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Executives

Ted Pile - Director of Corporate Communications

Micheal Quillen - Chairman of the Board and Chief Executive Officer

Kevin S. Crutchfield - President and Director

David Stuebe - Chief Financial Officer and Vice President

Analysts

Brian Gamble - Simmons & Company

Luther Lu - Friedman, Billings, Ramsey

Paul Forward - Stifel Nicolaus

Jeremy Sussman - Natixis Bleichroeder

Mark Liinamaa - Morgan Stanley

Michael Molnar - Goldman Sachs

Laurence Jollon - Lehman Brothers

Justine Fisher - Goldman Sachs

Kalpesh Patel - Bear Stearns

Brett Levy - Jefferies

Vladimir Jelisavcic - Longacre

Alpha Natural Resources, Inc. (ANR) Q4 2007 Earnings Call February 12, 2008 11:00 AM ET

Operator

Good morning, my name is Celina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alpha Natural Resources Fourth Quarter 2007 Results Conference Calls. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instruction). Thank you. Mr. Pile, you may begin your conference.

Ted Pile – Director of Corporate Communications

Yeah, thanks Celina. I would like to welcome everyone to Alpha Natural Resources earnings conference call and webcast for the fourth quarter and full year 2007. Speaking to you this morning will be our Chairman and CEO, Mike Quillen, and our President, Kevin Crutchfield. We’ve got a lot of ground to cover in this call, but our objective this morning is to leave ample time for your Q&A. Our CFO Dave Stuebe is also here this morning to help take your questions.

During this call and webcast Alpha Management will make some forward-looking statements. Actual results may differ material from these statements, and these statements should be considered in the context of the risk factors contained in the press release we issued this morning and which is posted on our website, and in our Form 10-K and other SEC Filings which you can also access through the Investor Relation Section of Alpha’s website. I will turn it over to Mike.

Micheal Quillen – Chairman of the Board and Chief Executive Officer

Thanks Ted. Once again we will start this call out by reviewing our safety performance which companywide has been tracking very well. 2007 marked the third striking year and police have been able to reduce the frequency of last time accident on the job. Frequency rate not only fell 17% last year, but is declined by 56% over the last three year. I know a lot of our employees are listening to these webcast. I want to take a moment and congratulate our manners on their achievement, and also on another achievement reducing another important safety measure, our reportable injury rate by 45% over the last three years. This is an outstanding trend and this substantiates our belief that if we stay alert and aware in fact the safe working habits and lookout for fellow matters we can continue to make major strikes to the ultimate goal of zero workplace accidents.

2007 was a tale of two halves. We came into the year with diminished, but realistic expectation having (Inaudible) production from some of our lower margin operations and facing a climate of reduce price expectations. Price picked in the second half, and we ended up selling more than a 9.5 more tons of coal in the first half and the price that was only average a $1.45 higher. A very strong spot market for export metallurgical coal that changed and we have seen absolutely no led up.

Its’ my belief merchant coal producers and integrating mail are very short on inventory in the United States and elsewhere. The tale of two halves also meant that we were able to complete 2007 within the fiscal financial lingers of guidance we gave and with an even stronger balance sheet. We finished the year with $54 million of cash and it’s increased substantially since then. We funded the Mingo Logan acquisition with surplus cash flow and we paid now more than 14 million of term debt.

Other half points we finished 2007 with a voluntary labor turnover rate in the single digits, not seeing a significant change in this area. Also in 2007, we added over 91 million additional tons of proven coal reserves to the annual geological reserve announces in small acquisitions, which equates to a net gain of 68 million tons in our reserve base year-over-year after deducting our 2007 production.

We’ve been criticized in the past for having a short reserved life, but we have passionately added onto the pole where we now have over 617 million tons of coal reserves, a 100 million more tons when we incorporated the company in 2004, and those reserves of course drive some additional options for future production. Onetime they did not track this plan in 2007 was the startup of the first kiln at our Gallatin lime venture. The management team in (Inaudible) have startup mostly related to quality control adjustments to the limestone treat and an end family bank year-end account and thus have delayed our first shipments of lime by several weeks.

Central steel and the started mode were not prepared in this call to give a lot more curb, but we should add more information to share with you on this project on our Q1 call. First, we plan to give more segmented detail in our filings. This year we planned to go ahead with construction of a second kiln at Gallatin with production targeted from May 2009 and we put in our 2008 capital budget $24 million for kiln #2 and about a $5 million carryover for kiln #1. Now, Kevin is going to talk a little about the market environment and our sales and marketing activities.

Kevin S. Crutchfield – President and Director

Thanks Mike. I know that the crab listening here this morning is pretty conversive on the global demand and supply dynamic shaping the business environment of late and many of the other coal companies that have already reported have discussed it pretty thoroughly, so I will delay with the full week. But I will say that we have all witnessed a very abrupt shift in both the global metallurgical markets and global thermal markets in a very short period of time. As Thomas Friedman said in his recent book, the world truly does seem to be flattening. I would like to pull in out couple of things. First, our sales and marketing teams did an excellent job last year of anticipating an acceleration of demand in the Seaborne met markets, due to rapid growth in non-Chinese iron and steel production in recent years. Strengthening steel and coke pricing, and surged in coal construction. Our teams anticipated this will begin to draw met coal out of the US.

During early 2007, they purchased more than a million tons of third party met coals and more than million tons of OTC coal as low prices turned higher. This helped us respond to the large number of spot opportunities that came our way in the second half of 2007. This is one of the reasons we completed the year with net sales accounting for 39% of our sales volume, whereas we started the year thinking more like 33%. Second, in the fourth quarter, we will besiege with inquiries for term business for the number of long-term customers, including substantially all our domestic customers and then put 4 million tons or so under contract at an average fob mine price of $87.

At year-end, we were holding about a million tons of uncommitted met coals for 2008 and an excess of 19 million tons of uncommitted and un-priced met for 2009 and 2010 combined. Meanwhile, the markets tightened even more in January and February to unprecedented levels exacerbated by the forwarding and force Majerus in Australia, which have not yet completed played out.

Demand for met coal remains extremely strong. In fact, we have never seen anything like it. It certainly exceeds what we have left to sale in 2008 and we expect conditions to remain favorable for the next few years. You might ask what gives us this confidence. First and foremost that’s China. We have seen a 15 million tons flowing in Chinese imports and exports of met coal. We are now firmly an importer and have removed tax barriers that were in place. Some projections have put Chinese met coal imports growing by 25 million tons by the year 2025.

Second, we have got a new kid on the block, Eastern Europe. This represents new major demand for well situated US suppliers of met coal. Under the Soviet System, the former satellites mostly set up their steel industry to use in business met coal, so their ports and infrastructures are inadequate and are certainly not equipped handle to Capesize vessels, which gives the US a big great advantage on the kind of max class vessels. When their traditional sources began to stumble, they came to the US and as a result exports to non-AU countries grew about 90% last year.

