Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Unknown Executive -

James T. Ketron - Vice President, Secretary and General Counsel

Analysts

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

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

Shneur Z. Gershuni - UBS Investment Bank, 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

David E. Beard - Iberia Capital Partners, Research Division

James River Coal (JRCC) Q1 2012 Earnings Call May 3, 2012 11:00 AM ET

Operator

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

Elizabeth M. Cook

Thank you, Mary. Good morning. Welcome to James River Coal Company's First Quarter Earnings Call.

We released our earnings this morning and our release and investor presentation are posted on our website and were furnished to the SEC on a Form 8-K.

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 this morning, I need to remind you that this call will contain forward-looking statements that 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 and on Form 10-K and other SEC filings. Now, I will turn the call over to Peter.

Peter T. Socha

Okay. Thank you, Beth. Good morning, everyone. We are -- our call today will be short. We recognize that there are 5 calls today and that everyone has a lot of work to do this afternoon, putting out various reports and doing modeling, updating their models. So we're going to have a short call today. We took a number of slides out of the slide deck, so this should not take long, and then we'll take 5 or 6 questions. So it shouldn't be too long and we want to respect your time.

The summary slide, the first slide, it's a fairly self-explanatory slide. The only thing I would do is I would add one note into the third bullet, which is the liquidity bullet, and that is I would draw your attention to the footnote on the -- in the press release, in the Liquidity section. You can see where we had collected about $19 million on April 2, that was not in the cash and it does not -- collection of that receivable because of the asset coverage on the ABL or on the revolver, we -- it does not affect the liquidity or the availability under that because we had such excess [ph] assets. So we we're pretty happy with that. It was collected in the ordinary course. It was on time, there was nothing extraordinary about it, and it was nice to get in.

And then the only other comment I would make is -- I actually thought of this last night and we'd already put the slides to bed, and that is I would add a bullet to the end of this and that is all of our shipments of CAPP thermal coal are normal and as expected. We're not seeing much in the way of pushback or delays or deferrals or things like that. We've had conversations with the utilities -- with our utility customers, but basically everybody is doing what they're supposed to do, and we continue to have very good relations there. So for those of you not familiar, there's been a fair amount of talk about in the industry, certainly since mid-February, early March, wherein everyone recognized what the winter has done to coal burn and to natural gas prices. So we haven't seen anything like that. We're pretty happy with where we are on shipments.

And I will turn it over to C.K.

Coy K. Lane

Thanks, Peter. One our Safety slide, I just want to make a comment that the company-wide NFDL rate remained strong at 1.68 for the quarter. We are making plans for 5 new MSHA initiatives this year: Dust, which is going to focus on lowering exposure to coal mine dust at underground mines; the proximity detection systems that will be required on all continuous miners; new rules coming out on the pattern of violations; examination of workplace areas -- really focusing on the pre-shift and on-shift exams at underground mines; and the Rules to Live by III, which is focusing on surface facilities. So we're still seeing a lot of activity on the regulatory side from MSHA on the safety direction.

In Central App, we reduced our production to match shipments. We had 2 idle days in the first quarter. We worked those around holidays and make a long weekend, and we'll continue to do that in the second quarter as we need to, to manage our inventories. We adjusted our mines to maximize our met production and try to conserve our capital. We have idled some steam operations and moved those employees and equipment into met contractors. It's not additional met tons, but it's just replacing contractors with company employees and our own equipment. Cash costs, as Peter mentioned earlier, the thermal and the met mines are within the expected range for our production levels. In the Midwest, the burn is still down. We are matching our shipments with our production. We did ship our first trains by rail from the new Log Creek loadout, and we adjusted several of our surface mine plans [ph] to work around permitting issues in the first quarter, which we resolved several of those already, and the mines are back to normal.

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

Joseph Czul

Thank you, C.K. Worldwide demand for metallurgical coal remains stable. In aggregate, our customers require about the same volume of met coal in 2012 as was consumed in 2011. There are some regional differences we can elaborate on. In India, total met coal imports were more or less flat when comparing 2011 to 2010. We expect the trend of the last decade to return, however, and believe that India will import more met coal in 2012 than in 2011. New steel mills are being constructed together with the expansion of some existing plants.

