought for next year. Can you guys think about it? Can we have a conversation to see what we can work out? We've done that in the past. So that's no great surprise, but the way that it was framed earlier, which is just reneging on contracts, we just never had that. But working with customers, we've absolutely done that in the past. Right now, we don't have any ongoing, I can tell you right now, we do not have any ongoing negotiations with customers regarding the deferral or delay of tons or anything like that. Could it happen in the future, we're into spring, we see the customers a little bit more in the spring. They know what their stockpiles are like coming out of the winter. As you know, you're in Richmond, so you know what the weather's like right now. Yes, it could happen.

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

And then on the met side, I guess just specific to the export side, some of your competitors had kind of talked about seeing some pushback or some delay on volumes. Are you all seeing any of that on the export side?

Peter T. Socha

Joe?

Joseph Czul

Yes, I mean volume is clearly down year-over-year. I don't know that I'd necessarily call it pushback. It's -- I mean, new sales are quite competitive and certainly so far, it looks like 2012 is going to -- it'll remain that way, at least until things bounce back second half. But in terms -- but when I hear pushback, what that means is that coal you have sold and expected to ship on a certain time period that the customers delayed those shipments and we really haven't seen very much of that.

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

Okay. Peter, last quarter, you talked about Stoker pricing and you said it was pretty healthy, kind of in the 90s. And just considering that I guess kind of across the spectrum of thermal and met coals are all down kind of now compared to where we were then, have you seen any kind of erosion on pricing of stoker coal?

Peter T. Socha

Yes, it has come off -- we haven't sold any recently. But it has come off some, but not by the same degree as the thermal has. Thermal has really come down quite a bit. As I think Paul might have said last week, I mean, you have multiple sources putting coal into the OTC market or into the market just in general. Utilities being one and coal companies being another and trader's being a third. So that happens more on the thermal side.

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

And then last question here, on the DD&A guidance, does that number include your amortization of acquired contracts or is that excluded?

Peter T. Socha

Sam?

Samuel M. Hopkins

Yes, that includes it.

Operator

Our next question comes from the line of Brandon Blossman from Tudor, Pickering, Holt & Co.

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

On the purchase coal side, so Q4 700,000 tons, is that a reasonable expectation on a run rate going forward?

Peter T. Socha

On purchased coal side, so much of it depends on the market, both on the buy side and the sell side. So that's a hard one to model and we appreciate that. But Joe, what do you think?

Joseph Czul

I mean Q4 is probably a pretty strong quarter, I guess would be the way to say it. I don't know that we give guidance for 2012 on that. But just -- I guess I'd leave it with -- that Q4 was pretty strong.

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

Okay. And then kind of following along on that theme, just qualitatively, say '11 to '12, are there more opportunities for good deals on the purchase side and perhaps a little bit of margin expansion as you buy some perhaps distressed tons and blend them and put them out to the market?

Joseph Czul

No, I don't think so. A tough market is a tough market.

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

On both sides?

Joseph Czul

I think so.

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

Okay. And then just switching gears real quick on Midwest, cost was good year-over-year. Guidance is fairly wide. Is it just production volumes that's going to move you from one end of that guidance race to the other?

Peter T. Socha

Absolutely. Yes. Out there in particular, we saw this from the time that we bought the property. When their production volumes are good or at their expectations, they do very, very well. And when they have -- a couple of years ago, we had terrible rains out there and their production volumes fell off. They are affected by 2 things. One is the weather, obviously. And then also the burn rate of their customers. But yes, operating leverage in the Midwest is a very -- is a big [indiscernible].

Operator

Our next question comes from the line of David Beard from Iberia Capital Partners.

David E. Beard - Iberia Capital Partners, Research Division

My question relates to capacity in the thermal market. First, do you think some of the cuts we're seeing from other players in the industry are going to be more difficult to bring on should the market improve?

Peter T. Socha

What do you think, C.K.? [indiscernible]

Coy K. Lane

I think the question obviously is that there will be some production that's cut, that you can bring back on fairly easily. You can always start working more over time, you can always start working Saturdays. You can always start a section back up or a surface mine back up to bring that on. So I think there's one level that's pretty good. I think there's going to be a lot of production that we will not see come back. All the big players and publicly traded players do announcements on the layoffs that there's an awful lot of layoffs happening to small mines across that East Kentucky and Southern West Virginia that don't make the headline. And I think some of those small mines we see -- once they close, I think it will be very difficult for some of those to bring back. So the production we're seeing falling off, I don't think it will all come back in the foreseeable future.