Being the largest exporters of met coal from United States, we are one of the first to recognize this opportunity and we are now one of the largest new suppliers into this emerging market. In the metallurgical characteristics about coals, we are very well in their coke heavens. Also, in the Atlantic market, Brazil’s net coal demand is expected to double from almost 10 million tons today to more than 20 million tons by the year 2012 with an upside beyond 2012, that is always been and will continue to be a natural market for Alpha. On top of this, we have seen record steel production in Japan and of course host of complications in Australia. The consensus seems to be the difficulties down under will persist with a government putting a 2010 completion date for real upgrades in Queensland. So that at is if all goes to plan.

Finally, here on outsource, we've seen a strengthening of market conditions for US steel producers, a sharp uptick in steel prices and plans progressing for several new nonrecovery coke batteries. So, all-in-all our view on worldwide met demand is pretty bullish at least through 2009, and perhaps quite a bit longer due mostly to surging demand from the steel triangle of India, China, and Brazil.

Turning to the thermal side, it's been awfully hard to keep up with the market in the news flow, which has been solidly in favor of the producers of late. But just like the met markets, we think its not just acute factors that have created a brave new world as far as global supply and demands on the metals are concerned what can actually better in China, it's more. It's the fact that demand for electricity in China has been increasing more than 20% annually since 2001, and the country needs to grow its power grid by more than the total installed capacity in the United States.

When China's emerging middle class hits the air-conditioning button this summer, and next summer, and the summer beyond that more energy crunches could develop like what has unfolded this winter.

It's the fact that India's coal use is projected to triple between 2005 and 2030, and that the EIA has their coal imports rising almost seven fold in that timeframe. Today, their stockpiles are barely keeping pace with their burn. Others sort of dynamics on the world stage like Baltic trade rates and the US dollar that yet again set new rows against the Australian dollar already this year have disrupted global supply patterns and driven thermal coal out of this country. The trend is not abating.

Now, the domestic utilities are starting to notice that exports are not a transitory phenomenon. While the abnormally high stockpiles we saw in 2007 may be June sketch is projecting that by spring utility stockpiles will end up lower in most areas than they were a year ago. Already, we are aware of some utilities in the north that have seen their inventories drop precipitously as their traditional supply channel has been redirected.

At least two northern utilities had backed the other needs by purchasing spot central (inaudible) and we've been one of their suppliers. And this has created a somewhat astounding trajectory in the fall of thermal pricing curve in just the last 60 days or so. So far this year we've locked up a couple of significant thermal coal supply agreements for 2009 in the low to mid $70 range or more than 800,000 tons in aggregate. That comes down with a 66% of planned 2009 thermal production we had uncommitted at the end of December. So we still got plenty of power.

I might add that the bulk of those uncommitted tons are higher quality thermal tons, which are commanding a premium in the marketplace. For record sake, at the end of 2007, our total sales book of combined met and steam production plans for 2009 were 73% uncommitted and unpriced, basically, unchanged from our third quarter conference call at the end of October.

For 2010, approximately 90% of our total plant production is uncommitted and unpriced. So frankly to say that we are happy with our long portfolio for 2009 and 2010 as we have significant leverage to the markets.

Even though we were patient from a historical level in pricing, our 2008 thermal and met business, we have to admit that we did not anticipate the sky rocket pricing that we have all seen so far this year in the markets. We are fully pleased to take advantage of that pricing in our uncommitted '08 and '09 and beyond business. We respect and will continue to work with our traditional customers, but I assure you we will market on price terms to the benefit of our stake holders. Now, Mike back over to you.

Michael Quillen – Chairman of the Board and Chief Executive Officer

Thanks Kevin. I'd like to conclude by recapturing some of the targets we gave for 2008 in the earnings release we issued this morning. And add some directional guidance on cost for year based on our expectations today.

First off, we mentioned this morning that our results including EBITDA may be proportionately lower in the first quarter than the other three as one would expect since the 2007 fiscal year exports, contracts rollout, and those stands re-priced at the end of the first quarter at significantly better levels.

We expect some cost purge from our purchase coal in 2008, based on the way the markets turned lately. Per ton pricing should rise proportionately with the market on the 4 to 4.5 million tons we think we'll buy. However, on the sales side we expect to recoup that increased cost to higher realizations. As we continue to pull fresh tons and steam into the met market. As we said many times before our focus is on margins. Supply costs are largely in line with expectations. Most of the main supply categories are running lower than one year ago and we're working through our preferred supply purchasing agreements to keep them flat this year.

Our main areas of exposure on direct line costs are more than likely going to be diesel fuel adding surcharges for steel products and explosives. Diesel costs were up over $10 million last year and we've entered into a swap agreements and have hedged $8 million gallons of diesel fuel so far for 2008, covering about 30% of our expected usage.

We'll continue to monitor the situation and later end additional coverage in 2008 and beyond if market conditions and prudent risk management technics dictate it. Now we are all well aware that our suppliers and service providers can read what's being touted in the trade press about coal pricing and spot markets. The perception is that this pricing applies to already priced 2008 business, but it doesn't. So we expect some job owning, but the fact of the matter is that our all end realizations for 2008 as we said in this mornings release is projected to be in the range of $62 to $63 a ton.

We had a bit of test sliding in the first quarter with our captive mine cost with a large part of the effect from the sequencing of mining plans of a half a dozen mines where we were either transitioning with high overburden ratios to get to coal. Our transitioning underground took some tough geology to mine new panels.

We're confident we can and we will work through these issues and we're taking a number of other actions to lower costs and increase productivity. For instance, we have a new shaft in place at our Kenwood mine, our second largest underground mine, which will add an hour and half of production time each day by cutting travel times.

We're putting more productive mobile equipment on our Callaway surface mines and implementing more aggressive production schedules which will both enhance productivity and generate additional volume, and we have the hedging place for good portion our diesel needs.

So altogether it’s a longwinded way of saying that a reasonable expectation per unit cost of coal sales for the full year of 2008, taking into consideration all of the things just discussed should be an increase in a range of 5 to 7% over 2007, including the impact of purchase coal cost.

Another item I wanted to point to in the 2008 targets we issued this morning is the DB&A target range of 170 to 175 million. That is higher than 2007 with the increase mostly coming from the acquired Mingo Logan assets, the Gallatin lime venture and higher depletion rates per ton at some of our surface mines.

Our target for produced and processed tons of 2040, 25million tons in 2008 implies fairly flat production. Considerably, we took targets and added growth from these two areas either an acquisition which have a pretty steady history of or some development opportunities that we've identified in Pennsylvania, West Virginia and Virginia. These opportunities involve mostly production tweaks adding a few continuous minor units, going to seven day schedules or for instance, opening up a surface mine on some net quality reserves.

Finally on the regulatory front, The Mine Safety and Health Administration published a final regulation from a new mine rescue team legislation last week. Within nine months, our large mines with 36 employees most have two teams and within 12 months all mines must be in full compliance with the new requirements. This is a little earlier than thought and will have an impact particularly on the smaller operators or those without existing teams which will put more stress on coal supply.