In the United States, steel utilization rates continue to improve with utilization rates currently over 80%. Most coke plants are running at or near capacity, but not all are, as the market for coke remains pretty stagnant. While our customers are generally accepting contract shipments on schedule, we had expected some opportunity for incremental sales to our customers that operate merchant coke facilities. Those opportunities have not developed thus far.

In Europe, shipments of metallurgical coal remains somewhat depressed when compared to shipments in 2011. European countries as a whole are very important customers of U.S. coke and coal, and we look forward to demand there returning to levels seen in 2011. But thus far, that has not occurred.

On the supply side, there continues to be ample production of metallurgical coal from the United States. While prices of met coal have fallen precipitously from June 2011, supply from the U.S. has largely remained intact, and much of it, although not all of it, has found a buyer. Partly due to the current market for thermal coal, suppliers seem reluctant to reduce met coal production even in the face of thin margins.

We continue to believe the world's metallurgical coal supply is quite vulnerable to shocks, particularly those emanating from Australia, given that basin's dominant share of the seaborne met coal market. Relatively minor labor or weather events have the capacity to have a disproportionate impact on the market for met coal. With that, I'll turn it back to Peter.

Peter T. Socha

Okay. Thanks, Joe. The next 2 slides -- what I tried to do was just answer the 2 questions that we get the most often and that is, how much production has been cut in the U.S. and then secondly, what are our views on the natural gas market.

On the first slide, on Slide 11, I guess it is on my deck, the -- we could ask this question almost every day, and that is, how much has been cut, how much needs to be cut? It was a very warm winter, natural gas prices got down into the $1.90 or $1.95. And everyone in the industry recognized that we needed to cut production to try to rebalance the market and prevent any type of a free fall in pricing or buildup in supply. Kevin Crutchfield, CEO of Alpha, went to I guess it's the University of Charleston in Charleston, West Virginia, in March, and he laid out a 100 million ton number, which was fairly well known within the industry. But I think outside the industry, it came as a little bit of a surprise. So that became the benchmark. Everyone was looking at that 100 million ton number, and then they started looking at announced cuts, whether it's from Arch or Patriot or Alpha or whoever, and adding those up. And so it became sort of a parlor game of you have 21 million tons announced cuts, you have 100 million tons that Kevin says has to be cut, so you have 79 million that needs to be cut. Then it went to 29, then it went to 32, and it was always the same question. And that worked fine. For several weeks, that worked fine. But as the industry was adopting to what needed to be done, what we started noticing in mid-March, and that's really the first bullet at the bottom here, cuts were accelerating but they weren't being announced. So to the outside world, we still had a long way to go. But what we were seeing -- and I said this to someone 1 week or 2 ago, for 6 weeks, almost every conversation I had with C.K. involved him telling me about another company and what they were doing on production. They were idling this mine or they were idling that mine or closing, and those were not being reflected in the public comments. So there really became this disconnect between the public perception of what cuts needed to be still and what we were seeing on the ground. And so you have Kevin's number out here at 100 million tons, which I'll describe as the consensus, but that's really I think what everyone believed. And then, Greg Boyce with Peabody came out, I guess 1 week or 2 ago on their call and said, they saw new cuts in March of 12 million tons, which was actually in his opening comment. And that annualized to about 140 million tons. So I think somewhere in the call, someone said, "Well, should we put any faith in the announced cuts or what? What should we look that?" He said, his comment was, "They're not even close." What he's saying is not even close. But 140 million tons is now becoming more accepted as probably being the number. And then we looked at railcar loadings, and if you just look at CSX, Norfolk Southern, Union Pacific and BNSF and you look at what their weekly railcar loadings are that they put on their website, they're down about 20%, which would equate to 200 million tons. So we started asking ourselves, "Well, if production is still at a very high level and the railroads are down by 20%, then that must mean that inventory is building in the channel at the coal company." And the more we talk to people, the more we found that in fact, the inventory build really took place in March and maybe early April, but it's not taking place as much today. So on this whole slide, I think the last bullet may be the most important, and that is the large build in supplier inventory has already happened. And I'm not saying we're not still seeing a build -- we probably are, but the greatest proportion or the greatest portion of that build, we believe, has already happened. So the actual level of cuts in our opinion is somewhere between 140 million and the 200 million. I'll take the 140 million as the low number. But if the railroads are down at an annualized rate of 200 million tons and the inventories are not building in the coal field, then it's a bigger number than the 140 million. So that answers that question that we get constantly.