David E. Beard - Iberia Capital Partners, Research Division

And just a follow-up, what do you think your capacity is on both the thermal and met side going into 2013?

Peter T. Socha

What is our capacity?

David E. Beard - Iberia Capital Partners, Research Division

Yes.

Peter T. Socha

Our capacity hasn't really changed, 8 some odd million tons. [indiscernible] What do you think? I mean, I talked about on the thermal side, on the met side, 1.3, 1.4.

Joseph Czul

Yes, I would agree with that, Peter.

Operator

Our next question comes from the line of Dave Martin of Deutsche Bank.

David S. Martin - Deutsche Bank AG, Research Division

Had a few remaining questions. Just starting with met and your comments about Europe, in particular. Could you comment on how you see met inventories in Europe and maybe possibly explain your comments about Europe being better than expected? Is this simply that the fear factor's no longer there?

Peter T. Socha

Well, okay, first of all, I think, in, let's call it, mid-Q4, there was a fair amount of that fear factor. Not so much here but in Europe -- our customers in Europe, they had very little, what they call, visibility of what 2012 looked like. And they were constantly bombarded with really pretty concerning news. And so I think their forecast for 2012, sort of erred on the side of being pretty conservative. And you've heard even the steel companies themselves, Mr. Mittal has come out and said actually 2012 looks a little better than we thought. And then when we're on the ground speaking with our customers, that sort of been a general sentiment that in December, they say things are a little better than we've thought in January, actually things are even better than that. Now, they're by no means robust but coming off pretty cautionary 2012 forecast, that's encouraging. On the inventory side, I think basically you've got a 60-day planning window. And so some of the plans were to get inventories down and they did that. And so maybe now if there is improved demand and what their forecasts tell them come to fruition, and that will translate to pretty immediate need for coal.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And then on the guidance of 2.8 million tons, on a pro-forma basis, I believe that points to more or less flat shipments year-over-year. Can you comment on your comfort level for that number given your comments about weakness in the export market, for example?

Joseph Czul

I mean, we just went out with the number this morning. So we're okay with it. We haven't started negotiations really on later half of 2012 on the met side. So we'll see what those negotiations bring and then we'll make a decision at that time.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And then just lastly, on your guidance and thinking about volumes and costs, can you give us any color about how the year will progress?

Joseph Czul

Quarter-by-quarter, you mean?

David S. Martin - Deutsche Bank AG, Research Division

Yes, more or less.

Joseph Czul

Do you want quarterly guidance?

David S. Martin - Deutsche Bank AG, Research Division

Just any color would be helpful.

Joseph Czul

Not really. I mean we don't have a whole lot of visibility. I mean typically fourth quarter is lower than earlier quarters. Second quarter is a peaker, and first -- the first and second quarters are peakers. Third quarter is off a little bit. And then fourth quarter, you have this seasonality to get back up. But that's true, that would be true across your coverage unit. But I don't know if we would be any different.

Operator

Our next question comes from the line of RJ Cruise [ph] from TCW.

Unknown Analyst

When I compare your 2013 commitments last November and today, there's no change. Same is true for 2014. So presumably, this reflects reluctance by your customers to commit. Maybe you could comment on your conversations with your utility customers related to 2013 and beyond?

Peter T. Socha

Well I think right now, the utility customers are really in the same boat as we are, which is they want to see what happens with CASPR or what happens with the EPA regulation. I'll just -- I'll put it in a big bucket. What happens with the EPA regulations? They want us to see what happens with their coal burn in the summertime this coming summer. They know what it is by now. They know it was in the wintertime and they want to see where natural gas prices are and where exports are. This is not that unusual. Most of our year-forward conversations with customers are with the utilities. The truly serious conversations really are in the September, October timeframe because they are now coming out of summer.

Operator

Our next question comes from the line of Michael Goldenberg from Luminous Management.