Since the passage of the Miner Act, Alpha has worked to be in compliance early. We've added two teams and we will achieve these deadlines. Operator, you can now open the lines up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from (Inaudible) from UBS.

Unidentified Analyst

Just a couple of quick questions. I was wondering if you can sort of talk about what the assumptions are you thinking for both high volume, low volume that what you have opened for this year and what you're thinking for next year and so forth? Or kind of what you're what you're seeing in the marketplace?

Micheal Quillen

Well, again we don't breakdown our ranges of bar on our metallurgical products. But we right now for the 2008 year only have about 1 million tons left to sell of met coal. In 2009 and 2010, we have about 19 million tons in total left. I think we broke that down in the press release this morning maybe a little more specifically than accurately in terms of how the fiscal year and calendar years worked, but it's about 19 million tons of met coal to sale over 09 and 10, but again we don't break that down between the volatile ranges particularly in this type of market for competitive reasons.

What we are seeing is some pretty dynamic things that go beyond anything any others I think anticipated or it ever thought about before. As we said, going back several years, there is a defined amount of good high quality strong metallurgical coals in the world and everyone knows where those are? I thank to customers in the last couple of years who really focused on that and with the dynamics as going on in China, it's caused the consumers to really focus on trying to lock those tonnages up as a base loads, so we are saying again in the stock market, we are seeing at the short the half (inaudible) prices in the $175 to $200 range which has been quoted in press, how that equates out to what pricing we see in ‘09 and ‘10 is still somewhat up in the area, but we are in a total new arena.

If you go back to Thanksgiving which is not that long ago, what we thought was a good net price at Thanksgiving may be not be a good steam price today, so it's a very volatile market that we haven't seen before, but the real question is how this spot pricing that I think is pretty well defined right now, because there are just no available turns out there, can translate in ‘09 and 10 business, and our marketing people are working right now to secure some of that business had those numbers.

Unidentified Analyst

Mike, it’s bit unreasonable to think that because he is seeing thermal shipments or contract that you find in the $200 territory on the global market.

Micheal Quillen

Thermal average short wave, I am not saying it’s different, it can happen anymore, what we’ve seen in the last six weeks, but that would be pretty astounding to see thermal move up in that way.

Unidentified Analyst

I meant, met coal sorry.

Micheal Quillen

We did not say no on the thermal of what we are seeing in the market place today, but I think that is possible, obviously, here is lot of things that can happen. As we look at our production tonnage, should we increase it? Should we speculate on what kind of production tonnage we want to put out in 09 and 10, we debated that internally, but again as we look at that right now what we look to do is secure some of that pricing for our base load tonnage. We want to lock that in with term if we can, so I think, it is achievable. As we look at all those announce like labor and contractors and equipments and permits, we have to factor that into what this acceleration in revenue is going to do those factors and how many tonnage are going to be available in the market place, you go back to 70s and we saw something similar to this in terms of proportional increase in pricing and it was a different environment, as an industry we overproduced and change that market pretty rapidly. Our anticipation is right now that we as producers are not going to be able to do that, likely did in the 70s, but it's going to be somewhere in between. I think those numbers are achievable, the bars or testing those waters now and certainly that is – the spot market is just -- let see how it goes. And again, as we are talking to people, they are not just talking about 09 already; they are starting to talk about 09 and 10 to get and of course locking in those type of prices for two years. I don't think it would be the worse thing to do particularly if you later some of it.

Unidentified Analyst

Okay, if I can just ask one last question with respective thought. You had noted 5 to 10% increase in funds including purchase full cost. What portion of that percentage is resulted for its full cost kind of where do you see if you will provide some granularity with how much purchase full cost is going up relative to last?

Micheal Quillen

Well, it’s anticipating 4 to 5 million tons, that’s -- about half of that range is influenced by the impact of purchase coal. We just right now be in the purchase coal price and we will chase the revenue site so much, it’s a little bit hard math to do, we just have to make an assumption where we see that going, but about half of that increase would be the impact of purchase coal cost. The other thing as we look at our plans going forward that we’re right back where we were in 2005 and as the contractor in our purchase that are preparation plan timings, we're beginning to see pressures on most prices and then we have to debate that do we raise the price to contractors or do we start looking including those mines back in as company mines again because as we're predicting right now, contractor prices will exceed company production again. So we see an increase in company, it is just a matter where contractors go. So the big factor that is influencing our costs right now is the impact of contractor terms purchase at the preparation plan times, it is what we call road times, again our regular purchase times that we blend with. They are having the biggest impact now. We also recognize that when you see revenue go up, obviously the round number of $100 again 10% to 12% of that is going to go to the cost line automatically. So the math gets a little bit difficult to do now. But when we see the revenue increases like we're seeing I can pretty much guarantee that we're going to see as an industry cost increases coming up behind that. It is inevitable with that kind of a revenue number.

Unidentified Analyst

Okay great. Thank you very much.

Operator

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

Brian Gamble

Good morning Mike and David, how are you guys doing?

Michael Quillen

Hey Brian.

David Stuebe

Okay.

Brian Gamble

Just wanted to continue to clarify on the met coal by May, when you look back at where you were at that 50-50 committed-uncommitted as you rolled in to a road path the Q3 '07 mark, in the light of what has happened on the cost side of things or on the realization side of things over the last two months, how do you structure your sales contracts and how do you look at immediate sales to try to best take advantage of the current market. Are customers out there right now willing, I know mentioned in your talk in '09 and 2010 as developing it together and ensuring up supply, but are you willing to kind of, I guess, commit it on it sooner than you have in previous years due to the pricing environment?

Micheal Quillen

As we look back over the last several months in the first half of the year we saw some people move to market on the thermal side and also move precipitably even down into the Brazil market. And we couldn't find in those numbers the right return that we wanted. However, this fall as that market moved, we did move. We moved tonnage at prices at that time seemed very reasonable. Today's its apparent in hand side that we should've waited. We would love to have a lot of uncommitted times today, but based on history we locked in 97% of our production back around by Thanksgiving. What I was referencing previously was the net paper talking about two years. The same paper actually, talking a little bit longer term than they have historically. The argument that, thankfully all the problem they’re having with them is how you index your cost impact, and how you cover that parameter, but we're seeing probably more thermal solicitations come out in just the last few weeks than that have come out in the last many months. And I think that's caused by the domestic utilities recognizing that there actually is some bandwidth to this opportunity for thermal coals to go export. And that's a $24,000 dollar question is do you move now? Yeah, we certainly think that the prices we are seeing both for steam and met that we're going to put some of tons, but they have rolled and put them all to bed we probably would not, but just like the two contracts we took in '09 for 70-some dollars, I mean, you are toping basic steam product 1251, its hard not to say that that's not a good price for that year. So we'll continue to do some of that, but we are watching this market daily. And I – did I think OTC is going to hit $80? No. But I think it did this morning or yesterday.