The second question is, "What are our views on the natural gas market?" And our views are that it's going to be much more volatile. There seems to be a common perception that prices are $2, they're going to stay $2 infinitum. For the next 20 years, we're going to see $2 natural gas prices because of the shale gale, all the new shale wells and how prolific they are. But what I think some people, when they make that conclusion, what they miss is 2 things. One is the rig count has fallen so hard, but also the decline curve. The shale wells blow the gas out and then they come to a fairly steady state normal decline curve for a natural gas well.

Now there are 2 things I want to talk about here. One is on the right hand, the decline curve well -- graph, and that is I'll freely admit the shale wells start from a much higher level. So they're falling faster, but they are falling faster from a higher level of IP, of initial production. So that needs to be clarified there. On the natural gas rig count, though, what's happening is they've gone from 1,606 to 631 -- 613, rather, which was I think was last week's number. This comes from the Baker Hughes, by the way, BHI website.

But what's not always readily understood is within the 613, about 2/3 of those new rigs -- of those rigs drilling new wells are liquids well. And the gas production, the actual gas production coming from a liquids well is about 2/3 less than a dry gas well. So it's a little bit like comparing Northern Appalachia coal and PRB or Indonesia coal. A ton of coal is not a ton of coal, and a natural gas rig is not a natural gas rig if it's drilling liquids or if it's drilling oil. If it's drilling oil, it's getting 90% less gas than a standard shale gas well. So this is a little bit of the 2/3 in that you've cut drill rigs by 2/3, you've cut production from the actual wells you're drilling by 2/3. So you're drilling fewer wells. The wells that you are drilling yield much less gas. And the wells that you drilled, that dry gas wells that you drilled in 2010 and in 2011 are well along their decline curve, so they're basically down by 2/3. And if you look at what gas prices have done in the last couple of weeks -- I looked at a report last night that showed natural gas production growing, this was about a month old, natural gas growing, just continuing to grow every month for the next 2 or 3 years. And lo and behold on Monday, the EIA came out with their 914 data, sequential production of gas dropped. It didn't drop much, but it dropped. And so I think there are moving pieces within the natural gas market that they are looking at a little closer.

Anyway, those are our 2 answers to the 2 most frequent questions that we get. The only schedule that we have right now are conferences, at least in the short term. There are some in the fall, I know, is Ray Jay. Sam is going to Ray Jay in June, and I believe Joe will be with him if Joe is in the country. If not, I think either Sam or Steve will be there.

And with that, Mary, we will answer questions.

Question-and-Answer Session

Operator

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

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

Peter, you've been through a few of these ups and downs. Curious -- as you look at the market today, you mentioned inventories at miners -- at mines probably peaking. How do you see this playing out as you go through second half of this year and into next year? Or another way to ask it is, how do you see the path to starting to bring inventories down? Is the momentum on cuts builds about the same time that demand starts coming back, if weather returns to normal?

Peter T. Socha

I think we need 2 normal seasons, Jim. I think we need a normal summer and a normal winter. Obviously, this winter was just 6 standard deviations off of normal with warmth, and that cratered everything. Apparently, I made -- on the last call, I made a super negative comment and everybody got all wee-weed up about that. But I think we need 2 normal seasons. If we have a normal summer and a normal winter, I think both the coal market and the gas market -- I think the gas market will lead. Clearly from my comments on what we see in the natural gas market, I think that will lead the coal market up. And so we'll see sort of what production looks like in -- what gas production looks like in October, November. By that time, the Haynesville [ph] should, should materially have come off. So we're looking at an improving coal market. Met should lead thermal. I believe that met will lead thermal and that natural gas will lead coal and that the Illinois Basin or the Midwest, the areas that were affected by low natural gas prices, should recover first on the thermal side.