Michael Goldenberg - Luminus Management, LLC

I missed part of the call so I apologize if I'm asking a question that might have already been answered but I wanted to understand, of the tonnage that you sold in 2012, both thermal or met, how much of those are the trading tons?

Peter T. Socha

What do you think on the met side, Joe? I mean 1/2 of the 2.8, what I said was about 1/2 of the 2.8 was met. And then I don't think the ratios are any different, about 1/2 would be traded, and 1/2 would be produced. Joe?

Michael Goldenberg - Luminus Management, LLC

But 2.8 refers to what?

Peter T. Socha

2.8 is what we put under contract in total. Okay? About 1/2 of that was met and 1/2 of that was other and traditionally, we trade and we buy in about 1/2 of the met side.

Michael Goldenberg - Luminus Management, LLC

Okay. So 2.8 is the total tons of the 7.9?

Peter T. Socha

Yes, I did cover this in the opening, Michael. So if you want, you and I can just have an off-line conversation because we're pushing up on [indiscernible] right now.

Operator

Our next question comes from the line of Lance Ettus from Tuohy Brothers.

Lance Ettus

Kind of a quick 2-parter, one is just if you could just clarify the production cuts, even if you can give a range on that? And 2, you talked about growing Canadian, Australian, as well as Mongolian and I believe South Africa, Mozambique. Could you just kind of quantify how much production is growing there and how much you think it could go to for the next few years, I guess?

Peter T. Socha

I mean Joe, you want to take a stab? To be honest with you, people like McCloskey implies and all that. They've got all these estimates out there. I did say we're -- I think Mozambique is going to be 4.5 million tons this year but I don't know on Mongolia. Jeff?

Joseph Czul

I might have to defer to the sort of statistical experts as well. I guess what we were trying to set forth is that our customers are seeing offers for increased coal for most of the basins. And that's -- and it gives us a little bit of pause for optimism.

Lance Ettus

Okay. And as far as the amount that you guys are cutting production in CAPP?

Peter T. Socha

Yes. C.K., you want to take a stab?

Coy K. Lane

We kind of looked at what our budget originally was and where the market's at. So we're probably trying just to reduce overtime and extra holidays, probably 7% or 8% from what we probably would have looked at producing this year if the market had been a little bit better.

Peter T. Socha

Probably a little bit less than 1,000,000 tons.

Operator

Our next question comes from the line of John Korver [ph] from Bennett Management.

Unknown Analyst

A couple of quick questions. I believe when you did the acquisition, you talked about $25 million of synergies. When you show your cash cost, does that affect all $25 million in them?

Peter T. Socha

I mean, the synergies have pretty well realized right now, what we talked about was they were not cost synergies. They're not -- you're looking on the cash cost side. We're looking at it on more on the sales and the blending. We're selling PCI, I never sold PCI before. I'm selling PCI now.

Unknown Analyst

Second one is you haven't filed your 10-K. But I was just wondering...

Peter T. Socha

10-K will be filed this afternoon.

Unknown Analyst

Usually, you put in your reserves in the 10-K. Could you share that with us on the call?

Peter T. Socha

You know what, let's just wait until the K comes out this afternoon. Honestly, I've been so busy getting ready for the call I don't know the number off the top of my head. And if then you have a question, call me back tomorrow.

Unknown Analyst

All right. Final question is just I think you're carrying $75 million in inventory at the end of the fourth quarter. That's obviously the extent of your business. What is going to be a normal looking number for inventory at this point?

Peter T. Socha

I hope we can kind of hold at that level, sort of plus or minus. I would not like to run it up. It may run up during the course of the year but right now, C.K. and the team are doing a pretty good job of managing the inventories.

Unknown Analyst

What would be your plus or minus number around 75?

Peter T. Socha

Say 10%, plus or minus 10%.

Operator

And ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn the conference over to Peter Socha for any closing remarks.

Peter T. Socha

Okay, Ben. Thank you. Thank you, everyone. I know that there -- there's some people may have follow-on questions or have additional question. Feel free to call Beth this afternoon. I think she'll be in this afternoon and we'll take care of you as best we can. The first week of May is usually our Q1 reporting period. I don't think that will change this year, so we look forward to speaking to you at that time. Thank you and have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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