David Stuebe

The only thing I would add to what Mike said just is kind of anecdotal advances. The work (inaudible) as Mike referenced on a fair amount of RFTs it has come out and they range anywhere from a year to 10 years in tenure. So I think to some extent the utilities are kind of testing the market, but the real question is what we are discussing is the mechanism around, lets say, you figure out, what your future price is going to be, I think everybody is pretty clear on what our outlook like for `09, so how do you translate in the 9, 10, 11 business kind of thing, what sort of mechanisms do you need to reset your price whether it’s a re opener or something that index is to a market based price re-opener.

Brian Gamble

What is your opinion as the best way to handle those contracts? I mean, what are you trying to get layered in when you're talking to utilities as far looking at forward looking prices?

Michael Quillen

I used to have a pretty solid answer to that and I would have said indices that reflect our actual costs whether its labor, diesel fuel explosives, mining equipment parts and supplies. And that route pretty much does track your costs but when you're looking at the revenue side moving like it is. I don't know, I mean, we historically have looked at collars to try give our steady customer some comfort level for both for selling and asset comfort level on the floor.

But we really don't have the final answer to that yet. We're least solicitations, we're looking at that but most of our thinking right now is leaning towards --maybe expanding the collars. We certainly are not going to give away any more free options like we have historically in the past to the utilities. But maybe winding the collars is one way to do that on a greater dollar per ton than what we have in the past. But I'm still not adverse to indices. Indices pretty well protects your margins too.

Brian Gamble

I mean I just had a follow-up on the mix of tonnage on the production volume guidance for 2008. I know you mentioned on the last call that the growth opportunities that you saw, you could conceivably get to 12 million on sales not on production, but on sales per met tons. Just wanted to get an updated view on that, you think 12 million is a realistic number could it be the north of that given the pricing environment? How do you see that shaping as the year unfolds?

Michael Quillen

Well, I think today that’s still a good number. Over the last few weeks, we set around and debated what's the best thing for us to do? Should we back away from the steam business and maybe use our employees in equipment's and do some things and move greater to the met. While we're doing that analysis we see steam coke pricing move $20 a ton and the margin start to come back in that arena. And so, what that mix is going to be, I still think that the healthiest profit margins are going to be in met. It's an area that we're very well known around the world in. And it’s not inconsiderable as we look at '09 and '10 that we look to even increase that metallurgical number. As far as percentage I'm not sure, as far growth, I can see that potentially going higher.

Brian Gamble

Thank you very much.

Operator

The next question comes from Luther Lu from Friedman, Billings, Ramsey.

Luther Lu

Hi Mike. How are you?

Michael Quillen

Hi Luther.

Luther Lu

I have a question on how do you plan to use the cash this year with this high margin coal business. You plan to retire from debt or making acquisitions? What do you think?

Michael Quillen

I think we'll look at it for a few days Luther. We never had this much money in my 37 years. No actually right now I have a very positive cash position we show potentially some very strong cash earnings for 2008. Again, our first priority is going to be to grow the company and to grow it efficiently and judiciously for the value of our shareholders. We obviously have behind that, we’ve got a good debt position right now. Our leverage ratio is very low, but we have those bonds out there in front of us that we'll also consider at this time. But we're not going to stop those cash for any long period of time. The growth opportunities aren't there, we will certainly look at debt next, and then, as the third choice we would move that to the shareholders.

Luther Lu

Okay. Could you just talk a little bit about, since you have a consolidation? What are the expectations that you see out there?

Michael Quillen

Well again in this kind of market obviously the pricing is going to go up. Also though we have a good currency to use in terms of our stock today and we continue to anticipate, that’s going to increase. And then, as you look at this tax year, I think, particularly on the private producers that are out there they will recognize that this maybe the best opportunity for them to sell their companies and have the lowest, probably capital gains rate they may see for some period of time. So certainly in our discussions with some of the private producers they are recognizing that the tax situation may well change, no matter who wins the presidential election and congress going forward. So I think there are going some opportunities there to comeback with (Inaudible). I also think that in our several calls before that the, I guess the aggravation concern, it goes along with the safety rigs and the rescue team just now came out and that's the capital expenditure on lot of these gas. I think considerable potential to seek consolidation may be coming first out of some of the private companies before the enact with both public companies in some way get together.

Luther Lu

Okay. And, then the last thing is can you talk about your outlook on the surface mining issue and how much it will impact your overall production in 2009?

Micheal Quillen

Certainly talking about the rules, I mean, really it’s not going to have a significant impact even in 2009. We like everyone else are looking at what happens if that does not get reverse and we have to change how we handle our fall on surface mines. Again, because of the nature of our surface mines it's not a significant, it's not going to take a lot of turns per se out of the production mix. It is going to move sometimes around. It is going to increase cost because we'll had to hold that material a little bit further than we might where we can use adjacent bailey fields. I don't frankly have a number on exactly. It is just as a drop dead we lose that case and do that. I call it more of an adjustment range going into 2010. Kevin, you don’t want to comment?

Kevin Crutchfield

And we are not going to be impacted before the exploration of the year 2009 for sure. We're obviously looking at what sort of plans would we effect if it were not overturned. In a lot of situations where our work around solutions as opposed to having to have the 404, but I don't think. If anybody tell its not going to effective at all that's simply not true because it will affect not only surface mines, it will affect underground mines, preparation plants, any kind of construction projects that requires 404 permit. So, we continue to monitor the situations and we'll adjust our plans accordingly.

Micheal Quillen

The area that does give a lot of discussion is the refuse facilities at everyone's co-preparations plants because if you have limited capacity and have to open up a new valley field you could be impacted by that. So, everyone's doing, they are forward looking work on the engineering permit. We tried to stay about three years ahead of that. Anyway, that's what's required in the industry today on you permitting and planning process.

Luther Lu

Okay. Great. Thank you guys.

Operator

Your next question comes from Paul Forward from Stifel Nicolaus.

Paul Forward

Hi! Good morning. I am just wondering if you could go through -- I saw that you're guiding to 24 to 25 million tons of produced volumes next year. Can you go through may be a few key projects that over the next couple of years, let's say beyond that, that might allow you to grow volumes above that 24 to 25 million range as you go through the end of the decade?

Micheal Quillen

I think we actually mentioned more of those at our press release this morning at JC mine which was actually a reserve we picked up in the progress acquisition. It turns out, that's probably going to be better more than we anticipated on the revenue side. We actually acquired that reserve in anticipation and some opportunities in this cover market particularly with our location to the Southeast versus say the Northern App coals, transportation to the Southeast.