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

Helpful insight. You're seemingly in a unique position that a lot of your peers are having some issues with deferrals or timing delays on shipments. And so far, you really haven't seen -- in fact, your contract portfolio went up. Is that somewhat unique to your customer base or just the Southeast or why do you think...

Peter T. Socha

Well, in the Southeast, I mean, as we've always said, we're very close to our customers. We try to match up the shipments. We've had conversations. If their inventories continue to build from where we are or where they are, we'll probably continue to have further conversation. But so far, everybody has been doing okay. The Midwest is a different story. The Midwest natural gas, the switching in the natural gas as we talked about in the last call, I think that's the bigger issue. The coal burn is way down in the Midwest. One thing I do like is we noticed with a customer, we noticed that their shipments were below where we thought they were going to be, even given a lower market, okay? And so our guys got together internally. We handled it very similar to how we handled another situation 2 or 3 years ago and that we met internally and we came up with solutions that we felt would work for us and would work for the customer. And without getting a call from the customer, we went out and met with them and we laid out what we thought were some ideas. And they were very, very appreciative of what our ideas were and the fact that we were trying to think about things that would work for them and work for us. And so from my standpoint, we handled it the right way. We did everything we were supposed to do. They're still thinking about it and they're still noodling over it. But I think it's a question of sort of our contract levels -- we're a small supplier to a lot of these utilities. We have long relationships with them, and we're very proactive in how we handle things when they get a little bit -- when they're starting to go a little bit off of the direction that we thought they were going to go.

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

Last question that that brings up for me. In the Midwest, obviously, volumes or shipments this quarter was quite a bit light of the annual contracted pace that you're supposed to be on, which presumably was the reason why cost bumped up into the low 40s. Do you think you'll get to that full 2.776 million number, or is that the one area that may be has some risk and is it basically just take volumes getting back up to get your cost back to the 30s?

Peter T. Socha

We've said on previous calls, for people who haven't been on it, when the Midwest is running at full production capacity, it is a great thing to watch. When they're at less than full production capacity, they struggle, and that's just operating leverage. We haven't -- we chose to not update any guidance on anything other than the CapEx. And so we'll stick with what we have now. But that might be the one area that -- just given where the coal burn is in the Midwest, that if you wanted to look at that area, you could.

Operator

Our next question comes from Michael Dudas from Sterne Agee.

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

First question for C.K. C.K., you mentioned in your prepared remarks about contractor mining versus your own mining. Can you remind us where you are with contractors versus your own company and the cost differential that you might save by doing it yourself versus a contractor, offsetting by, maybe, the capital that's required? And is that something that can help mitigate cost and margin as you move through 2012?

Coy K. Lane

Well right now, we have one contract underground met mine left. The -- really, the move behind moving from the contractor is we had a extra steam production, and we're trying to manage our inventories on the steam thermal side. And we were able to displace the contractor and just move the employees and equipment from one of the steam mines into that. As far as the capital difference, with the contractors now, the way we choose to do it, we buy all the infrastructure and the belts and everything that you need to operate the mine. So we'll still be doing that as a contract or a company mine. In that way, you have the flexibility to switch out the contractor if you need to. So it was more displacement of the -- cutting the steam production back a little bit and being able to maintain the met and replace the contractor more so than a cost differential. I do believe that company employees will operate a little more efficiently and will run 2 shifts in that mine, so I think we'll do a little bit better cost-wise.

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

For Joe and maybe Peter. Joe, you mentioned about the ample supply or more supply than anticipated of the crossover and peat coals out of the U.S. When do you think that's going to start to diminish if at all? And given your big -- the production cut numbers that you allude to, Peter, isn't some of that going to be impacted with some of the lower quality coals? And how difficult will it be for some of these mines to come back online if you shut down sections and have MSHA dealing with you when the market comes back?

Peter T. Socha

Joe, why don't you take the first part?

Joseph Czul

Okay, sure. Yes, there is a pretty good price difference between those called highball Bs and maybe the benchmark. We just haven't seen really a whole lot of production being cut there. What the future may hold -- we're not really sure what other people's cost structure is, so -- what we can say is that we don't see it yet.

Peter T. Socha

C.K., you want to take the question on production coming back?

Coy K. Lane

I think production, once you start idling some of it, some of the smaller mines that have been idled I don't think will come back. To what percentage of that, I don't know. But it will be difficult to bring those mines back. If you idle mines in today's regulatory environment, they will be at a higher holding cost just because of the examinations and the regulations that you have to follow. So taking a hard look at holding cost, if you idle a property or cutting it back to a reduced work schedule such as a 4-day week, is -- we look at that all the time, but holding cost will be higher today than they have been in the past.

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

My follow-up question. Peter, maybe if you can update, if you've been reading any legal briefs lately or involved in some of what's going on in the regulatory front? And a follow-up to that, as we move towards the second half of the year into November, is that going to matter for the coal industry?

Peter T. Socha

Well, I won't know until I read them, but the biggest one we're waiting on right now is probably the transcripts on CSAPR and I think, I think that's expected out. Andrew, are you with me? Andrew Hammel [ph]?

Unknown Executive

Yes, Peter, it should probably be available in the next couple of days, they said.

Peter T. Socha

Okay. So that will be my next reading project, beach reading. But other than that, I mean, without -- the biggest thing is still natural gas. It's still the economy, particularly in the Midwest. The Southeast is -- if you read the calls or listen to the calls from Duke [ph] or Southern or whoever, Progress, the Southeast is doing better economically than the Midwest. We still need the economy to come back and we still need a bid under natural gas prices. We need discipline from the natural gas industry, which I think we're seeing in abundance. And then we need an economic recovery that's a little better than what we have.

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

You skipped November, that's all right, Peter.

Peter T. Socha

What was November? I'm sorry, what was the question?

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

The elections.

Peter T. Socha

I had a dream the other day that Mitt Romney won the election and appointed Jim Inhofe as administrator of the EPA or Newt Gingrich.

Operator

Our next question comes from Shneur Gershuni from UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Just a couple of quick questions here. I guess the first thing is, is that, Peter, remind me if this is still the case. But at some point, you were talking about having cost writers within your contracts to gain recovery of cost if ever you have some cost escalation and so forth and it sort of materializes in revenue per ton.

Peter T. Socha

That's kind of hard to get in this market share.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I was going to say, do any of these contracts still have...

Peter T. Socha

We just want to ship what we have under the contract we have. If we do that, I will call that a victory and go home.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. So there's -- so the numbers -- for what you have right now, we should see it for what it is, and we shouldn't be expecting that to be [indiscernible]?

Peter T. Socha

Yes, the Midwest has those riders in several but not all of them, has -- mainly diesel pass-throughs that we've had for years. But amending a contract now in a way that might possibly be favorable to us with the utility, man, I don't want to have that conversation. I don't want to go in. What about you, Joe, do you want to go in and have that talk with a customer?

Joseph Czul

Yes, I think you know the answer to that.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I guess as a follow-up -- and maybe this is more for C.K. and so forth, and it's a follow-up to Mike's question. But I was wondering if you can talk about what levers [ph] you have left in the quiver with respect to cost. I mean, geology is geology, you can't change that. Sounds like you're really doing something along the lines on the switching out the contractors for employees. Were some of those costs kind of in the numbers in the first quarter? Do we see a stepped improvement as we move forward just seeing you're running to company-operated mines rather than contractors? And is there anything else left? I mean...

Peter T. Socha

Let me address the arrows in the quiver, and I'll let C.K. talk about it.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Sure.

Peter T. Socha

I mean, obviously, we're doing everything we can to control cost. Our guys don't voluntarily mine the coal so they can see whether or not they can have a higher cost. So I wouldn't describe it as arrows in the quiver. What more can you do to cut your cost? I think our guys have already done, particularly in the Midwest, given their production profile and given the demand profile. I think they've done a phenomenal job. But we are doing -- we are amending or we are revisiting production plans, we're revisiting budgets, we're revisiting plans on a much more regular basis than we ever had in the past. C.K. and Sam and I had a fairly lengthy conversation 2 weeks ago. I was with C.K. last week, the 3 of us are together again next week. So it's just a constant topic of what we're doing. But the arrows in the quiver, I think, I might disagree with that a little bit. C.K.?