We've also got some other opportunities in terms of couple of large underground mines in Virginia, they think that we will be evaluating as whether these are replacement mines or whether they're incremental increased production. And that's a little difficult to say. It's easy to sit here and say, do they got (inaudible) always new turn to keep everything we've got going in today's market, but we need to do a thorough analysis of what's the best thing for us to do to protect our margins and control our cost. So, we see these times out in front of us acquisitions, particularly, synergistic acquisitions like we've done in the past with some of the smaller producers may give us more opportunities than actually our current base load tonnage. We're pretty comfortable with our profit profile on base load tonnage going forward allowing 24 to 25 million tons. So, I'm not going to throw out at '10 number, but I will say as a – and we planned to be bigger in 2010 than we are today, it is not yet definitive and how we are going to get there

Paul Forward

And would you say that your decisions to grow volumes are going to be heavily influenced by your ability to sign contracts already or monthly contracts for that coal for the next couple of years, so you just not speculatively building?

Micheal Quillen

Well, I mean there is no question as we look at putting major capital in again and deposits that we’re primarily looking at, right in the range of say $30 to $40 an annual turn. We’re not end of the big long romance and some of the large dry gland jobs that hit into the May $70 to $100 a ton. So we’re -- our projects with the type of mining we do are a little bit of different scale. Now we do obviously wanted to lock that in. We go somewhat more for the product than we do for the two volume bases, so the higher margin products, we are going to stay in that area, that's proven out to work very well and concentrate on margins and cash flow. So, you’re right though if we can lock in, we have historic signs everyone ask, we have people coming in today, they start talking about joint ventures and partnerships, but we also debate is that really what we want to do. I mean, in this type of market, our choice today would be is probably better to keep to the current game plan that we have and not (inaudible) because they’re trying to turn in tonnage and we don't want to lock up tonnage and miss an opportunity.

So there is -- so many things going on that we are not just into the guessing game right now. We want to have a definitive plan. We got our permanent engineers. We got our operations engineers, has some pretty good right now. To put everything in front office, that's viable and then we will figure out what's the best mix for the long term. But we also, and I think we have that personality, we cautioned ourselves to step back every once in a while and look at what history is proving in this industry and to not go totally crazy to be prudent about that, and the big issue out there is, I think, I think as everyone recognized is it still not a lot of additional labor out there spread around. So you always have that issue, we do the calculation, for every turn you say you’re to produce four kiln times a man day, you come up with about 3000 tons per man, you got to have a man for every 3000 tons. So that's the first calculation we do on increase as far as the manpower is going to come from.

Paul Forward

Alright. That great and I guess lastly, I think last conference call I gave you some number of roughly $25 a ton to ship coal on average from your mines to the port. Has that number changed at all or is that -- do you think that number is going to change over the next year or two?

Micheal Quillen

You asked two questions (inaudible) pretty sure, we will change over next year or two, but I think the $25 is a pretty good number right now. We have to recognize that the railroads do have a diesel fuel escalation clause in their pricing and then it got adjusted little bit last year, but they get an automatic increase in the freight rate, when the price for barrel oil goes over a certain number, so it can go up, if we were to see an another run up in diesel fuel pricing, but that $25, I think is a pretty good number for 2008, I yet don't have a number what 09 might look like.

Paul Forward

It does not change as far as if you have to send coal in a different direction because of just happen to use different ports or anything like that?

Micheal Quillen

The majority of our cost is pretty definitive and we are going to go the majority, the vast majority of our coals is going to go to Hampton roads either to the North folk southern peers or to the – our own peer DTA, we have in the past brought some coal down to mobile and going out of the gulf, that's not something that we have in our current plans, but I think everyone is looking at full capacity right now. We do have a good position in that, we have a strong track record in the way that the railroads allocate the permits, part of that is historical on how much you shipped in the past and if you are a new ship you got to come in and compete for a permit capacity going to the ports, if you are a traditional ship or you have a history that they can do a formula that allocates to those permits.

So, we are in good shape there, we are also the largest owner of demand in terminal of those capacity there we are looking to increase at demand in terminal production that's going up to 12 to 13 million tons this year from (inaudible). We're always going to double the capacity out with DTA we think this year. So, we're pretty good shaped out at our Hampton Road and don't really look have to go to Baltimore to mobile.

Paul Forward

Okay. Thanks a lot.

Operator

Your next question comes from Jeremy Sussman from Natixis Bleichroeder.

Jeremy Sussman

Just piggybacking on the railroads, what are you seeing there, is there railroad capacity to the ports, or is the situation getting a bit tighter as obviously exports are increasing?

Micheal Quillen

It is getting tighter. I think it goes back to which railroads you're on right now, but have a lot of productions on the Norfolk Southern about half on the CSX, and with that question when you look at the revenue to the railroads, the export business is a big portion of their profitability, so it does get e I'm sure attention from their perspective. And, the other thing that has been I guess, a little bit of relief to get additional export tonnages. And inventories at the domestic utilities, there is not a lot of pressure to after service those. If we were to see a significant drive down in the domestic utilities, I think you would definitely see added pressures going to the railroads, which then would see a little bit of pullback on the capacity that we're seeing going to peers over the last six or eight months.

We have stayed in constant contact with the railroads. They do have some plans for additional capital expenditure for railroad cars and engines. But I can anticipate in the short-term that the life of (inaudible) getting even tighter is probably greater than seeing a lot more capacity. We do know that a lot of people particularly when (inaudible) moved in Europe jumped in that there were traditional export shippers and started looking for business prior to figuring out full capacity and regular capacity, and then turned out it was not necessarily that easily achievable. We're pretty traditional in those markets. We don't see a dramatic change on our part, but I think some of the new players will struggle a bit, particularly to find full capacity.

Jeremy Sussman

I appreciate that. And, then in terms of your mix for 2008, may be even 2009, I guess, what percentage of your quality is staying domestic versus export, or may be if you can even break that down on the met versus the steam side?

Micheal Quillen

Crutch, I don’t have this number really on top of my head.

Kevin Crutchfield

In 2007, our met exports were about 63% of the total exports, I am not sure I want to predict exactly how the (inaudible) going to go in 2008, but probably pretty similar.

Michael Quillen

Yeah, what we're seeing is right now the export market does appear to be willing to pay higher price in the domestic market and that's a significant shift from where it was primarily in the 80s and 90s. The domestic market was a little bit higher priced and a little bit more dependable. So, what we're going to see is pressure on the domestic market to see where they move to, if not you're going to see an increase percentage of coals going export from where they (inaudible) be in the last few years.

Obviously, when you shift within the United States, your paperwork is not as complicated, your liability is not as great, your cash is a little more dependable, but again since we're traditionally been met exporters, we're familiar with all those things and right now it's just an issue of making a balanced decision between the type A customers downing in type C, but when you type B and C start button, several dollars more on the table is going to entrench this, I want go guess that you’re going to see our percentage might even go up in terms of export. And as per that, we're getting into the thermal steam side.

Jeremy Sussman

Great, thanks very much. Appreciate it.

Operator

The next question comes from Mark Liinamaa from Morgan Stanley.

Mark Liinamaa

Good day guys.

Micheal Quillen

Hi! Mark.