Coy K. Lane

We continue to just look at everything on what we can do with vendors, on pricing, looking at both pricing, even in the smaller items than we have before, looking at each one of our operations on how they're laid out, configured. So, I mean, it's a continual process to keep working on it.

Peter T. Socha

We're just down to very small cost centers now, sort of looking at every single thing, Shneur.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. And then one final question for Joe. Several other large metallurgical coal exporters spoke this morning and talked about how the conversation with customers is actually changed in the last couple of weeks. One made the point that their shipments in April were, if you annualize, that was more than what their guidance was for the year. Another one said Europe is actually back in the market, buying. Now, granted they did say it was on the higher end of the curve, more towards HCC, are you kind of seeing -- are you seeing that? Are you having some similar conversations or you're mostly focused on the highball B side of the market where there seems to be -- continue to be challenges?

James T. Ketron

I mean, we're not necessarily just focused on the highball B. I think that would not really be right. We sell quite a bit of mid-ball blend. We're just maybe a little bit more conservative. Certainly things are better than they were in the first quarter, but still, there's not a great deal of visibility for the whole year yet. And I guess I would say parts of Europe are better than or even a good bit better than they were, but parts are not a lot better. So overall, a little better than this time last quarter but not as strong as 2011.

Operator

Our next question from Lucas Pipes from Brean Murray.

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

My first question is about kind of -- some of the chatter we've heard about a peer of yours trying to sell some assets in Central Appalachia. If you look at this from the outside, what do you think is kind of the environment for selling reserves right now? And who do you think could be potential buyers?

Peter T. Socha

I'm going to simmer on that one. I'm just not going to address that. M&A questions, we've never really addressed on our calls and so I try to stay away from it. People are doing -- I mean, people are conducting strategic reviews, I think, that's been publicly acknowledged. And that's not -- it's not necessarily surprising given that the quantity of assets that were picked up over the last year or so.

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

Very good. And then just really quickly a follow-up on the met coal side. Again, some of your peers this morning said that, essentially, there is a market for met coal, it just depends on the price. And would you agree with that, and would you say there is opportunity for you to maybe push a bit more met coal into that market even if the price is not the highest it could've been?

Peter T. Socha

Yes, Joe? I think Joe might have dropped off, not dropped off, but I think -- I got to note that I think their phone systems messed up after Charleston [ph], so he may have dropped off. Okay, ask your question one more time.

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

So some of your peers mentioned earlier today that also for maybe a little bit of the lower quality spectrum on the met coal side, the prices are not great, but there is a market if you want to sell it. And would you agree with that, and would you say there are additional opportunities for you even if the price is not as high as where it was?

Peter T. Socha

Well, I mean, the price is definitely not as high as it was once was. I think we're satisfied with the opportunities we're seeing. I mean, Joe -- every time Joe goes overseas, he goes out on customer calls, we speak afterwards or we exchange emails, I think we're basically satisfied. The -- as Joe put in his opening comments, the market is a little bit better than it was, but we wouldn't describe it as a good market by any stretch. And I think somebody described it as much, much better, very, very good or something like that. We probably wouldn't go that far, but we're basically okay with where things are today, with pricing where it is today.

Joseph Czul

Peter, this is Joe. I got disconnected and reconnected. In our opening sort of statement, we said that not a whole lot of met coal supply in the U.S. has come off, which we believe, and that most of the coal at a price finds a buyer. And I think that speaks for itself, albeit some of it is selling at a pretty substantial discount. I'm not saying we're necessarily participating in a whole lot of that, but we observe it, and it's -- we think it's something that can be pointed out.

Operator

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

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

Pulling the CapEx, I got to ask, the $23 million spend in the quarter, how much better could that get on a quarterly run rate as you continue to try to optimize things and move stuff around?

Peter T. Socha

You notice we didn't provide any updated guidance on CapEx. We're still looking at everything. The guys have done a phenomenal job, and this really started last fall and -- when we started to see sort of weakness in the market that everyone recognizes. So they've done a phenomenal job at pulling in the CapEx. I would not -- and I'll let C.K. add any comments if he wants. I would not expect it to see it fall much, if anything, from here. We've got some projects later in the year that are must-have projects rather than want-to-have projects. And so we've just chosen to go without any updated guidance on CapEx. But from my standpoint, you don't -- I don't update guidance quarterly. It's all Brett [ph] Levy [ph] thing. Brett's out there in cyber world somewhere. I don't update guidance quarterly. But if you have something and you know it's going to meet a materiality standard, it's going to be materially different from your guidance number that's out there, you need to come out and do something about it. So that's why we chose just on the CapEx to address that. But as I said, they have done a great job. I'm very, very happy with what they've done on CapEx, and we'll continue to do that. But we do have some need-to-dos later in the year. C.K., do you have any?

Coy K. Lane

I agree with that. There are some projects coming up this summer, especially around vacation we'll have to do. So I don't see it falling a whole lot, but we'll continue to try to keep it reduced as much as we can throughout the year.

Peter T. Socha

Brian, obviously, it's something we are very focused on. Capital in general, just capital preservation in general is something we are focused on very, very tightly. But we chose to not go out with additional guidance, with new guidance.

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

No. That's greatly appreciated on the -- the color in, obviously, on the discipline. How much of your, I guess, success with not having deferrals has been based on any either conversations or just your general relationships with the railroads themselves? And then, also from the rail side, what are they saying in regards to exports later in the year? What sort of a rail rates -- not specific rail rates, but what sort of flexibility have they shown in any sort of negotiations that have gone on so far?

Peter T. Socha

Well, the -- I mean, it seems like most of the deferrals have been more on the domestic utility side, and that's driven by the ultimate buyer, the utility, more so than the railroad. And again, we're a small supplier to these utilities. We've been with them for a real long time. And generally, we have shown a willingness to work with them and to be flexible, and we'll continue to do that. Thus far, we're okay with our shipments and they are okay with our shipments. As far as exports, I mean, Joe, you want to -- are you still there?

Joseph Czul

Yes, yes. Well, really more focused on the met coal right now. And I guess I would say shipments are at least on pro rata for the year.

Operator

Our next question comes from Chris Haberlin from Davenport.

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

I know you don't like to update guidance quarterly, but you all had provided a -- I'm not asking for an update here, at least I don't think so. But you all had provided kind of 8.5 -- I'm sorry, 9.5 million tons for Central App guidance last quarter, and that would imply that you still kind of got 0.5 million to 1 million tons left to sell. I just wanted to see kind of how -- of the coal that you have left to sell or that you could sell, how is that kind of split quality wise? Do you still have some met to sell or is it mostly thermal...

Peter T. Socha

Well, I think in -- and, Joe, kick me electronically if you want. I think it is -- it's met coal that is sold but not priced [ph], is that correct, Joe?

Joseph Czul

Correct.

Peter T. Socha

Yes. So it's met coal that is -- the reason it's in the production guidance and not in the sales contract table is that it will be produced then it will be -- or shipments, it's actually in the shipments table. It will -- we expect it to be shipped assuming the price is where we want it to be, so that's the delta [ph] there. It's not utility coal or anything like that. We're fully sold out. We don't have any unpriced coals that I'm aware of other than the committed but unpriced met coal.

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

Okay, so same holds true on the industrial side?

Peter T. Socha

Industrial is a little bit different. It doesn't price quarterly the way the met does. Industrial prices in a whole variety of different ways, sometimes annual and sometimes not. Actually, met is that way also, but less so today than it used to be.

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

And then Joe had said earlier that you all were still seeing pretty large price differentials between the highball Bs and the benchmark. And then I just wanted to kind of get an idea of what you're seeing. I know that as we started the year, met markets were still relatively weak, but obviously, things have improved here with the supply issues and so forth in Australia. Are you all starting to see that differential narrow some and kind of what's your expectation going forward?

Peter T. Socha

Joe?