Mark Liinamaa

Can you comment on any changes you're seeing in domestic customer's wing, may be potential to switch to TRB coal in light of the high eastern prices we're seeing?

Micheal Quillen

I have to think with doing the Math on that. When you start looking at price at demand of

70 plus dollar for steam coal say for 125 to 13,000 BTU and then you look at what 8,400, 8800 PRB ton can bit earn. You can see that there is more opportunity for them to also move in this market. How that revenue gets split up between the railroads and the PRB producers is yet to be seen. But mathematically there does appear to be some opportunity that PRB is going come into the southeast or the east more than it was as tons leave here going to Europe.

But then you get into the logistical issues of railroad capacity and the two railroads. Again if you’re a PRB railroad putting your railroad car out into Georgia or Florida or North Carolina and when you get it back from Eastern railroad as always been the thing that complicates that process. But certainly the opportunity is going to be there for the PRB to potentially fill that void that maybe created by more thermal offshore.

Kevin Crutchfield

And Mark, I think to Mikes point. I mean, the capacity in the Powder River basin based on our intelligence anyway it is there. But, can it get hauled and can it penetrate these further and further distances and still achieve acceptable cycle times I think is the question. But I guess 2008 might be the year we'll get the answer to that question.

Mark Liinamaa

And certainly one way or the other price indicators are all looking very favorable. But overtime would you see it’s kind of a normalized, if we believe in some form of price conversions would you see it more domestic prices converging or is the international going to be the price setting mechanism you look for?

Michael Quillen

I'm not sure how we normalize anything today. I mean it just is so volatile. Honestly we thought when this thermal thing first moved internationally that it might be more short term than we think it is now. I think we believe it is more long term than it is. And again we're seeing opportunities for US coals to go internationally that bring you back prices to the mine in $70$. We then seen the domestic gas move to where they're agreeing the pricing in the $60 and $70 range.

What I think eventually will happen is the domestic again, coal produces 52% of electricity. There's not a real different, there is not an alternative out there to the natural gas. I think the domestic pricing is going come up and it will go back to where we were -- more the coal stays inside than maybe what might be thought of today. Buts it's going to be at higher revenue numbers.

Mark Liinamaa

Thanks very much guys.

Operator

The next question comes from Michael Molnar from Goldman Sachs.

Michael Molnar

Hey good morning everyone.

Micheal Quillen

Good morning.

Michael Molnar

You know you gave us some data on price tonnage for 2009. Can you give us some color or comment at what this price these tons were contracted for on average for both steam and met?

Micheal Quillen

Though we did give out the most recent sales that we made in 2009 for steam coal had been in excess of $70 back to the mine. On a metallurgical side, that’s been a pretty broad range depending on quality and probably ranges from the high 80's up to well into the 100 dollar range for '09. We haven't sold a whole lot of '09 tonnage yet we're still holding back the majority of our metallurgical coal for '09 is still in discussion.

I mean, we really are just now, well we haven't yet entered April 1st season, we entered '08 business. So this is really, really early to be talking about '09 price from an international level.

But we are in discussions even today about that. And again when you hear these numbers of $150, $200 in the boat you convert that back to short ton at the mine.

We actually have a conversion chart that we've adjusted two times. We didn't have it high enough either time. So it’s just a whole new dynamic and the '09 business most of what's out there for on the metallurgical side is some tonnage that is legacy contracts that carryover that has some collars around them that are also up for discussion already. So we could probably sit here and say most of our'09 met ton is just going to be re-priced in this environment

Michael Molnar

I guess on the steam side you just talked about, one-third, I am just trying to get a feel for that on average, I know you mentioned, 70, should I take those tons out of price now to be about $70 on average or is that just

Micheal Quillen

No that's a newest deal, no that's an 800,000 times, we just put to be it. As we look at our carryover steam tons going into.

Kevin Crutchfield

I think the way I think about it Mike, in 2009 on thermal something in excess of 5 million tons close to $50, plus or minus which represent here roughly a third of the total book. So you got about two third open to market pricing and then similar story on met, we have a very large uncommitted there, what's committed is committed at last years sort of prices in the 80+ range. So it's a very large open position, both on met as well as thermal.

Michael Molnar

Okay. Great. That's helpful. One last question, if you have to think about exports for the whole of U.S, and we would typically about 50 million ton, obviously that's increasing a lot, where do you think exports in total could go for 2008. Could it go up 15, 20, 25 million, if you have to take a guess, what would it be in total?

Micheal Quillen

I think the early reconnaissance tells us that about 56 million tons left, the United States last year, I think about 33 million of which were met and the balance being thermal, so that's brings you to what close to 60 million tons. So the question is it 80, is it 90, I think our guess is somewhere probably in that range.

Kevin Crutchfield

I think your range is okay. I think that probably the upper limit in the best of circumstances we could see would be 30 million additional tons, I think practical numbers probably more in that $15 to $20 million range, but you can do some pretty extraordinary things at $200 a ton.

Micheal Molnar

I could imagine. Thanks a lot.

Operator

The next question comes from Laurence Jollon from Lehman Brothers

Laurence Jollon

Hi, good Morning. Following up on acquisitions Mike, in the past you have talked about how the valuation gap between buyers and sellers has prevented some deals from being consummated. Can you give us an update on the so called valuation gap and how it's changed since the third quarter?

Micheal Quillen

It has changed. Again what we see is everybody has taken these prices that are being published in the coal rigs and assuming that what you are going to sell every time for going forward and that's what I would do if we were a seller. So there is some extraordinary numbers out there in terms of that, so that gap has widened, however, the thing that I mentioned earlier that does bring that back to reality is that people recognize this is uncharted waters, but they do have these tax situation out there in front of them. So I think the product, that gap may not be as wide, when you start looking at private companies and how they react to tender offers. I will just reference the BHP Rio thing or probably could reference the Microsoft, Yahoo thing is you never really know what's going on behind close doors versus someone public statements is what's achievable, I still think there will be deals done, again as you look at the all the coal companies and increasing staff prices, again you are also buying with an increasing value currency, if you stock in that mix, but I also would say, obviously, the debt market out there is not too good right now.

There is tremendous backlog of unsold debt to be put into the market place, that went down a little bit in the fall, but it’s back up about where it was in the summer. So borrowing capacity is somewhat limited, and all those factor go into those calculations, but there has not been any -- actually the activity discussed and just probably increased, because a fellow that's thinking about getting out of this business there's probably not a better time to talk about getting out than right now. So we reference back a lot of times to the acquisition we did with Nicewonder. It wasn't necessarily that he was looking at what a multiple of EBITDA was; he knew that there was $250 or $275 million put on the table. So I am not sure the gap -- the gap may have been pretty great in the initial discussion on some of the metrics we talked about, but we start talking about pretty big dollars that also give us return on a invested capital basis that. Its (inaudible) people are trying to doing some deals.

Kevin Crutchfield

Nothing too odd. The other factor play is whether you have to believe to sort of pay up, and I think also the way we look at it too is to affect some meaningful consolidation, because we think there is some benefits associated with that, and I agree exactly with Mike. I think it's the extent you see big deals get done this year. They're likely to involve a component of equity.

Laurence Jollon

I will thanks, Kevin and Mike. And, then finally just touching on your cash uses again, in my opinion it looks like Alpha should have enough dry powder between its cash balance, its revolver availability, and free cash flow in '08 to satisfy your first two objectives you have which is to grow the business and pay down the debt. In my opinion, again it's pretty attractive from a corporate finance perspective to call upon this summer, given the 10% coupon, and from that with cash and revolver borrowings that would have half the interest rate. Can you just give any more color on my thinking about this the right way, are you thinking about it in the same manner?

Micheal Quillen

Well. We're looking at all those things and there is certainly no lack of tricks to having (inaudible) banks. They are having opinion of what we have to do with this cash and how we are out to allocate it. Yeah, the only thing I would add to that is, transformational acquisition could even exceed those numbers that you just talked about. So, if you talk about something in the range of NiceWonder acquisition in the $200 to $300 million range, you're exactly right that cover with the bonds, It does work out pretty well, and in our mathematics we do something really large, you could go beyond that. So, it's not that we don't have our sight set pretty high and how we're going to grow this company.

Laurence Jollon

Thank you very much.

Operator

Your next question comes from Justine Fisher from Goldman Sachs.

Justine Fisher

Good morning.

Kevin Crutchfield

Good morning Justine.

Justine Fisher

The first question I have is just about why the cost for (inaudible) was so lower in the fourth quarter? Is that the case you bought more of it earlier on in the year at lower prices before they went up so much?

Micheal Quillen

Justine, I knew you'd be the first one to pick up on that. Actually, that was somewhat of an accounting adjustment on some -- obviously mentioned in there the mark-to-market, we’re in a very volatile mark-to-market in today’s environment. We actually were working on that this morning as you – and hat happened some of that mark-to-make, Justine, that’s the category that went back – back against those turns by slowing that, that’s basically an artificial number.

Justine Fisher

Okay. So, it's pretty much the margins as you were saying previously the margins on purchase coal are going to look more like they had historically going for it?

Micheal Quillen

That's correct. Yes.

Justine Fisher

And then, is there anyway you could quantify how much of the company mines cost per ton was related to those onetime overburden issues, because 3 bucks quarter-over-quarter was kind of astounding, and I am just wondering, how much of that you think you could get rid of in '08.

Kevin Crutchfield

Well, we've broken that down into dollars, a $1.13 of that increase was directly related to surface mine ratios, part of that was as we were transition, and the other saying that as we go through our 60 mines or whatever they are, when you release type of margins, it's very easy to fetch yourself, take an extra cut on the eye-wall, and I know that's a little complicated (Inaudible), but when you remind a ratio, you're right there, you're sitting there, and the price of coal margins are good, and where you gad historically mine 17, you might take another cut and go up to 19 to 1 rather than relocate to another mine location.

So, probably I don't expect right now and now – but half of that we think we're going to change just in terms of overburden ratio, same thing on kiln tons per foot underground. We pushed our mines to keep going forward in not as good kiln tons per foot of advance that we had historically engineered and designed our '07 model for, because they’re in a producing turns in this market, we're going to push them a little bit further to do that, and (inaudible) it looks about half and half. The area that concerns us is as I said earlier, no one that is involved in this business is going to miss the fact of what these revenue numbers are speculated to be. So, there is going to be pressures there when we didn't have supply side and the service provision side. The geography I think, we have got worked out, but it could come back at us on just the people that sell us products no matter what it is. I mean, to answer your question specifically about half of it.

Justine Fisher

Okay. And then on the pricing side. Most of your steam coal is obviously priced by the third quarter of last year, and then, and then given the fact that you priced another 4 million tons of met at 87 bucks. I was wondering how much of your already priced met coal tonnage maybe indexed to market prices, because even if I blend in a triple digit really high met coal price for the million tons you have left. I'm grappling with how you got the $62 to $63 average price. So is there a possibility that some of you previously priced met coal tons will be re-indexed to market prices this year?

Kevin Crutchfield

No, I think that math's should work. I think, again, in fact, when you put in the additional tons at 87 and again our steam coal prices should have been in the high 40's.

Micheal Quillen

Yeah. I looked at the math, math last night; I think it comes out real close.

Justine Fisher

I'll try again. I'm doing another (Inaudible).

Kevin Crutchfield

So I guess, you call back, if that doesn't match up because we looked at that number pretty carefully. We thought you're going to say it’s too low.

Justine Fisher

Okay. I have one more question. And I already asked this to another eastern producer last week. But I'm interested to know your opinion; because I think your company given your export exposure and met exposure might fit the profile quite well. But I was wondering if you guys are seeing any foreign buyers look at US companies. I mean, if the Eastern Europeans are going to be structurally short the met coal that they need or even the Brazilians who also have a lot of cash to their names. Are you seeing them start to look at US coal reserves at all?

Micheal Quillen

We've heard rumors of that. We don't have any things specifically that we have knowledge of. But it’s actually been maybe smaller just direct. You know there's not a lot of 100% met producers out there. And what we find in discussions over the years as people come in and look at that. They get a little skittish when they talk about trying to operate a mixture of met stream mine, and even the assets, the high 30%, were the highest percentage per se versus you look at a Jim Walters its maybe a 100% metallurgical. They have come back around; they're looking at that similar as they've looked at securing other of their natural resources. But I don't know of anything definitive. And if there is anything growing on behind the scenes, we don't know about it. They're going to talk about that, I think particularly as you have seen the consolidation of the industry. They're really big guys have been in their board rooms be sitting around saying “gosh we need to lock in this”. Whatever the price is we got to have this strong coke and coal to get run our batteries on. When you look at coke prices where they are today, they got to have iron ore and they have got have metallurgical coal.

Justine Fisher

Okay. Thanks very much.

Operator

The next question comes from Kalpesh Patel from Bear Stearns.

Kalpesh Patel

Hello.

Micheal Quillen

Good morning.

Kalpesh Patel

I think you mentioned a total US export forecast. Was that 80 to 90 million tons?

Micheal Quillen

Well I think that to be on the very high end. And I think we're in the high 50's right now, and we said that -- we thought more practically it was around 20 million tons. So that puts you in 75 to 80 range, we think actually that (Inaudible) might get you to 90. To do that, you’re probably going to have to see some more tonnage coming out of the Gulf to get to that kind of a number. And I'm just not really sure of what the barging capacity in some of that could be. But when you look at Hampton Roads at Baltimore, 75 to 80's is going to pretty much get you out of there if Gulf stays normalized where it is right now.

Kalpesh Patel

Is it that for this year or you're talking 2009 or later…?

Micheal Quillen

I am probably talking April of '08 to March of '09.

Kalpesh Patel

Okay. And how much growth is Alpha expecting in their exports?

Micheal Quillen

Again we're looking at May production going in at 11 to 12 million ton range and how much of those exports still up for debate. Again, we're in discussions both with domestic customers and with international customers. We – our domestic business was -- in hindsight maybe put together, put to be too early. The domestic guys I think got pretty good deals based on what prices are today since they work on a calendar basis. But as we look at that for '09 I can conceive that, domestic prices will need to come up a little bit from where they are or we’re going to see a higher percentage and it’s gone (Inaudible).

Kalpesh Patel

So you don't have actual like volume numbers that you are projecting for exports for like say ‘09 or ‘08.

Micheal Quillen

We have a very long customer list. We shift to 17 countries last year and about every major mill with exception of the Asians, being the Koreans and the Japanese. By the way, they are coming through the U.S. producers again. I don't know of any really they have done yet, but they have been back in the area, but we will see how it shapes out and our percentage is mathematical calculation after we go to the most margin added price we can get, so we don't set a goal or we are going to export X and keep X domestic. We are going to after what gives us the highest margin for our shareholders and then we will figure out what percentage of that's met in domestic.

Kevin Crutchfield

For the record sake, last year it was close to 8 million tons of total export throughout.

Kalpesh Patel

Okay, and one last question, it seems to me in this discussion with the free cash flow that you are going to generate, it seems that you are more inclined to do an acquisition than perhaps open new mines or develop reserves. And I want to just kind discuss -- to me it seems like labor is probably the biggest constraint, I mean, leading you towards acquisitions versus expansion is that accurate?

Micheal Quillen

Yes. Without question, when you do an acquisition, you usually pick up labor with it, so without a doubt that’s how we look at it, when you do an evergreen project than you got to go out and complete on the labor field for those personnel. So that's basically how we look at it. Now the other thing is as exuberant and excited as we all are about what's going on in the market place today and we can't erase our hard drive and not recognize what happened historically overtime. Our base load is pretty diagram profitable. It generate strong cash flow and that gives us a big comfort level going out for several years in front of us at our current so, we are kind of keeping that in the back of our minds as we look at our current reserve base, but we can keep doing what we are doing and generate some pretty good financial returns if the market comes back at us a little bit. So, right now between those two choices, we think acquisitions are better because one we think we can do that economical from a capital perspective and it brings the labor with it.

Kevin Crutchfield

It also brings synergies as well as the notion of consolidation which we have always harped is needed in Central Appalachia.

Micheal Quillen

Again we are not discounting evergreen growth. We have people working on that just as we do, so we will get the permits. We will do the planning and engineering around that, but right now our focus is on the acquisitions.

Kalpesh Patel

Thank you. Good luck.

Micheal Quillen

Thank you.

Operator

The next question comes from Brett Levy from Jefferies.

Brett Levy

Most of my questions have been answered. Can you guys just talk in general, obviously, you are looking at types of the acquisition, can you talk geographically steam versus met is a kind of a – is there any orientation towards looking overseas, just talk a little bit about what you are looking at in terms of priorities for acquisitions.

Micheal Quillen

We don't discount anything. I mean, our first look right now would be a synergistic acquisition of the metallurgical product that seems to be the most attractive from a financial return basis right now. I mean we continue to always have our M&A guys looking at all different basins, but again I think as everyone has talked about the greatest opportunities particularly to pickup private producers is in the Central Appalachian basin. So, we’re going to concentrate on the metallurgical site currently, but also investigate other opportunities. As we look internationally, Venezuela is not where we going to look. When you look around the world at things that are stable, we again have a strong relationship and constant communication with our contacts in Australia, where Kevin and I both have a prior history and we will continue to look at those things. It's just those opportunities are not that available out there as you look at crossing our desk, we have seen things come in on Columbia in the last few weeks, we have seen things coming in on Africa, Canada, so we contain a demand for those but when you -- in terms of probability, I think the most likely thing you're going to see is continued consolidation in Central Appalachia, and then potentially some movement into other basins in the United States, either Illinois or PRB. We'll have some small organic growth on our own, I think, up in Northern App. So I would put as a third tier down there whether we do anything offshore at this time. But if the right opportunity comes along we look at them. We would move on it.

Unidentified Analyst

Thanks very much guys.

Operator

The next question comes from the line of Vladimir Jelisavcic from Longacre.

Vladimir Jelisavcic

Good morning thank you very much. Question is, given the shortage in international met and steel market, is there an opportunity to contract for longer periods of time and thus creating shareholder value by having a longer locked in cash flow stream from a stronger counterparty?

Michael Quillen

That's something that we've always said we would like to see more of. We do, as we look out into multiyear contracts, as we discussed earlier, we're particularly cautious based on experiences of the last three or four years of protecting our margins, and thus somehow have things indexed that if we see runaway diesel prices for example, we've seen diesel prices almost double in the last couple of years so. As a business model it is something that we certainly are open to discuss with customers and think in the long term that is the appropriate time to do as long as you are covered. What we haven't agreed to and haven't done and we haven't heard a lot about that in the last few months for the last couple of years we had a lot of customers throwing out multi-year contracts but they wanted fixed prices for two to three years. And we just could not convince ourselves in the cost environment we're in to swallow that pill. So if the opportunity comes out there that we think we're covered on the margin side, we would prefer longer-term contracts. And I'm sure our lending institutions would like to see a little bit longer-term contracts. Again, a very volatile market; we'll just see where that goes.

Vladimir Jelisavcic

Understood. Just a couple of housecleaning issues. You made a couple of statements about '09 tons that you sold in the fourth quarter. Could you jut repeat exactly what you did please?

Kevin Crutchfield

We sold 800,000 tons in excess of $70 think of it as a low 70s.

Vladimir Jelisavcic

Okay so it was just steam, just '09 steam.

Kevin Crutchfield

Yeah, that was just steam that we sold 4 million tons of met at $87 FOB mine.

Vladimir Jelisavcic

Okay, excellent. And then, regarding unpriced '09, you sort of talked about two-thirds of the steam tons. What's the actual amount by tons instead of in percentage?

Kevin Crutchfield

It is about 10.5 million 11 million tons of steam and right now about 8.5 million tons of met 8 to 9. Again, we've got to be more careful about what year we're talking about here, whether it's the calendar year or fiscal year. But for '09 calendar year, it's about almost 11 million tons of steam and 8 to 9 million tons of met unpriced.

Vladimir Jelisavcic

Understood, thank you.

Operator

There are no further questions. Management do you have any closing remarks?

Michael Quillen – Chairman of the Board, Chief Executive Officer

We thank everyone. It's a pretty dynamic time. We're sure you all are running your models just like we are, trying to keep up with what's going in the marketplace. But it's an exciting time. It's a good time to have cash and a good balance sheet, and we look for a lot of opportunities going forward. Thank you very much for your interest.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Alpha Natural Resources, Inc. Q4 2007 Earnings Call Transcript
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