Joseph Czul

I guess -- I mean, I would probably say that we see things somewhat better than the first quarter. But I don't know that in aggregate, it's materially better. Or I think, Peter, it's not -- I don't know that we'd say it's much, much better. And thus far, we haven't really seen any of the spreads narrow. What the future holds? We don't know. And some of it is this -- there's a little reluctance to reduce that production at the moment. And I guess that's -- maybe that's contributing to the differential.

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

Okay. And then just kind of -- final question here. I know that the L&K trading business is primarily focused on the met market. But just considering the availability of thermal tons in the resale market from utilities, is there any interest or have there been any moves to kind of get involved in that on met -- on the thermal export side?

Peter T. Socha

We have been involved in the thermal export side. And Joe and the team at L&K are handling a great deal of that right now. So we've been involved in thermal exports on and off for the last period of years. And certainly to the extent that we're selling to traders in the U.S., we handle that out of the James River side, involving Joe and his team. And to the extent that he's in contact principally with direct customers in Europe that we can put together cargoes, we'll do it that way. Eventually, that's the way we want to migrate towards, towards the direct -- because I've spent a fairly long period of time building up relationships there. Joe has got a lot of relationships there. And so the closer you can get to -- this is just the U.S. model. The closer you can get to the ultimate consumer, the better off you're going to be.

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

Okay. And then maybe a follow-up to that then, I guess do you see incremental opportunities to sell James River thermal coal produced thermal coal in the export market given kind of the price weakness we've seen in the API 2? Or are most of those incremental opportunities kind of involved in that resale market?

Peter T. Socha

No, we have those conversations regularly. I'm not -- I can't -- I'll be honest with you, I can't remember whether we have sold any within the last several weeks or months or so, but we have those conversations regularly where we'll put together a trainload here or a trainload there. I'm sure we're shipping some now that we had sold previously. But that's part of our normal business. There's nothing new or incremental about it for us, just part of our regular business.

Operator

Our next question comes from David Beard from Iberia.

David E. Beard - Iberia Capital Partners, Research Division

A question relative to the shuttered production. Given the new MSHA regulations, do you think that shuttered production will take longer to come back online if prices move that way? And if so, how long relative to previous cycles?

Peter T. Socha

I think that's a very good question. C.K., you want to take that?

Coy K. Lane

If the production has been shut, there will be -- as the market picks up, there'll be production comes back online fairly quickly. If you are working a 4-day week, you'll go back to working 5 or working Saturdays and working overtime. So those things will likely come back fairly quickly. As idle sections of existing mines have been shut down or some of the surface mines, those will be able to be brought back on pretty quickly. If you've idled a complete mine and bringing that back will be much more difficult, and the cost of entry of new production with all the new regulations continues to be high and hard to get back into the market. So I think you can see some production come back on just with working Saturdays and the overtime. New production or reopening in mines that had been shut for a long time will be much more difficult.

David E. Beard - Iberia Capital Partners, Research Division

Right. And do you have a sense of how much production is in that permanent category? I mean, I know it's difficult, but any thoughts there?

Coy K. Lane

No, I really don't.

David E. Beard - Iberia Capital Partners, Research Division

All right. And just 2 other numerical ones. Switching -- I noticed the working capital -- you guys paid down some payables. Should we expect working capital sources and uses to be fairly stable going forward?

Peter T. Socha

Yes. Or as a general rule, yes.

David E. Beard - Iberia Capital Partners, Research Division

Okay. And then -- I appreciate what you said on CapEx. And when I kind of look at what happened in '08, '09, this seems to be as bad, I mean, different in a lot of ways. Would we be out of the ballpark to think your CapEx could go to that level at some point?

Peter T. Socha

Well, we're a bigger, we're a different company today than we were then. I mean -- and so I think that would be -- analytically, I don't think that would be exactly correct. I mean, for instance, IRP.

Operator

Thank you. That concludes our call for today. I would like turn the conference back to Peter Socha for closing remarks.

Peter T. Socha

Great. Thank you, Mary. And we appreciate your patience, everybody. As I said, we want to try to get the call done early if we could, and we did a little bit. And if you have any questions, feel free to give us a call, as always, and we will be here. Thank you. We look forward talking to you in early August.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program. And you may all disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: James River Coal's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts